Gold Breaks Out As Bonds And Stocks Trade Lower From Their Recent Highs On The Exhaustion Of The World Central Banks’ Monetary Authority

Financial Market Report for Tuesday July 31, 2012

Junk Bonds, JNK, Emerging Market Bonds, EMB, and US Short to Medium Term Corporate Bonds, LQD, rise to new highs, causing Bonds, BND, to trade slightly higher, but below their recent highs, as stocks, VT, traded slightly lower, on news that the US Federal Reserve will wait for a decision for further easing.

The Steepner ETF, STPP, has risen from its July 11, 2012, low of 34.50, as is seen in this ongoing Yahoo Finance chart of STPP, ZROZ, EDV, TLT, and VT, as the 10 30 US Sovereign Debt Yield Curve, $TNX:TYX, has been rising from its historic low on July 24, 2012, suggesting that an exhaustion of the  world central banks’ monetary authority.

Staples, XLP, and Utility stocks, XLU, and creditors, V, MA, DFS, manifested bearish engulfing;

Biotechnology stocks, XBI, fell parabolically lower today suggesting that risk on investing has turned to risk off investing.

The Gold ETF, GLD, has been in breakout for five days now suggesting that an investment demand for gold has arisen.

Gary of Between The Hedges relates The Fed’s ZIRP is pushing institutional investors too far out on the risk spectrum, subprime auto lending is soaring.  I relate that subprime auto lender, Nicholas Financial, NICK,  pays a 3% dividend and has soared from from 2.00 to 13.40 since the beginning of the Quantative Easing.

Mike Mish Shedlock writes 51% of Germans believe Germany better off outside eurozone.  That pole hat poll, with only 29% believing the euro is a good thing, suggests that if the German constitutional court forced Merkel to put the euro to a referendum, that Germany would vote to leave the eurozone. On September 12, the German constitution court is expected to rule on the ESM as well as the fiscal treaty chancellor Angela Merkel signed in March. Is it any wonder ECB president Mario Draghi is loathe to do anything but talk before the court meets? Should the court rule both are OK, eurocrats like Jean-Claude Juncker will immediately seek to change what the ESM can do, including the use of leverage. Let Voters Decide. Given that Germany is better off outside the eurozone, and the eurozone is arguably better off without Germany, hopefully, the constitutional court will say it’s time to put all of this to voters, including whether Germany should stay in the eurozone. Unfortunately, I expect the court will OK both the ESM and the Merkozy treaty, but give further warnings to Merkel and the ECB that 500 million euros is the limit.

Last week Mario Draghi, said ”he would do whatever it takes to preserve the euro”.

And today Open Europe reports Showdown looms at tomorrow’s ECB board meeting; German government rejects equipping ESM with a banking licence
The WSJ reports that tomorrow’s monthly meeting of the ECB’s governing council is set to be fractious, with Bundesbank President Jens Weidmann resisting calls by many of his colleagues for the ECB to play a more active role in the eurozone rescue efforts, for example by resuming its purchase of eurozone government bonds. The paper notes that a compromise could be struck whereby the ECB would announce its intention to buy government bonds and to take other measures, but to delay their implementation.

The German government yesterday rejected reports that the eurozone’s new permanent bailout fund, the ESM, could be equipped with a banking licence, with a Finance Ministry spokesperson saying such a move “was not necessary”. Speaking on Deutschlandfunk this morning, the FDP’s parliamentary faction leader Rainer Brüderle, described the idea as an “inflationary suicide mission”, adding that “we cannot save the euro by limitlessly printing money”. The concept was also rejected by the opposition SPD, but the Green’s financial spokesperson Gerhard Schick said the idea had some merit, adding that assistance to Spain could be made conditional on it taking measures to impose higher taxes on its wealthiest citizens.

Meanwhile, Westdeutsche Allgemeine Zeitung reports that according to a confidential Bundestag document on the ESM, Germany won’t be able to always veto capital calls in case the ESM has incurred losses and needs to restore its €80bn of paid-up capital threshold, given that its Board of Governors can make these decisions on the basis of a simple majority. WSJ FAZ Welt Handelsblatt Zeit Il Sole 24 Ore El País Tagesspiegel: Barthle Westdeutsche Allgemeine Zeitung

Talks over new budget cuts continue in Greece; Greek Deputy Finance Minister: Our cash reserves are almost zero
The leaders of Greece’s three-party coalition will today resume talks over the €11.5bn budget cuts Greece is due to make in 2013-14. Kathimerini reports that Evangelos Venizelos, the leader of the socialist PASOK party, is proposing that only €6.5bn cuts be implemented over the next two years, while the rest would be made during 2015-16. A separate article in the paper notes that Greece will be forced to issue higher amounts of treasury bills this month, after eurozone governments turned down the request for a ‘bridge loan’ to cover a €3.2bn bond – held by the ECB – which matures on 20 August.

Meanwhile, Greece’s Deputy Finance Minister Christos Staikouras told NET television, “Cash reserves are almost zero. It is risky to say until when [they will last], as it always depends on the budget execution, revenues and expenditure.” Separately, German Transport Minister Peter Ramsauer (CSU) told ARD this morning, “Of course, Greece can exit the eurozone”, but added that this would not be “the solution to all problems.” Kathimerini Kathimerini 2 EUobserver Il Sole 24 Ore

The Irish government is to begin the process of ratifying the ESM treaty after the country’s Supreme Court rejected a claim brought by independent MP Thomas Pringle that it was unconstitutional and could not be ratified without a referendum. However, the Court referred a second claim concerning the ESM’s compatibility with the EU Treaties to the European Court of Justice in Luxembourg, asking it to urgently determine the matter under its accelerated procedures. Irish Times

In an interview with Helsingin Sanomat, Italian Prime Minister Mario Monti confirmed that eurozone leaders “are thinking of a possible intervention in various combinations involving the EFSF, the ESM and the ECB.” He said Italy “doesn’t seem to need any special help at the moment”, but may need “some breathing space” in future if its borrowing costs remain high. Monti is in Helsinki to meet his Finnish counterpart Jyrki Katainen today. Reuters Italia HS: Monti HS FT Telegraph Irish Times La Stampa Le Figaro Le Monde Il Sole 24 Ore Liberation Ansa Corriere della Sera Repubblica

Figures released by the EU’s statistics office Eurostat yesterday showed that the unemployment rate in the eurozone reached a record-high 11.2% in June. Spain had the highest unemployment rate, at 24.8%, followed by Greece at 22.5%. WSJ  FT EurActiv Ansa

In an interview published in the staff magazine of the Bundesbank, the bank’s President Jens Weidmann said, “Seeing how reluctant some countries are to relinquish their fiscal policy autonomy – even in return for financial assistance – it is hard to imagine political union being achieved in the foreseeable future.” Bundesbank magazine: Weidmann

Bloomberg reports Bloomberg:Monti Says Rescue Fund Will Win Bank License to Tap ECB. Italy’s Prime Minister Mario Monti said the permanent rescue fund should have access to European Central Bank liquidity via a bank license, challenging German policy makers to back more actions to tame the euro-area crisis. “I think this would help, I think this will in due course occur,” Monti said today in Helsinki at a news conference with Finnish Prime Minister Jyrki Katainen. Monti’s assertion was a rebuff to Chancellor Angela Merkel’s Cabinet after ministers meeting in Berlin earlier today hardened their opposition to granting the planned bailout fund access to the ECB’s resources. Monti is prodding colleagues across Europe to back his fight to lower the borrowing costs that investors are imposing on Italy and Spain. In travels from Paris to Helsinki and on to Madrid tomorrow, where he’ll meet with Spanish Prime Minister Mariano Rajoy, Monti is seeking to bridge a north-south divide on crisis fighting and capitalize on a pledge by ECB President Mario Draghi to do whatever it takes to defend the euro. Monti and Katainen both declined to say what they wanted to hear from Draghi after a meeting of ECB policy makers tomorrow. The Italian premier instead urged central bankers to show equal respect for ECB independence, after Bundesbank President Jens Weidmann said the ECB shouldn’t exceed its inflation-fighting mandate and stressed Germany’s importance in setting common strategy in the 17-nation euro area, according to an interview conducted in June and posted on the Bundesbank’s website today. (Hat Tip to Gary of Between The Hedges)

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