Rumors of ECB’s new bond purchase program spread ahead of today’s meeting. While some reported that the program would be sterilized and of unlimited amount, others said that it would not be unlimited. Investors were cautiously awaiting the meeting, looking for President Draghi’s announcement of bond purchase related news.
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Rumors Spread ahead of ECB Meeting
Financial markets firmed on Monday morning as investors continued to be thrilled by Fed Chairman Bernanke’s speech at the Jackson Hole conference. The Chairman’s dovish comments and his defense on unconventional monetary easing were interpreted as signals of QE3 in coming few months.
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Investors Still Thrilled with Bernanke’s Speech
8:30am USD Non-Farm Employment Change 8:30am USD Unemployment Rate 8:30am USD Average Hourly Earnings m/m 10:00am USD ISM Non-Manufacturing PMI Statistics: Posted by Bon — Fri Aug 03, 2012 6:47 am
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Daily News Events • 3rd August
Investors stand on the sideline ahead of the ECB meeting with commodities moving sideways in European morning. While speculations of re-activation of bond purchases heightened after ECB President Mario Draghi said on July 26 that policymakers are ready “to do whatever it takes to preserve the euro”, such hopes have waned in recent days. Crude oil prices have been directed by macroeconomic developments and especially the sovereign debt crisis in the Eurozone with the supply/demand balance being neglected in recent weeks.
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Markets Moving Sideways ahead of ECB Meeting
The euros exchange rate against major currencies will be back in the spotlight today as the ECB (European Central Bank) meet up to take the next actions and failure to “do something big” could see markets once again punish the euro zone.
Last week, Mario Draghi had said “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,”.
The ECB has little margin for error to maintain its credibility and avoid bond yields climbing in the indebted countries on the euro zone periphery. The market’s faith in Draghi will be tested before the 1230 GMT post-meeting press conference by a Spanish bond auction that could see its debt costs rise.
“Draghi has unfortunately painted himself into a corner. The ECB does need to demonstrate its credibility … Otherwise Draghi will lose face completely.” JP Morgan analyst Pavan Wadhwa said in a conference call.
“We could see markets going back to where they were before last Thursday,” said Nordea analyst Anders Svendsen, who expects more words but little concrete action from the meeting.
Falling Euro
As the crisis has intensified, the euro has taken a hit in foreign exchange markets. It has fallen about 15 percent in the past year to trade at $1.23 against the US dollar. On a trade-weighed basis it trades at nine-year lows.
The falling euro is likely to delay the day when inflation falls below the ECB’s target of 2 percent. In July, it remained at 2.4 percent. It also assuages fears of deflation, however, a spectre that could otherwise have prompted the ECB to consider large-scale bond buying.
IMF Urges Euro Zone Action
Speaking ahead of a critical meeting of the European Central Bank on Thursday, the head of the IMF signalled that they believe the European Central Bank should cut interest rates given low inflation levels.
The IMF has recently come under attack from private economists and analysts over its handling of the euro zone crisis, which some say is toeing the official European-German line. Its critics also question whether the IMF can remain truly independent and give independent advice while working as part of the “troika” of lenders in countries like Greece, Ireland and Portugal.
“I find it surprising when I see the hostile response,” IMF head Christine Lagarde said, vowing “to do everything I can” to protect the IMF’s credibility as it deals with Europe.
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Euro exchange rate back in spotlight as ECB meet to take action
Investors are thrilled by the comments from European officials and are anticipating big things to happen at the ECB meeting on Thursday. Market sentiment is positive with Asian stock markets surging, following the rally in Wall Street last Friday. Commodities also firmed amid reports that the ECB will re-launch the SMP together with EFSF primary market purchases. It is expected to consider granting the ESM a banking license. The benchmark Comex gold contract ended the week with gains of +2.23%. Crude oil prices lost during the week but the front-month WTI contract closed above 90/bbl for a second consecutive week while the Brent contract settled at a 3-digit level for the third week, signaling a return of market confidence.
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Market Thrilled by Europe’s Pledge to Preserve Single Currency
The price of an ounce of gold remains underpinned near $1570 following yesterday’s market sell off on stock markets which continue in negative territory this afternoon, with most major markets still in the red.
Latest Gold Price
Spot gold was down 0.2 percent at $1,573.40 an ounce at 12:00 GMT, while US gold futures for August delivery were down $3.80 an ounce at $1,573.60.
Gold prices hit a ten day low on Monday but stayed within the $75 range in which it has traded this month, holding up better than some other commodities like copper and crude oil, as chart support arrested its decline above $1,560 an ounce.
“Markets sold off really heavily yesterday, and gold held up pretty well against that. It is maybe the one thing that has really stayed solid against some pretty solid headwinds elsewhere,” Macquarie analyst Hayden Atkins said.
Analysts who study past price patterns to determine the future direction of trade said gold’s consolidation is showing signs of ending in correction. Commerzbank said in a note that it expects the major $1,532/1,522 support area, which held in September and December, to give way over the summer.
“The metal continues to move deeper and deeper into a consolidation triangle,” ScotiaMocatta said in a note, meanwhile. “Current parameters currently lie at $1,560 and $1,611.”
“We would expect fresh selling now below $1,548 and fresh buying above $1,623 as the market tries to play the breakout, it added. “Big picture, triangles tend to be continuation formations, so bias would be a break lower from the $1,790 to $1,528 March-May drop.”
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Price of gold remains underpinned after yesterday’s market sell off
US oil futures fell 4.2 percent on Monday and stock markets around the world headed lower on concerns over Europe’s never ending debts following headlines about high bond yields in Spain and more difficulties in Greece.
Latest WTI Oil Price
US Light crude oil futures for September 2012 delivery was trading at $88.85 a barrel, 08.22 GMT this morning in electronic trading on the NYMEX. Front month oil futures settled fell 4.2 percent to settle at $88.14, while Brent crude futures traded down $3.54 at $103.29 a barrel.
Doubts Over Euro Zones Viability
Phil Flynn, senior market analyst for the Price Futures Group, a futures-trading firm, said recent headlines raised new doubts over the euro zone’s viability, pushing aside geopolitical concerns that preoccupied the oil market last week.
“Based on what we’re hearing, it’s amazing we’re not down more,” Mr. Flynn said.
The euro zone crisis has for months stood as an albatross on the oil market because it raises concerns about the economic growth needed for energy demand. A weaker euro relative to the dollar can also depress the price of oil, which is traded in dollars. On Monday, the dollar was stronger relative to the euro.
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US oil price falls 4 percent on concerns over Europe’s never ending debts
US WTI oil prices are hovering around $89 a barrel today as traders and investors mull over the situation with the West and Iran, which could have the potential to see crude prices leap higher if tensions turn into firm action on either side.
Latest WTI Oil Price
US WTI light crude oil futures for August 2012 delivery was trading at $89.01 a barrel, 12.34 GMT today on the NYMEX, whilst European Brent is down 0.1 percent at $103.85.
Strait of Hormuz
America has warned Teheran about blocking the strategically important Strait of Hormuz, and has significantly bolstered its military presence there. Announced yesterday, the Pentagon will be building a missile defense radar station at a covert location in Qatar according to news reports.
Fears of a closure of the strait through which about a fifth of the world’s traded oil passes intensified earlier this year after Iran threatened to close it if Western governments kept up efforts to rein in Tehran’s controversial nuclear program by choking off its oil exports.
Tehran’s oil exports halved in the four months from February to June because of the US and European Union sanctions aimed at discouraging what the West fears is an Iranian programme to develop nuclear weapons.
However, Iran’s revenues from export of crude and oil products jumped 59 percent in 2011, despite a mounting pressure on the country.
Iran exported crude and petroleum products valued at $114.8 billion compared with $72.2 billion in the previous year, data from the annual statistical bulletin of OPEC showed. Oil export revenues earned by the OPEC members exceeded $1 trillion for the first time in 2011, according to data of ASB. Soaring oil prices increased revenue year-on-year for every OPEC member, apart from Libya which saw exports drop by 73 percent as it was beset by civil war.
Oil Minister Rostam Qasemi says although the West seeks to topple the Islamic establishment by imposing sanctions against Iran’s oil sector, the country’s oil exports will never cease.
Addressing a group of the Oil Ministry staff on Monday, Qasemi emphasized that Iran’s oil market will never close because oil consumer countries need Iranian crude.
“There are many ways to easily sell oil one of which is to take advantage of businessmen and the private sector,” Qasemi said.
The oil minister stated that the enemies of Iran are trying to bring the country under their control because of its huge hydrocarbon resources.
“Fortunately, the Islamic establishment governs these unique reserves and the enemies are trying to either topple the government or prevent Iran’s potential resources from being taken advantage of,” he noted.
Heightened concern of possible military activity on the part of the US or Iran is keeping the price of oil high, whilst the two nations play war games on the Persian Gulf.
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US crude oil price hovers at $89 a barrel as traders mull over situation with Iran
The euro’s exchange rate is coming under more pressure from the markets as risks of losses against other currencies continue to make investing in the currency similar to a game of poker between euro zone states.
Latest Euro Exchange Rate
As of 10.40 GMT today, one pound Sterling exchanged 1.26080 euro, nearing a four year high against the shared currency, whilst one euro exchanged $1.2280 US dollars, slipping back in the direction of a two year low of $1.2225 hit on Monday.
Spanish Bank Funds
EU finance chiefs agreed a deal this morning which will release 30 billion euros of bailout funds for Spain’s troubled lenders by the end of July.
The euro zone ministers also decided to grant Spain an extra year until 2014 to reach its deficit reduction targets but made no apparent progress on how the bloc’s new rescue fund, the European Stability Mechanism, will be used to help lower Madrid’s elevated borrowing costs.
Huge uncertainty over the ESM will continue to pressure the euro on currency markets as German law makers mull over the text and consider blocking the deal.
“With the euro zone finance ministers meeting out of the way without proving to be a source of inspiration for risk assets, the focus of the market now turns to the German constitutional court,” said Chris Weston, an institutional dealer with IG Markets.
The German court is due to give its preliminary ruling on complaints against the ESM and the euro zone’s fiscal compact, which could ultimately lead to a further implementation delay.
Gambling Games
As new bailout funds are pledged to Spain, it makes us wonder if the current deals for Ireland, Portugal and Greece will come back under the spotlight. Recent financial decisions in Europe are starting to resemble a big EU poker game which the online poker industry would find quite amusing to take part, however these players are in fact the euro zone member states.
The problem is that everyone wants to win…
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Euro exchange rate under more pressure as risk of losses resemble EU poker game