Despite mild economic data announcement it was probably one of the most difficult weeks of the year, as signs of global slowdown combined with Europe’s financial and political uncertainty kept financial market choppy and nervous. World stocks are under pressure, European banks are suffering, European bond and Credit Default Swap (CDS) market is on declining trend and Euro is taking the beating since last couple of weeks and gold making some recovery after hitting 2012 lows. Gold after hitting all time high in September 2011 lost 20 pct of its value in last 8-months when it touched the lows of USD 1527 last week.
Europe is having difficult times because of its harsh austerity policy resulting constant change in their political leadership that has so far toppled Italian, Greek, Dutch and French governments.
Angela Merkel’s party lost badly in a state election, which is bad indicator. In future German parliamentarian that supported Merkel’s policy despite have opposing views will not dare to support her policies risking same fate.
Spanish Prime Minister is fast losing his popularity due to austerity drive and with Greece, yet undecided about its political leadership until June fresh election. Europe’s financial system is in dismay.
In Europe, Trillion Euro LTRO or global pledge to increase the size of IMF’s firewall plan could not clam the market sentiment. It has only helped the banks faced with capitalization issue to avoid collapse/closure/takeover, as the money did not flow to the corporate sector to stimulate the economy.
Greece that has no choice but will have to give another try next month for its new leadership is faced with a threat of bank run. There is a growing fear that appointment of anti austerity leader would finally end up with exit of Euro and re-introduction Greek Drachma. Estimates suggest that depositors had so far withdrawal and transferred roughly around USD 1.3 billion abroad.
Europe’s banking system is faced with huge risk as Spain’s banks are faced with big trouble that could have contagion effect in region. Rating agencies have already chopped banks credit ratings on Spanish banks.
Meanwhile, since last two-weeks US economic data is constantly showing signs of slowing down forcing many market players to interpret that quantitative easing QE3 is unavoidable, which also means buying of more bonds from the market. I do not support this view of FED opting for QE3. I think FED will go for Operation Twist.
However, there is still some time left for FED to decide next course of action. Expectation of QE3 strengthen after the FED’s minute that has revealed that in the last Federal Reserve meeting question was raised about the confidence in the outlook for US Economy suggesting that some of the FOMC members are not too confident of the economic recovery that could also mean that US interest could remain low for longer duration. But simultaneously some of the optimist members wanted to ensure to keep grip on the economic gains.
From market perspective, G8 nation meeting has been keenly watched because seemingly at present Europe is entangled with numerous types of problem that includes financial and as well political, due to change in voting trend as the European leadership minus Germany is tilting towards anti-austerity stance.
There are some hopes that US President Obama presence could help to introduce the balancing factors, as newly elected European leaders are divided over growth and austerity stance. Obama clearly supported pro-growth policy in Camp David on Friday gathering, probably aware that how much damage lingering European crisis can inflict to the US economy, which is may not be affordable at the time of US elections.
Such discussion may be temporarily good to calm the rising temperature in Europe, but in past there has been many such uncountable discussions that could not produce result. Calmness prevailed for couple of months after injection of Euro 1.1 trillion LTRO money, as most of the funds were utilized by the banks to meet their capitalization requirement.
But this injection of liquidity could not bring stability in Europe, nor helped in creating jobs that got from bad to worse reaching 10.9 pct. Banks are struggling to survive and corporate earnings have been slowing down.
On Friday, in the last the trading hour of the day currencies made sharp gains versus US Dollar. There are two versions about this sudden surge. One is that USD weakened due to Brazilian Central Bank intervention in thin market condition and second factor could be due to talk by G8 leaders to support growth, which means more spending.
Shift in policy towards growth may have been discussed as G8 leaders may have realized the high price after the voting trend caused by the ongoing austerity policy. But fate of Europe is not in the hands of G8 leaders. It is for the European policy makers to decide the future if Europe. Therefore, next European leaders meeting will provide better clues as challenges are unending, resources are limited and mostly unknown and change in leadership is a cause of concern due to disagreement with the ongoing austerity policy.
Some of the major economic events of this week are Tuesday’s existing homes sales, which is important economic housing indicator to measure the economic strength and is expected to have sold 4.6 million existing residential buildings. On Wednesday, UK’s retail sales will provide major economic activity and the change in the total value of inflation adjusted sale in real value. But all eyes will focus on US New Home Sales which measures the annual single family home sale in the previous month and is likely o have sold 335K. On Thursday, there is a long list of European data, but Germany’s GDP will provide widest range of economic activity and after next 2-hours time another crucial data IFO will be released, which is Germany’s business climate index that will give hint about the business activity expected in coming next 6-months time. Later in US morning session, US Durable goods and Initial Jobless claim will be released that will provide further evidence about economy. On Friday, mild data will be release from Europe, with no data to be released in USA.
GOLD @ $ 1592.90 = Gold recovered sharply after receiving plenty of hammering for the last couple of weeks hitting and breaching my given target of USD 1546 to test USD 1527 to close at USD 1593. The up move gained momentum after the release of FED minutes as expectation of QE3 gained strength after some of the FED members showed discomfort with current wave of data.
Market should keep in mind that this was not an outright one sided view in FED’s minutes, as some of the FOMC hawks wants to maintain growth, which means strong US data could disappoint the doves.
If gold surged on belief that QE3 is coming, which means more liquidity in the system that could lead to inflation. This also means FED will expand its balance sheet then why USD has not weakened, so keep an eye on US Dollar.
However, overall gold sale is not too encouraging because in China 1st quarter gold sale is up by 10 pct to 255.2 tonnes, but signs are that Chinese economy is slowing down in 2nd quarter. Whereas, gold sales dropped in India by 29 pct to 207.9 tonnes and in this quarter Indian Rupee has taken lot of bashing. The two nations are the major gold buyer and demand is unlikely to pick up in such environment, which means gold could be short lived if the economic condition does not improve.
Gold needs to break $ 1598 for $ 1610-15 zones where it should exhaust, but needs to break $ 1630 resistance level to maintain its bullish momentum. However, still looking for a test of USD 1575, a break would push Gold towards USD 1558.
EURO @ 1.2778 = Euro saw another perfect move dropping nicely to hit target my target 1.2665. This week all eyes should be on 1.2870 on break of 1.2820 and only break of this level would encourage for a test of 1.2980 not a favored scenario. If Euro moves beyond 1.2820 I will be looking for levels to pick the top to sell on the downside break of 1.2650 should challenge 1.2580. Ranges for the week 1.2550 – 1.2980
GBP @ 1.5814 = This week Cable should retain its stronger tone and unlikely to fall below 1.5760. Break of 1.5880 is required to test 1.5975, but may find resistance around 1.6050. Buying on dips will be the preferred strategy. Ranges for the week 1.5760 - 1.61
YEN @ 79.00 = The move was in line of my forecast finding support around 80.50 and nicely dipping down to hit target 79.20 comfortably. Yen’s gain should exhaust around 78.50 and should not break below 78.20. Expecting a move towards 80.10 and break would encourage for 80.60 or probably 80.95. Range for the week 78.20- 81.20
CHF @ 0.9396 = Swiss Franc could make small gain to hit 0.9330 on break of 0.9350. 0.9280 is the level that Swiss Franc should not breach. However, I am expecting SFR to ease off later in the week to test 0.9490. Range for the week 9250 - 9520
PiCk tOp To seLL EuRo & GoLD – maY 14-18