Last week my headline was “Euro & GolD To Test New Highs - July 2-6"
But my daily updates had different story to tell, as I shifted my stance accordingly and the end result was…….
July 6 - Score 6 Correct call – 1Bad Call
July 5 – Score 10 Correct – 1 Bad Call
July 4 – Score 4 Correct Calls
July 3 - Score 5 Correct Calls - 2 Bad Calls
July 2 - Score 7 Correct Call
Total 32 Good - 4 Bad Calls
ECB rate cut and BOE’s liquidity injection on same day should not be a big surprise, as both were due for its monetary policy announcement. But the biggest surprise of the day came when Peoples Bank of China (POBC) announced cutting its rate by 31 basis point (bp) to 6 pct, slashing its 1-year deposit rate by 25 bp to 3 pct and lowered the floor for lending rate to 70 pct of benchmark rate from 80 pct.
All three announcements were minutes away from each other strengthening market belief that this is a coordinated effort. There is surly some sort of urgency, as China has earlier slashed its rate on June 7, hardly a month ago. Economic data of recent months shows that Chinese economy is on constant decline and a quick move suggest that more economic slide could be in the pipeline, as China could making extra effort to halt its manufacturing slump.
Due to reduction in cost of funds, this easing will be advantages for the state enterprise that carries huge debt burden will get some relief, mortgage borrowers will surly benefit from the outcome and the local municipalities will also enjoy the relief. If the money does not flow into new business corporate profit will drop, but jobs situation may not deteriorate for some more time.
Similarly, Europe with unresolved debt issue and faced with recession and fear of deflation that has pushed unemployment rate to historically highest level in the Euro-zones region gave enough room to ECB to cut its rate to 0.75 pct from 1 pct.
In a more surprising move to stimulate economy, anticipating fund to divert towards much touted growth ECB slashed deposit rate to Zero from 0.25 pct. But when there are fewer jobs, no credit new lines availability due to contraction of corporate balance sheet that reduces the chances of business expansion, non-performing loans on the constant rise and less spending due to empty or thin wallet. How will the economic activity revive?
Recent purchasing managers index (PMI) clearly indicated showdown in manufacturing and construction sector indicating that the British economy could further contract that could lower GDP growth. BOE that opted to maintain its lending rate to 0.5 pct extended its quantitative easing program by adding another Pound 50 billion asset purchase to increase the amount to Pound 375 billion through its bond purchase program, since its economy could not expand. UK is desperately trying to boost its export that has slowed and wants its housing market to flourish that could create jobs.
Meanwhile, US job data, last before August FED FOMC gathering to decide its next policy direction was disappointing and added 80.000 jobs in June against projected 100.000 jobs, but may be as bad that will force FED to go for early QE3.
I think gradually from now onwards US economic data will start picking up, as we may have seen the worst. Mild recovery will provide sigh of relief to the FED official as they may not be comfortable taking any drastic measure prior to November US election.
Looking at the most recent global developments such as gathering of G-8 leaders, European leaders gathering in Brussels and so called coordinated global interest rate cut decisions by the major economies, market trend suggest that nothing is working as per the wishes of governments, financial regulators, policy makers and so called think tanks. Therefore, threat of financial disaster still looms.
Last Week - Monday July 2-6
GOLD @ $ 1597.30 =The fall was quite in line of my last week projection hitting bottom of $ 1552, but bounced back to break the upside resistance of $ 1593. Now risk is for more gains, as gold could find support around $ 1588-90 and clear break of $ 1610-12 would encourage for a test of $ 1622-25, but unlikely to surpass beyond $ 1630. On the downside break of support levels of $ 1585 will space for dip $ 1570-72, which should hold.