Perhaps it was just the calm before the storm, where the latter represents whether the Fed Chairman will announce his preparedness to undertake more QE when he speaks on Friday at the Jackson Hole symposium. After the volatility evident at the end of last week, trading conditions yesterday were generally less eventful. Buyers were lurking with intent, some keen to put risk back to work at (now) much cheaper valuations. In response, the FTSE 100 was up more than 2% at one stage, and bond yields were around 5bp higher in the major markets.
Overnight, some of the Asian bourses have registered significant gains – the Kospi is up 4%, and Taiwan’s Taiex has jumped more than 3%. The gold price has been incredibly volatile – it fell almost $40 after reaching a record high of $1,895 early in London trading, before climbing gradually through the New York session to eventually achieve a fresh new high 0f $1,913.50. The major currencies were relatively becalmed, with only some of the high-beta currencies attracting some buying interest.
Guest post by FxPro
Commentary
Merkel pours cold water on Eurobonds. Angela Merkel tried hard over the weekend to slow the gathering momentum for common euro-area bonds, claiming that it was “precisely the wrong answer” at this time of dramatic crisis. In an interview with ZDF television in Berlin ahead of elections early next month in her home state, Merkel pointed out that Eurobonds would require changes to EU treaty rules that would take years to alter, and in any event such changes may well fall foul of Germany’s constitution. According to the German Chancellor, Europe should focus its efforts on reducing government debt and improving competitiveness. She has a point – Eurobonds will not be a panacea for the sclerotic growth dynamics in most of the eurozone, nor the excessive debt accumulated by many of Europe’s sovereigns. The obdurate stance of Germany’s leader was, unsurprisingly, supported by her Finance Minister. That said, he did intimate that he had no issue with ceding sovereignty to Brussels over time. Interestingly, EU president Von Rompuy sided with Merkel, claiming that joint bonds would not work until economic and fiscal policies within the eurozone were better aligned. As widely recognised, the whole euro project has reached a crucial crossroad. Either Europe accepts the need for closer fiscal integration and all of the compromises to national sovereignty and policy independence that it involves, or the single currency will rapidly morph into something very different from that which exists currently. The appetite for fiscal union, not just in Germany but elsewhere in northern Europe, is definitely waning. Last week, six countries including Austria, Finland and the Netherlands commenced bilateral discussions with Greece in an attempt to secure collateral as part of the release of the next tranche of bailout money. Right now, northern Europe seems a long way from agreeing to Eurobonds. Their reluctance is understandable. Without structural reform and closer fiscal alignment, Eurobonds would merely increase funding costs and raise the debt burdens of Europe’s strongest economies.
Glittering gold. The glittering allure of gold as a store of value in these incredibly uncertain times shows absolutely no signs of faltering, with the price reaching yet another record high overnight of $1,913.50 an ounce. Perpetuating the surge in the gold price over recent days has been the increased threat of further central bank intervention weighing on the two traditional safe haven currencies, namely the Japanese yen and the Swiss franc. Policy-makers in both countries are incredibly aggravated about the potential financial damage which substantially overvalued currencies may wreak on their local economies. Gold’s ascent is both expected and surprising at the same time. Expected in the sense that it represents one of the few viable options for those seeking to protect their wealth from the deliberate currency debasement being implemented by policy-makers in advanced economies. Surprising, in the sense that it has been so incredibly widely expected. Since early July, the gold price has jumped by more than $400 or 29%. Gold has doubled in less than 2 ½ years, tripled in the past four years, and quadrupled in the past six years Quite a good investment! In the near-term, it is not clear what might arrest this relentless demand for the precious metal. The RSI has been around 70 (regarded as technically overbought) for more than a month, without any hint of a pullback. At a time of widespread asset price destruction and currency uncertainty, gold has been a welcome port in the storm.
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