Another disappointing weekend

IMF and G20 summits over the weekend meant there was a hope for some kind of action in a big fashion. However, all the weekend brought was a mounting pressure on Europe. Japan and China signaled they might be ready to help but provided little details and it was pretty clear that everyone expects Europe to make the key decisions before any external intervention takes place. Those decisions center around:

Greece – heads of a mission might recommend granting Greece the next tranche of aid but it’s not going to be enough. The market is convinced that the fiscal path in Greece is unsustainable and the debt burden will need to be reduced. The sooner it becomes clear in what way this is going to be achieved, the better – a prolonged uncertainty increases a risk of contagion.

Support mechanism – Germans will vote on the EFSF on Thursday but Europe is behind the curve in this aspect as well. The question now is how to leverage the fund to make it capable of handling a contagion that might take place after financial institutions recognize losses on a Greek debt.

Banking capital – recapitalizing banks may ease strains in a baking system that have caused a sell-off on many “risky” markets; unless those strains are mitigated, things may slip out of control soon

More liquidity – the dollar liquidity operations announced by major central banks hasn’t succeed in easing concerns in a banking sector so the banks may need to do more in this area

At the moment investors are left with uncertainty with time running out and a risk of banking crisis on the rise so it is not surprising that we start the week from a run from risky assets (especially commodities) to the dollar and the yen.

A sell-off on commodities

We have reiterated numerously that commodity prices were far too high given the economic environment and some kind of adjustment was necessary. This adjustment is taking place rapidly, triggered by a run to the dollar. Even though commodities lost massively last week, the downward potential is still there, especially on oil which (in case of Brent) remains above 100 USD per barrel.

Interestingly, and contrary to a general belief, precious metals are leading the way in the sell-off, confirming a speculative (rather than a safe-haven) nature of preceding gains. Surely a decision from CME to raise margin requirements added to a pressure but it shouldn’t be seen as a main culprit. A price of gold has just broken a significant support at 1575 USD per ounce and may head south to 1475 USD in the near future.

Przemysław Kwiecień PhD, Chief Economist

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