the pain in spain
THE PAIN IN SPAIN FROM THE APRIL 2012 HRA JOURNAL ERIC COFFIN Fear won over the market again this month as traders wondered if the Euro crisis would enter its next stage and the bond market turned on Spain and Italy. A weakened Euro combined with comments in the latest Fed minutes that imply no QE3 drove gold lower while lower imports and a tick up in Chinese inflation readings had a similar impact on base metals. A weak US employment number was the icing on the cake that drove resource markets back to levels last seen in December. China reporting the expected slower growth just added to the market pain. You can see that central banks are already having second thoughts. The big drops in the gold price were generated by the Fed downplaying the idea of QE3 but every weak economic stat released in the past few days has more traders doubting central banker’s commitment to stay out of the market. It seems highly likely the ECB will blink first and if it does that gives some political cover for the Fed to get active again though the markets will have to drop a lot before the Fed moves. We don’t think growth numbers will be that terrible and reactivated central banks would be enough to give gold an uptick. That leaves gold as the favoured metal but the ECB and EU need to show some commitment first to calm markets.
There are times when the markets leave one shaking their head in wonder. The latest US Fed inspired drop in both gold and equities was a case in point. The Fed Open Market committee has eight scheduled meetings each year. Three weeks after each meeting, the Fed releases the Minutes (transcript) of the meeting. These meeting minutes give some extra insight into who voted for which actions or inactions and where each Fed governor stands on a number of monetary policy issues. The Minutes rarely hold any real surprises. The actual decision was released three weeks earlier, after all. A rational person would assume these transcripts would hold mainly academic interest but no one told Wall St that. On reading the Fed Minutes and learning (?!) that a number of Fed governors were hostile to the idea
of QE3, markets sold off hard and gold prices fell to three month lows. This speaks New York markets that were in need of consolidation after a strong run up. The situation on the other side of the Atlantic and in the resource markets wasn’t so simple. As we discussed in the January issue new ECB president Mario Draghi did a great job of calming markets with two large liquidity operations. The honeymoon hasn’t lasted very long unfortunately.
In the past two weeks yields on Spanish and Italian government debt, particularly the former, have been rising again. The prices of credit default swaps, especially for Spain, are rising even faster. Five year CDS on Spanish government debt are now priced above 5%, the highest on record. How did we get here again so quickly? A large part of the blame should be laid at the feet of Euro area governments that have again come up with inadequate responses to the crisis. A series of meetings led to an agreement to combine the temporary and permanent rescue funds to crease a €700 billion firewall. While this may sound like an impressive number some of those funds are already committed and it’s far less than market participants were hoping for. Like the Fed news commented on earlier there should have been no surprises here either for traders or for Euro area politicians. It has been widely acknowledged for months that the EU would have to come up with a rescue fund of at least €1.5 trillion for the market to take its resolve seriously. Ideally, a fund that could at least in theory handle most of the Spanish and Italian debt load (at least €2 to €2.5 trillion) would be preferred if the aim was
to really calm markets. This doesn’t mean the EU has to spend these funds. Indeed, the whole object of the exercise is to impress the bond markets enough that it won’t have to. Unfortunately, the EU seems not to have gotten the memo, again. You can’t blame the Spanish government for this one. It has introduced a severe austerity budget in the face of 20%+ unemployment rates which took some real political courage. The real problem lies with northern European governments that continue try minimalist solutions even after earlier attempts have fallen flat. It’s not just bond traders that are skeptical. The chart below is an estimate of cross-border money flows within the EU. There appear to be increasing amounts of money being moved from Spain and Italy to safer countries, especially Germany. This gives a pretty good indication of how little faith most Europeans have in their political class right now.
It looks like we’re forced to watch inept EU politicians play catch up yet again. There were some positive comments from ECB committee members late last week. We hope that Draghi et al have the sense to walk the walk while the political class continues to fumble around. There will be a two year and ten year note auction by Spain on April 19th. That will be a test of the market’s patience. If enough politicians and the ECB itself makes the right noises we’ll see stable or lower yields. If not, the bleeding will continue and we may see another down-leg for the Euro that will take gold with it. While that drama was unfolding, traders were also reacting negatively to weaker growth numbers in China and a week employment report for March in the US. We suspect the US number was at least partially due to seasonal effects. Employment
gains may shift to a lower level for a while but I doubt we’re seeing a steep downward trend. As expected, China released weaker Q1 GDP numbers that followed an equally weak trade report. The numbers justified the selloff that followed but it’s the forward looking trend that matters. More recent figures out of China give some reason for optimism. Steel and concrete usage increased again and there was a large increase in bank lending in the past couple of weeks. This speaks to some of the recent loosening efforts by Beijing starting to gain some traction. The market is telling the EU—again—that it has to get more serious and Europe’s trading partners are sending the same message. The EU is looking for a leg up from the IMF but it’s clear most developed countries outside of Europe do not think they are doing enough themselves. Europe needs to make a move soon or we will see continued deterioration of the Euro and lower gold prices. Basically, the market wants the liquidity taps open again on both sides of the Atlantic. That would be the shortest route to stronger markets. Proof that the US is still growing more strongly and that China is accelerating again would work too but it will take longer for that scenario to show up in the numbers. Stay tuned for Spanish bond sales.
Ω The HRA – Journal, HRA-Dispatch and HRA- Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing timely and factual analysis of junior mining, resource, and other venture capital companies. Companies are chosen on the basis of a speculative potential for significant upside gains resulting from asset-based expansion. These are generally high-risk securities, and opinions contained herein are time and market sensitive. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein. We do not receive or request compensation in any form in order to feature companies in these publications. We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced in any form for other than for personal use without the prior written consent of the publisher. This document may be quoted, in context, provided proper credit is given. ©2010 Stockwork Consulting Ltd. All Rights Reserved.
Published by Stockwork Consulting Ltd. Box 85909, Phoenix AZ , 85071 Toll Free 1-877-528-3958 [email protected] http://www.hraadvisory.com
There are times when the markets leave one shaking their head in wonder. The latest US Fed inspired drop in both gold and equities was a case in point. The Fed Open Market committee has eight scheduled meetings each year. Three weeks after each meeting, the Fed releases the Minutes (transcript) of the meeting. These meeting minutes give some extra insight into who voted for which actions or inactions and where each Fed governor stands on a number of monetary policy issues. The Minutes rarely hold any real surprises. The actual decision was released three weeks earlier, after all. A rational person would assume these transcripts would hold mainly academic interest but no one told Wall St that. On reading the Fed Minutes and learning (?!) that a number of Fed governors were hostile to the idea
of QE3, markets sold off hard and gold prices fell to three month lows. This speaks New York markets that were in need of consolidation after a strong run up. The situation on the other side of the Atlantic and in the resource markets wasn’t so simple. As we discussed in the January issue new ECB president Mario Draghi did a great job of calming markets with two large liquidity operations. The honeymoon hasn’t lasted very long unfortunately.
In the past two weeks yields on Spanish and Italian government debt, particularly the former, have been rising again. The prices of credit default swaps, especially for Spain, are rising even faster. Five year CDS on Spanish government debt are now priced above 5%, the highest on record. How did we get here again so quickly? A large part of the blame should be laid at the feet of Euro area governments that have again come up with inadequate responses to the crisis. A series of meetings led to an agreement to combine the temporary and permanent rescue funds to crease a €700 billion firewall. While this may sound like an impressive number some of those funds are already committed and it’s far less than market participants were hoping for. Like the Fed news commented on earlier there should have been no surprises here either for traders or for Euro area politicians. It has been widely acknowledged for months that the EU would have to come up with a rescue fund of at least €1.5 trillion for the market to take its resolve seriously. Ideally, a fund that could at least in theory handle most of the Spanish and Italian debt load (at least €2 to €2.5 trillion) would be preferred if the aim was
to really calm markets. This doesn’t mean the EU has to spend these funds. Indeed, the whole object of the exercise is to impress the bond markets enough that it won’t have to. Unfortunately, the EU seems not to have gotten the memo, again. You can’t blame the Spanish government for this one. It has introduced a severe austerity budget in the face of 20%+ unemployment rates which took some real political courage. The real problem lies with northern European governments that continue try minimalist solutions even after earlier attempts have fallen flat. It’s not just bond traders that are skeptical. The chart below is an estimate of cross-border money flows within the EU. There appear to be increasing amounts of money being moved from Spain and Italy to safer countries, especially Germany. This gives a pretty good indication of how little faith most Europeans have in their political class right now.
It looks like we’re forced to watch inept EU politicians play catch up yet again. There were some positive comments from ECB committee members late last week. We hope that Draghi et al have the sense to walk the walk while the political class continues to fumble around. There will be a two year and ten year note auction by Spain on April 19th. That will be a test of the market’s patience. If enough politicians and the ECB itself makes the right noises we’ll see stable or lower yields. If not, the bleeding will continue and we may see another down-leg for the Euro that will take gold with it. While that drama was unfolding, traders were also reacting negatively to weaker growth numbers in China and a week employment report for March in the US. We suspect the US number was at least partially due to seasonal effects. Employment
gains may shift to a lower level for a while but I doubt we’re seeing a steep downward trend. As expected, China released weaker Q1 GDP numbers that followed an equally weak trade report. The numbers justified the selloff that followed but it’s the forward looking trend that matters. More recent figures out of China give some reason for optimism. Steel and concrete usage increased again and there was a large increase in bank lending in the past couple of weeks. This speaks to some of the recent loosening efforts by Beijing starting to gain some traction. The market is telling the EU—again—that it has to get more serious and Europe’s trading partners are sending the same message. The EU is looking for a leg up from the IMF but it’s clear most developed countries outside of Europe do not think they are doing enough themselves. Europe needs to make a move soon or we will see continued deterioration of the Euro and lower gold prices. Basically, the market wants the liquidity taps open again on both sides of the Atlantic. That would be the shortest route to stronger markets. Proof that the US is still growing more strongly and that China is accelerating again would work too but it will take longer for that scenario to show up in the numbers. Stay tuned for Spanish bond sales.
Ω The HRA – Journal, HRA-Dispatch and HRA- Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing timely and factual analysis of junior mining, resource, and other venture capital companies. Companies are chosen on the basis of a speculative potential for significant upside gains resulting from asset-based expansion. These are generally high-risk securities, and opinions contained herein are time and market sensitive. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein. We do not receive or request compensation in any form in order to feature companies in these publications. We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced in any form for other than for personal use without the prior written consent of the publisher. This document may be quoted, in context, provided proper credit is given. ©2010 Stockwork Consulting Ltd. All Rights Reserved.
Published by Stockwork Consulting Ltd. Box 85909, Phoenix AZ , 85071 Toll Free 1-877-528-3958 [email protected] http://www.hraadvisory.com
