Italian Bond Auction and Bullish Headlines
The market began to roll over at key resistance on Tuesday on concerns over Italian debt auctions, but those fears seem to have subsided on today’s auction results. While the market is up on the news, the results were rather mixed; U.S. economic releases today might explain the other half of the equation.
As the last debt auction of 2011 came to a close, the Italian debt auction results were mixed. The country sold 7.02 billion euros of bonds while the target was between 5 and 8.5 billion euros. While the auction fell short of the target, yields fell from the prior sales back at the end of November. But even here, yields are still near 7% which is dangerously close to where Ireland and Greece started looking for help. Mario Monti was happy with the results considering the ECB has pulled back its support with less bond purchases. He also mentioned there weren’t any more plans for austerity and his focus was going to shift towards growth opportunities; however, he didn’t rule out future austerity if needed.
While the major news item today was the Italian bond auctions, the market was peppered with other market friendly headlines, such as:
- Lower inflation in Germany falling to 2.4% from 2.8% - Bloomberg
- European Meetings filling in January
- January 9th meeting between Merkel and Sarkozy leaked today - WSJ
- Financial Minister meeting January 23-24 – Agenda Here
- European Leaders Summit on January 30th
- Shanghai up two days on speculation China will cut banks’ reserve requirements in January - WSJ
- Bullish Housing data on Pending Home Sales – Moody’s
- ISM – Chicago manufacturing remains elevated at 62.5 for December as new orders and employment were solid – Moody’s
- While Jobless claims rose last week to 381,000, economists were largely reminding us that the December drop in claims is near record lows since the “great recession”.
The market continued the morning rally on to the close, closing near the session’s highs. Market strength was found in the financials, materials, industrials, and energy sectors. Within the industry groups, homebuilders, precious metal miners, regional banks, capital markets, large banks, and oil & gas exploration powered the S&P 500 back towards 1263
Peeling the ECB Onion
There have been some interesting developments regarding Europe since the ECB released the results of its three-year liquidity facility. There was a record use of this facility last week with 520 banks borrowing 489 billion euros. That’s great if they can lend those funds to support sovereign debt or lend to businesses to grow the economy, but no, that’s not what’s happening. The ECB’s deposit facility, which has a low rate of interest, is where banks are parking this money. Almost 412 billion euros were deposited recently which is a new record. The last record use of the facility came in June 2010 when the Greek crisis reared its ugly head again. 384 billion euros were parked there at the time. While I imagine it was not the intent for banks to borrow at 1% and invest in 0.25% returning investments, it’s obviously a clear signal that banks are very nervous right now.
We had a similar situation in 2008 when the U.S. Treasury created TARP and the Federal Reserve began quantitative easing in 2009. Inflationists argued this was inflationary, but deflationists fired back. Deflationists argued that if the banks didn’t lend the increased money supply, then there wasn’t any money velocity. Essentially, right now, there is no money velocity in Europe. Even though banks are investing in 0.25 percent rates of return in the ECB deposit facility, this is obviously only a short-term issue until fears abate. Eventually, when confidence is restored this money will make its way back into the economy in a reflationary event.
I’ve read many analyst reports of austerity versus monetary reflation over the last two weeks heading into 2012 and they all seem to agree that Euro woes will carry into the first half of the year. Some disagree here at this point arguing a breakup of the EU or a partial split while the others argue the ECB will eventually cave-in and support the sovereign bond market with their SMP. Who’s right? Time will tell as nobody has a crystal ball.
Regardless of which point of view you favor, the market is showing us that the risk-off trade continues to perform well with healthcare, utilities, and staples dominating the list of new 52-week highs. Additionally, gold and the U.S. dollar are telling the same story, “de-risking and safety”.
Gold Top?
There have been calls for a gold top recently by Dennis Gartman, George Soros, and many others. Fundamentally speaking, I think calling the gold bull market over is a little premature with all of the liquidity floating around and record-setting accommodative monetary policy from central banks around the world. Those are the fundamental catalysts supporting a long-term bull market in precious metals (and equity markets) that obviously aren’t going away any time soon. Interestingly, Soros sold his position in GLD during the first quarter. Even now, the price of GLD remains elevated from that period. Gold rose another 30% from March to the August high before correcting from excess.
Gold got ahead of itself in September like silver did in April and that has to work itself out – painfully to investors who bought at the top. I tried my best to signal caution in April, “Bulls, Do Not Lower Your Guard” and in August, “Preparing for a Dead Cat Bounce: With a Side Note on Gold”, when those events were happening.
The gold bull market of the 70s ended when monetary policy had raised interest rates to the mid to high-teens. At the Fed’s target of 0-0.25 basis points, quantitative easing 1.0 and 2.0 behind us, and a Fed that still wants to consider more accommodation according to the last two meetings; we’re pretty far away from the conditions of a gold top. As I stated previously on December 15th, RSI below 30 means gold is oversold. Citing that gold is trading below the 200-day moving average also doesn’t mean much to me considering it’s been there before (2003, 2004, 2005, 2006, 2007, 2008, and 2009). I might add that the 150-day and the 200-day moving average are both still rising on gold futures.
Gold and silver both rallied after dipping briefly below the September lows today. The intraday lows on the futures contracts for gold and silver were $1,523.90 and $26.145, respectively. Gold and silver rallied to trade near $1547 and $27.64 at the close of the equity markets. Likewise, the U.S. dollar index failed to breakout above the December 14th high of 80.73. So we have gold at support in a downtrend and the dollar at resistance in an uptrend. Many of the technical levels I talked about on the 15th are still holding.
2012
So next month, we should get a number of prognostications about what 2012 will bring as crystal balls are polished and buffed. At the top of the list will be European concerns as fears continue to remain elevated, as are bond yields. I’m going to continue to focus on the day to day events, both in the headlines and technically in the charts. 2011 sure was interesting and I expect nothing less of 2012.
