WISE MONEY

On Friday, the Dow Jones fell by as much as 120 points after annualised growth in gross domestic product (GDP) was found to have slowed from 3.7% in the first quarter to 2.4% in the second.That came on the back of growth of 5% in the final three months of 2009. The US was initially thought to have grown by 2.7% in the first quarter but that was revised upwards on a day of surprises for economists.

The US Commerce Department also revised downwards GDP figures all the way back to the beginning of 2007.

The second-quarter slowdown led economists to question whether the US might be poised to enter a period of negative growth later in the year, leading to a much-feared double-dip recession.

The Dow Jones fell sharply after the release of the GDP data before recovering ground to settle down 40.72 at 10,426.44 in lunchtime trading. Economists had predicted second-quarter growth of 2.5pc, but their disappointment was compounded by the revised data for the first three months of 2010.

The biggest concern in the City was the size of the downward revisions to previous years’ growth. In 2009 the economy was previously estimated to have declined by 2.4%, but the figure was revised to a drop of 2.6%.

The disappointing growth numbers were compounded by the International Monetary Fund’s (IMF) annual report on the US economy. The IMF said there may be a need for the Obama administration to increase the amount of fiscal stimulus in order to boost the recovery, warning the “outlook remains uncertain”.

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This week is all about the euro and the approaching stress test results which will offer much needed feedback on the health of European banks.
The euro has experienced a significant turn of fortune from its June 4 and half low against the USD gaining over 10 cents to test the 1.30 level.

One reason that the euro has gained is simply that the market was significantly over short in the euro and naturally a lot of these short investors paired their positions leading to a short squeeze higher.

In addition some comfort has come back into the euro approaching Fridays stress test results as comments in the run up from members of the IMF and the ECB have been bullish – we will see!

Recent gains have led to EUR/USD testing the 1.30 level and GBP/EUR falling back into 1.17 territory. The results are due out from 5pm GMT on Friday- good feedback should push EUR/USD over 1.30.

An unnamed bank or banks had lent 380 tonnes of gold to the Bank of International Settlements in return for foreign currencies causing widespread surprise and confusion.
The news that a mystery bank has just pawned the family jewels gave traders a jolt – nervous about the sudden transfer of almost 20pc of the world’s annual gold production and the possibility of a sell-off.

In a tiny footnote in its annual report, the BIS disclosed its unusually large holding of gold, compared with none the year before. The disclosure was a large factor in the correction of the gold price this week, which fell below $1,200 for the first time in more than a month.

Concerns hinged on whether the BIS could potentially sell on this vast cache of bullion in the event of a default, flooding the market with liquidity.

It appears to have raised $14bn for whoever’s been doing the swapping – small fry on the currency markets, but serious liquidity in the gold market.

Denominated in euros, gold has fallen 8pc since the beginning of the month and is now trading at a seven-week low of €937 per troy ounce.

The big gold exchange traded funds (ETFs) – having peaked at record inflows in May – have also been showing net outflows over the past few days.

Meanwhile, economists and gold market-watchers were determined to hunt down which bank is short of cash – curious about who is using their stash of precious metal for what looks suspiciously like a secret bailout.

At first it looked like the BIS was swapping gold with a troubled central bank. After all, the institution is the central bankers’ bank and its purpose to conduct transactions with national monetary authorities.

Central banks in the troubled southern zone of Europe were considered the most likely perpetrators.

According to the World Gold Council, central banks in Greece, Spain and Portugal held 112.2, 281.6 and 382.5 tons of gold respectively in June – leading analysts to point fingers at Portugal, or a combination of the three.

The only other potential monetary authorities with enough gold as the US, China, Switzerland, Japan, Russia, India and Taiwan – and the International Monetary Fund.

This led to musings that the counterparty was the IMF, making sense because the lender of last resort is historically prone to cash shortages and has been quietly selling off gold in the first half of the year.

Renowned gold expert Jim Sinclair adopted this explanation. The panic came when people mistook a lease for a swap, he argues. Far from being a big release of gold into the market, it is simply a commercial arrangement between the IMF and BIS with a favourable rate of interest paid for the foreign currency.

“Gold swaps are usually undertaken by monetary authorities,” he writes on his industry blog, JSMineSet. “The gold is exchanged for foreign exchange deposits with an agreement that the transaction be unwound at a future time at an agreed price.

“The IMF will pay interest on the foreign exchange received. Historically swaps occur when entities like the IMF have a need for foreign exchange, but do not wish to sell the gold. In this case, gold is a leveraging device for needed currency to meet requirements.

“The many reports that characterise the large IMF gold swap as a sale of gold into the markets do not understand the difference between a swap and a lease.”

However, the day after original reports about the swaps, BIS emailed a statement saying that the swaps had not been conducted with monetary authorities but purely with commercial banks.

This did nothing to quell the sense of mystery surrounding the deal or deals. It is almost inconceivable that a single commercial bank could have accumulated so much gold alone. And cynics have suggested that the whole affair still looks like a secretive European bailout that a single country wants to keep quiet.

In this case, one or more of the so-called bullion banks – which act as wholesale market-makers and include Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale, Mitsui and the Bank of Nova Scotia – would have agreed to act on behalf of a monetary authority.

The euro hit a two month high against the US Dollar before running into large selling resistance and falling back towards 1.25. Although German manufacturers posted some impressive sales figures at the end of last week and boosted confidence in the continuing Eurozone economic recovery, fears over manufacturing and unemployment data in periphery member nations is swamping any and all positive news from Germany.

Added to the muted response to the Stress test methodology there is enough news around the keep the Euro suppressed for the next few days.

Sterling fell below the key 1.50 level over the weekend as fears over the UK economic recovery remerged. The IMF’s warning that spending cuts and tax increases announced by the coalition Government will reduce future growth levels has pushed the pound lower against the Dollar and Euro, but the key driver of the Sterling sell off seems to be technical.

Failure to break through the 1.5260 level signalled to traders to realise profits, sending the Pound lower.

We will get a clearer picture of the current economic climate in the UK this week, with the release of the delayed GDP figures and inflation and unemployment data.

Asian stock markets fell today and the euro and sterling hovered near the lows they reached yesterday as concerns persisted over Europe’s debt worries.The Nikkei index in Japan fell 98.81 points, or 1 per cent, at 9,439.13 to record its lowest close for six months after earlier falling as far as 9,378.23. Japan’s export-led economy is dependent on demand from Europe.

Asian investors were also jolted by a warning from the International Monetary Fund that the European sovereign debt crisis could spill over to Asia.

Naoyuki Shinohara, the IMF deputy managing director, told a forum in Singapore: “Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand.”

He also warned that although Asia’s bright growth prospects were currently attracting capital, “further increases in global risk aversion could see capital flows change direction quickly.”

Investors were also unsettled by comments by the ratings agency Fitch that Britain faced a “formidable challenge”.

However after currency trading began in London this morning both the euro and sterling edged up slightly against the dollar. The euro rose nearly a cent from yesterday’s four-year low of $1.1876 to $1.1967 while the Pound improved by half a cent to $1.4462.

Traders and analysts said that the focus was on the European Central Bank (ECB) to shore up sentiment.

In a further sign that investors were seeking cash the Bank of England’s latest offer to buy corporate bonds from banks was met by record demand this week. Banks tried to sell £507 million of bonds, the highest since the Bank of England began its bond buy-back programme in February last year as an attempt to restore confidence in the midst of the financial crisis.

The price of gold reached $1,236 an ounce, within sight of yesterday’s record high of $1,250.

The euro weakened for a second day against the US Dollar, the Japanese Yen and the British Pound as signs the European debt crisis is spreading revived concern the region’s recovery will slow.In particular, the 16 nation currency fell to within one yen of its weakest point in more than eight years after the IMF urged Spain to do more to overhaul its ailing banks.

Markets are concerned about what policy makers can do to contain the debt crisis should it spread from Greece to bigger nations like Spain and Italy. The IMF welcomed the new Spanish austerity measures, referring to plans to rein in its budget deficit with the deepest cuts in three decades but expressed concern over its banking industry and the slow reaction in consolidating ailing lenders with stronger partners.

The EUR/USD is now back trading close to the May 19th four year low.

Despite recent acceptable data from the Eurozone countries themselves, there is a real fear that the recovery will sputter to a halt amidst the internal wrangling of how to deal with the spiraling funding crisis.

This will obviously have a knock on effect towards the global recovery, with the UK especially exposed to a weaker European market.

Sterling has accordingly been shorted aggressively, but largely against just the Dollar and the Yen. It has managed to gain slightly against the Euro on the back of QoQ GDP coming in as expected at 0.3%.

The US was decidedly quiet yesterday although we are still experiencing US$ LIBOR ticking higher on a daily basis adding further fuel to the Dollar strength argument.

The market appears to be waiting for anything tangible on exchange rates emerging from Geithner’s meeting with Chinese officials.

Yesterday they appeared to skirt the issue and spent most of their session together discussing Europe and the implications to both countries of the current situation. Today’s final session could be more interesting.

Today sees the start of a new age of austerity as the Government announces £6.2 billion of immediate spending reductions, paving the way for much deeper cuts in the future.

The Liberal-Conservative coalition is hoping that these initial cuts will prepare the population for severe fiscal measures next year with reports of up to 300,000 public sector redundancies.

Despite these unpopular decisions, markets have been indicating that they want these measures in place if Sterling is to recover against the majors in the long term.

Over to the European mainland and the Euro recovered somewhat on Friday, reaching a one week high against the Greenback as buyers returned to the Euro and halted the currency’s decline. This welcome support came on the news that EU officials pledged to tighten sanctions on high-deficit member countries and said that no European country will be allowed to renege on its debts.

In the early session this morning, the Euro has given back some of these gains with traders reported to be selling into the bounce on ongoing concerns about the outlook for the Eurozone.

To add the Euro’s problems, concerns that the EU credit crisis is spreading with the announcement that the Bank of Spain is to take over the running of one of the country’s saving’s banks.

This pushed the Euro lower against the Dollar and Sterling from highs of $1.2510 and $0.8635 respectively. However the Euro remains well off last week’s four year low of $1.2146, as markets awaits further developments in terms of the sovereign risk issue.

The discredited labour govt has caved in to demands that British taxpayers underwrite at least £13 billion of debt held by other European governments as EU finance ministers agreed an even bigger bail out for the flawed euro.
Labour, representing Britain until a new government is formed, was forced to participate in a £95 billion “stabilisation mechanism” aimed at helping European Union countries who face a debt crisis.

The decision followed a crisis meeting in Brussels to discuss the financial turmoil that has raised doubts about the future of the euro.

It exposes the British taxpayer to £9.6 – £13 billion in liabilities should Spain or Portugal go the way of Greece.

Mr Darling had no choice but to surrender because the decision was taken under a Lisbon Treaty “exceptional occurrences” clause that stripped Britain of its veto.

Britain last night succeeded in staying out of an even larger fund solely for the 13 countries using the euro.

The EU agreed a £624 billion rescue package of bilateral “special purpose vehicle” loans for the 16 euro zone states struggling to finance their debts.

As well as the loans, an extra £52 billion of new cash for a “stabilisation mechanism” will be raised by allowing the European Commission to use the EU budget as collateral on international debt markets.

Britain escaped being sucked into the wider bailout loans but was forced to underwrite the “stabilisation mechanism” which, added to an existing “facility” of £43 billion, makes British taxpayers liable for £13 billion of a new £95 billion fund.

Already indebted euro zone states will be on standby with £382 billion of loans, which will be topped up by an IMF contribution of £191 billion).

The measures were rushed through over the weekend to be in place when the markets open today. Yesterday President Barack Obama urged EU leaders to restore confidence in their economies.

European stock markets and the euro have fallen and government bond yields have jumped as investors fear that the large deficits run up by some EU countries will cripple economic growth.

Mr Darling said Britain would not provide support for the single currency, but Sweden, another influential non-euro country, called that stance into question, saying it would “not rule out” being part of the wider fund.

Separately, the European Central Bank is later expected to announce that it will buy up Spanish and Portuguese government bonds at premium rates even if they are junked by markets.

Billions wiped off global markets with Greek bailout fears spreading to Portugal, Italy and Spain.

Wall Street suffered one of its worst falls in a single trading session yesterday, with mounting concerns that the sovereign debt crisis in the eurozone will not be confined to Greece.

In one of the most frenetic trading sessions in memory, the Dow Jones industrial average fell by 500 points in a matter of seconds at one point, prompting an investigation by the New York Stock Exchange.

At its worst point, the Dow fell by just under 1,000 points or more than 9 per cent— which would have represented the biggest one day fall in 17 months.

The market immediately rebounded, raising speculation that the falls had been caused by a “fat-fingered” trader who had entered an erroneous transaction, although the New York Stock Exchange was quick to point out that the fall was largely due to programme trading.

About $16 billion worth of stock changed hands during the burst — suggesting that genuine trading activity was behind the fall and rally.

Other markets also saw some spectacular lurches, with US crude oil futures for June delivery collapsing by just under 4 per cent to $76.70, its lowest level since February. Amid signs of safe-haven buying, gold prices also hit a record high.

Earlier the euro fell by more than two cents against the US dollar. Having traded at $1.2856 earlier in the session, the currency fell to as low as $1.2653 in the late afternoon, after the European Central Bank (ECB) killed hopes of early action to limit the crisis.

After a closer examination of the Greek rescue financial package, the €110 billion on the table from the EU and IMF will not be enough unless private markets start lending again.

In the short term the bailout will mean that Greece will have sufficient cash to repay an €8.5billion that is due in a fortnight, however the suggestion that Greece will be able to raise its own finance by the end of 2011 is optimistic according to bond market specialists.

The first hurdle Greece faces over the coming months is to implement the €30 billion tax rises and budget cuts revealed last week. This has been met with industrial unrest in the capital as government workers shut down schools and hospitals and disrupt flights in response to the austerity measures.

The Euro itself did not respond well to the bailout news yesterday falling more than 1% against the green back to $1.3184 as fears that the fiscal cuts required will be too much for the debt stricken country to bear.

Over to the UK and the Conservatives are maintaining their efforts to win a majority in Thursday’s election. Sterling has been largely unaffected so far although the forecasts for the Pound could be turbulent ahead of the election on swings in voter sentiment but for a bounce in the currency’s fortunes once the result is known …. either Friday or in the case of a close call, early next week.

Also on a busy Thursday we have the European Central Banks Interest Rate decision, Ben Bernanke’s speech in the US and the UK general election.

Friday could possibly see an election result, in addition to a Canadian and US job number, so everyone hold on tight on the rollercoaster week ahead!