US, China Monetary Easing measures may be ruled out; not Eurozone

Last Updated : 24 April 2013 at 15:00 IST

It is greed and fear that drives the markets. But what drives the economy is hope. When it comes to economics of commodities, the ultimate hope is the hope of Quantitative Easing.

We know it all started with the Great Recession.

Unconventional monetary tools were suddenly deployed to create a new normal with a hope to draw some sanity from them. US, Europe, China, Japan, India...the list of regions and nations that employed stimulus measures goes endless.

Now, the sudden spurt in gold, silver and copper prices is attributed to a new round of hope of monetary easing. This hope has arrived because the economic activity around the world is exhibiting signs of slowdown.

Just go through the recent numbers:

Factory activity in the US for April--preliminary, factory purchasing managers' index fell to 52.0 this month from 54.6 in March--expanded at its slowest pace in six months. But the housing sales data at their second-highest level in 3 years provided some anchor.

HSBC Flash China Manufacturing PMI for April gave a reading of 50.5 compared to 51.6 in March. A reading above 50 is indicative of expansion in the economy. But the dip from March levels is surely a cause of concern.

Flash China Manufacturing Output Index provided a reading of 51.1 compared to 53.0 in March, a two-month low.

Private sector activity in Eurozone too declined, amid business activity in Germany dropping.

All these economic events are pointing towards yet another possibility of a fresh round of global easing measures, analysts say. Will that be the case?

The case of US

We know that in US a round of stimulus measures is already underway. The US Federal Reserve is currently running its fourth round of Quantitative Easing measures. The latest round of easing is seeing to it that $85 billion in bonds and Mortgage Backed Securities are purchased by the US Federal Reserve on a monthly basis.

“I don't think there will be an additional round of Quantitative Easing measures from US. On the contrary they are seeking to exit the stimulus measures as exiting is also important.” said V.K. Vijayakumar, Chief Investment Strategist, Geojit BNP Paribas, South India.

The US Federal Reserve has tied QE measures to a positive evolution of job markets and a healthy inflation. Latest data suggests that unemployment rate in different US States dipped in March year on year including California where joblessness dipped to a low in 4 years. The housing bubble in US which invited the global downturn had destroyed the associated job markets there on a substantial scale.

Now, with new home sales and housing starts gaining momentum, US economy is trudging on a path of return. For instance, new housing starts climbed 7% in March from February to touch an annual rate of 1,036,000, and were up by 46.7 percent compared to March 2012.

According to Stephen Levy, Director of the Center for Continuing Study of the California Economy, a private research organization in Palo Alto:

"The good news is that the recovery is spreading beyond the [San Francisco] Bay Area. There are parts of southern California, such as Los Angeles County, that were badly hit by the housing crash, that are showing signs of recovery," California, he said Reuters, "is emerging again as an economic growth leader led by traditional strengths in technology, trade, tourism, agriculture and the application of creativity to the design of goods and services in demand worldwide".

This trend, if it sustains can see a phase out of Quantitative Easing.

Also, it has to be noted that the jobless claims in US climbed 4000 in figures to a seasonally adjusted 352,000 for the week ending April 13. However, the rise was in line with the expectations fielded by economists even as the claims stood near a line economists normally associate with average monthly job gains of more than 150,000.

The US recovery may at best be termed fragile, and a few indicators are not sufficient enough to hold forth the true picture. Nonetheless, it gives a picture and sunshine as of now outshines the shadows.

So, one can say that another round of monetary stimulus measures is least forthcoming from US.

The case of Europe

An April 4 report appeared in the Bloomberg hints at the possibility of a stimulus measure to be adopted by Eurozone.

“We are considering both standard and non-standard measures” to increase stimulus, ECB President Mario Draghi was quoted by Bloomberg. He was mum on what the tools are.

The report also notes:

“Our monetary policy stance will remain accommodative for as long as needed,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at a record low of 0.75 percent. “We will assess all the incoming data in the coming weeks and we stand ready to act.”

Meanwhile, in Europe, the Eurozone nations cannot think of stimulus measures as Germany has vehement opposition to such a move.

"The deficit reduction in the eurozone must continue," said Wolfgang Schäuble, the German finance minister raising his voice over and above stimulus measures; after all, Schauble is the pay master of the Eurozone. 

"Europe can't function without solving the structural problems." he added.

Germany is still haunted by the specter of hyper inflation episode it experienced in its formative years.

Now, if Germany will have its way, then chances are more that Eurozone would maintain the current status of depressive growth.

However, the picture is not definitive as Gavin Hewitt Europe Editor of The BBC notes in a an analysis titled 'Europe: Retreat from austerity':

Like the arrival of a new season, all the signs are that Europe is in retreat from austerity.

The retreat is disguised, but cannot be concealed. The President of the European Commission, Jose Manuel Barroso, said: "While I think 'austerity' is fundamentally right, I think it has reached its limit."

He implied that a policy can only be pursued if it has "a minimum of political and social support". There is not a general recanting yet, but the explanations are flying thick and fast as to why the policy that Europe has embraced for the past three years must change.

"A period of reduced spending and borrowing was necessary to calm markets concerned about out-of-control debt levels, particularly in peripheral European countries. That time has passed." The EU's Economics Commissioner, Olli Rehn, too said.

If this idea goes viral, chances are more that the Eurozone austerity drive would come to an end even as Germany would be forced to tow the stimulus line. After all, the German economy is also slowing down.

The case of China

Meanwhile, in China, yet another big economy, there are problems of inflation and asset bubbles. “This would deter the Chinese leadership from employing yet another round of stimulus measures,” Vijayakumar noted.

The Chinese property bubble and local government debt issues have already been dealt with here. 

While additional stimulus measures by US and China can be ruled out, the same cannot be the case for Eurozone. The general mood of Eurozone is drifting towards consumption/stimulus led growth rather than austerity driven recovery.

As published here: http://www.commodityonline.com/news/us-china-monetary-easing-measures-may-be-ruled-out;-not-eurozone-54108-3-54109.html

Euro implosion: Where Gold and Dollar can together appreciate

Last Updated : 12 December 2012 at 14:40 IST

The general impression is that worsening Eurozone crisis can underpin gold by a major degree. But have you ever thought that the worst economic crisis of the modern age can in fact inflate gold and Dollar together, making null and void, the cardinal negative correlation between Gold and the world's reserve currency.

Euro, when it was launched was touted the next reserve currency by its architects; but when Greece cooked its books and problems of liquidity snow balled into problems of solvency, there began a capital flight: this means people who owned Euro used that to buy dollar sending it higher; but the accompanying uncertainty and continued easing measures ensured that gold too maintained its demand.

So while dollar gained against Euro, the former lost in relation to gold.

So what happens if Euro implodes?

This is not an unlikely scenario. The litmus test would be the elections scheduled in Italy where Mario Monti is resigning from his Prime Ministerial post even as Silvio Berlusconi is seeking a re-election to the post.

The ballets would announce if it really made sense for Italy to stick to austerity. If Italy ultimately decides to quit Euro, there would be no doubt that others on the periphery too would follow suite. Admittedly, the dynamics of this process is not as easy as it sounds and the whole scenario is peppered by many if-conditions. Seeking to probe them is beyond the scope of this article.

However, if Euro implodes, the torrent to dollar would gain strength; but not all assets would be invested in Dollar. A majority may get diverted to gold as well taking gold higher. Dollar may see gaining strength initially as investors abandon Euro, but the same Dollar would be spent on gold purchases.

In effect, gold would gain, so would Dollar, the former possibly outshining the latter in the long run. 

As published in: http://www.commodityonline.com/news/euro-implosion-where-gold-and-dollar-can-together-appreciate-51780-3-51781.html

Euro Zone Crisis: Will IMF spoil the chance of saving the world?

Last Updated : 21 November 2012 at 12:20 IST

The room is closed and jammed with water seeping in from all sides. Yet Greece has delivered, but the meeting attended by the wizards of the financial world, the IMF, European Central Bank and Eurozone Finance Ministers have all failed in clinching a deal that would see $44 billion delivered to the coffers of Greece so that the country, brimming with frustration at its seams, may at least be able to service its debt.

The issues are more or less technical in nature and what is technical is often not deemed political. We have forever reserved political things for politicians and technical things for bureaucrats. And it can be good at some exceptional circumstances...

"We are close to an agreement but technical verifications have to be undertaken, financial calculations have to be made and it's really for technical reasons that at this hour of the day it was not possible to do it in a proper way and so we are interrupting the meeting and reconvening next Monday," Eurogroup chairman Jean-Claude Juncker told reporters and was quoted by Reuters.

"There are no major political disagreements," he added.

While $44 billion-issue is for the short-term, the sustainable long term solution is to maintain Greek debt-to-GDP ratio at 120%, a figure that should be achieved by 2020. Next year, the figure is supposed to hit 189% as per sources. That is a debt reduction of 69% in a span of 7 years. Either the debt has to come down or GDP has to go up in drastic scale so that this outcome is achieved. The debt of Greece, however is going up and GDP is contracting for the fifth year. A solution is as elusive as a monkey.

Meanwhile, in a document that was circulated in the meeting of the lenders and was seen by Reuters, it was mentioned that the debt levels of Greece could not be brought down to 120% of GDP in 2020 unless euro zone member states write off a portion of loans to Greece.

But this could happen in 2022 without any politcal, economic ramifications for any country in the Eurozone, the document did say, though the news report did not mention how:

“The document did say Greek debt could fall to 120 percent of GDP two years later -- in 2022 -- without having to impose any losses on euro zone member states or forcing through a buy-back of Greek debt from private-sector bondholders.

But International Monetary Fund chief Christine Lagarde rejected such an extension at similar talks last week.”

The Euro Zone situation is such that Germany, or for that matter any other nation cannot take a hair cut, especially because of the political sensitivity of issue. The Germans love their money, just as anyone else and they will not let the tax money go down to some drain in Athens.

But the IMF being an international organization and having a facade of bureaucracy free of socio-political frills and pretensions, can extend some magnanimity and help Greece. Two years is not even a drop in the ocean of time. And one does not get a chance to save the world often; but this looks a cakewalk.

Reduce the interest rates on loans extended to Greece, call for a moratorium on interest rate payments and lengthen the maturities on loans: Greece would become a bit more stable and will do good.

As Juncker said: "Greece has delivered. Now it's up to us to deliver,"

As published in: http://www.commodityonline.com/news/euro-zone-crisis-will-imf-spoil-the-chance-of-saving-the-world-51456-3-51457.html 

Gold: Is the judgement day near?

Last Updated : 05 November 2012 at 10:45 IST
NEW YORK (Commodity Online): Gold prices have firmed up on the Comex subsequent to charting below-$1700 levels Friday, as positive US jobs data for the day portrayed a robust picture for the economy.

At 10.10 am IST, gold on the Comex is up 0.27%, a nudge of 4.35 USD at $1679.75. Gold on India's MCX for December delivery was seen trading at Rs.30564 a gain of 0.2%.

"In the short term gold may hover around Friday's low, but there isn't much room on the downside as easing monetary policy is still a global trend," said Li Ning, an analyst at Shanghai CIFCO Futures to Reuters.

The incessant cash printing by Central Bankers have aided inflation and currency debasement which is prompting investors to flock to gold. But having QE measures by US tied down to job market recovery by Federal Reserve could mean that easing measures may not continue in the very long-term. At least that is what the investors think about it.

Now, with massive selling in gold just past, some amount of buying can be expected. It is possible that US apart, markets would take cues from Eurozone crisis, especially Greece, where the Parliament is about to vote on an austerity bill even as Unions there are about to embark on a nation wide general strike.

The proposed budget cuts are expected to be the last by Greek govt if words of Prime Minister Antonis Samaras is to be believed.

"These will be the last cuts in wages and pensions," Samaras said on Sunday in a speech aimed at galvanizing the members of his New Democracy party. “We promised to avert the country's exit from the euro and this is what we are doing. We have given absolute priority to this because if we do not achieve this everything else will be meaningless.": Reuters reported.

If the vote fails and the proposal hits the dust, chances are more that the troika of lenders would turn their back on Greece. To finance its needs, and to fill its coffers Greece would then have to exit Euro killing the currency union and its spirit by resurrecting Drachma. Greece would then rather be a part of problem than solution.

The consequences of Greece's exit cannot be predicted: analysts use the word catastrophe to describe a less-Europe situation.

Moreover, if Greece exits from the currency union, attention will be shifted to Italy, Portugual and Spain whose debt yields would then be taken to unsustainable levels resulting in a total collapse of the union as both countries too would have to follow the example set by Athens.

It all depends on the vote which is expected to be passed on a tight note on Wednesday. Vote fails, gold gains and vice versa.

As published in: http://www.commodityonline.com/news/gold-is-the-judgement-day-near-51186-3-51187.html

Irish debt crisis and the future of Euro

The problem with economic bubbles is that the existence of a bubble would only be identified once it goes bust! Until then, no one would heed to the cries of hard-core economists.

But experience is a great teacher subjecting you to exams first and then teaching you bitter lessons! Having gone through a global crisis, people are more aware of bubbles and their bangs.

The Irish financial crisis also started off with a bubble formation in the property market. Until it went bust in 2008 global meltdown, Irish banks were lending like crazy to property developers.

Anglo-Irish bank, now on the ventilator, was the craziest lender.

In a lending frenzy, almost all the banks in the nation vied for property developers’ business pie, resulting in a sharp upward movement in house prices and office-space costs.

Finally the house of cards came down with property prices tumbling down by a whopping 50-60%. Bad debts resulted out of reckless lending to property developers got accumulated.

Now the Irish republic is gearing up—and it is a slow-motion shift—to bail out the banks at a cost of 45 billion Euros! This means, the government will run a budget deficit equivalent to 32% of GDP this year!

Needless to say, Anglo-Irish bank is now nationalized. To save this bank alone, government must pump in 35 billion Euros!

Recently S&P had brought down the credit-worthiness of the Irish Republic.

The nation’s sad state of affairs was very much evident when it implemented two emergency budgets in October 2008 and April 2009, respectively, followed by a drastic cut in public pay in another budget in December last year!

In the bygone year, Irish economy shrunk by 10%; the worst in Europe.

The coming budget, slated to be unleashed this December means:

-Ireland should make 15 billion Euros in savings by 2014
-Public spending would be less by 4.5 billion Euros next year
-Tax rates would be up, to collect 1.5 billion Euros in 2011
-6 billion Euros in cuts will have to be effected immediately to bring down budget deficit down to between 9.5-9.75% of GDP.

Clearly, something has gone wrong with a nation ranking fifth in UN’s Human Development Index.

Known as the ‘Celtic Tiger’ the republic finds it humiliating to approach EU institutions for money, even as the figures tell us, it has already happened! ["It has been a very hard-won sovereignty for this country and the government is not going to give over that sovereignty to anyone.” said Irish Enterprise Minister, Batt O'Keeffe, which the BBC reported]

As of September, the European Central Bank has already lent 83 billion Euros to Ireland’s domestic banks and all Irish credit institutions getting 130 billion Euros by the end of October; the sum is equivalent to the value of Ireland’s current GNP!

But this lending phenomenon, having already breached a Central Bank’s basic policies of lending, cannot be expected to continue.

In such a scenario, Ireland will have to run to European Financial Stability Fund or to European Financial Stability Mechanism for respite.

The latter can lend up to 60 billion Euros while the former is capable of lending many times over sitting on reserves close to 440 billion Euros.

Further, there is the IMF ready to lend 50% of what Europe would provide.

Obviously, tax payers of Ireland are already over taxed making them redundant to be of any help.

The crux of the crisis
It is all about the banking system in Ireland.

Despite being State controlled, the banks in Ireland are finding it immensely difficult to borrow from other banks and financial institutions. Following the market mishap, foreign financial institutions are not keen on purchasing Irish government bonds or are willing to lend to Irish banks.

This has brought about a liquidity crisis in Ireland even as the government says it is fully funded until the middle of 2011 to carry on with routine affairs.

Meanwhile, Irish bond yields exhibited a free rise, signaling uncertainties and lack of confidence in the government’s ability to honour debts.

Political stability of the Fianna Fail-Green Party ruling coalition is also under threat with just a three-seat majority in Parliament.

Why Euro zone should worry?
Ireland being a Euro zone member country, its problems becomes Euro zone’s problem as well.

For instance, Spain and Portugal, two other Euro zone States, also exhibit the same state of affairs as Ireland, in stretched government finances.

With shadows of apprehension in the repayment abilities of the Irish government looming large, it is natural that the lenders are having concerns regarding the replenishment abilities of these two countries as well.

This would seriously inhibit both countries’ ability to borrow from international markets by pushing up bond yields.

Though Ireland is ‘fully funded’ until the middle of next year, the same may not be the case with Spain and Portugal pegging their expenditures on borrowed money!

The threat to Euro
With bond yields rising and bond values tumbling, the interest rates across the Euro zone member nations would rise. This would significantly harm their growth and development with lesser capital for industries.

The crisis thus, would spread to other member nations in the form of a second round of recession.

Since Euro is a multi-nation currency, devaluing Euro is deemed complicated if not impractical. This means, a general short-cut to fiscal and monetary growth through increased exports is out of question.

The only alternative is to tighten the belt and skip a meal! Some of the hard fiscal measures, including significant cuts in spending on welfare programs will have to be adopted.

The social repercussions of such an activity can give jitters to politicians.

In this context, it will not be erroneous to assume that certain Euro zone countries may force themselves out of the Euro embrace.

Portugal has already issued a warning in this regard. Its Finance Minister has urged Dublin to opt for the bail out and “do the right thing” for Euro.

In another instance, Expresso weekly quoted Portuguese foreign minister as saying, “I believe that the parties understand that the alternative to the situation we confront is eventually leaving the euro.” He was expressing his disgust at a political consensus not emerging to save the nation from the current crisis.

Clearly no one prefers austerity measures.

As published in: http://www.commodityonline.com/news/Irish-debt-crisis-and-the-future-of-Euro-33560-3-1.html