Gold Reacting to Rising Elements of European Risks
The U.S. Comex gold futures climbed 1.17 percent this week after rising
1.29 percent in the previous two weeks on the back of heightened
concerns of the European debt crisis. The S&P 500 index dropped
almost 1 percent from its recent high on 14 March while the Euro Stoxx
50 Index plunged almost 2 percent this week. The Euro/Dollar bore the
brunt and dropped to a four-month low at 1.2859 during Asian open on
Wednesday. The U.S. 10-year Treasury bond yield dropped about 16bp
since the recent high of 2.05 percent on 11 March.
Renewed Turmoil in Europe
In the recent EU Summit, the European finance ministers agreed to extend
the bailout for Portugal and Ireland. They also agreed on the Euros 10
billion rescue plan for Cyprus, a reduction from the original Euros 17
billion. However, the banks in Cyprus will have to impose a levy on
bank deposits in a progressive manner compared to the previously
announced 6.75 percent levy on bank deposits up to Euros 100,000 and a
9.9 percent levy on deposits above that amount. On 19 March, the Cyprus
lawmakers voted the levy down as depositors and the Russia government
both cried unjust, urging the EU-17 finance ministers to negotiate a new
package. This unprecedented levy could have triggered scare of similar
levies being imposed on other peripheral European banks, raising
renewed concerns on the European debt crisis and capital flight to safer
havens. The risk-off scenario has increased demand for alternatives
such as gold and safer assets such as U.S. Treasuries.
Better-than-expected Economic Data in the U.S. and Germany and Chinese Inflation
Stronger economic numbers from the U.S. and Germany have tempered the
market’s enthusiasm in gold. The February housing starts in the U.S.
rose to 917,000 compared to an expected 915,000. The March ZEW consumer
confidence index in Germany has risen to a three-year high in March,
giving hopes that Germany will return to a positive GDP growth in Q1.
In China, the PBOC governor warned on the high inflation rate in
February of 3.2 percent and released a survey saying that 68 percent of
the Chinese households believes that housing prices are too high. The
government is likely to tighten the property market again, thus curbing
any expectations of further monetary easing in the short-term.
Watching the Fed
With the ongoing Cyprus and Euro situations and the better economic data
from the U.S., the Fed will likely in his FOMC announcement on 20 March
incorporate some optimism in the U.S. outlook and mention the downside
risks of global financial markets while largely maintain the low
interest rate and the existing QE program.
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20 Mar 2013 | Categories: Gold
