Compass Directions Morning Report Friday, 9 December 2011
The European Banking Authority (EBA) overnight released a report that showed that European banks would need to raise almost EUR 115 billion in new capital as part of the European rescue plan that involves write downs on Greek debt amongst other measures. Out of that total, the EBA estimated that Banco Santander alone would require EUR 15.3 billion while Unicredit SpA would require EUR 8 billion. Only two months ago the EBA had estimated that banks would require EUR 106 billion. The EBA which runs stress tests on banks annu-ally failed 8 banks in July and will now postpone next year’s test to allow banks to finalise capital raisings. The EUR lost ground overnight.
As expected, ECB President Mario Draghi cut interest rates and offered banks unlimited cash for 3 years while stopping short of announc-ing more bond purchases. The omission surrounding further asset purchases weighed heavily on the markets and in combination with the EBA announcements of increasing capital shortfalls in the European banking system has seen risk aversion rise overnight. In the prelude to the EU Summit, EC President Barroso called on leaders to set aside differences and work towards more fiscal discipline.
Equity markets were dragged lower once again by news developments out of Europe. Not surprisingly banks were hardest hit overnight with Morgan Stanley and Citigroup falling almost 7%. However, there was some good news with fewer than expected unemployment claims filed in the US last week. The optimists believe that the figures show that the US job market is in recovery mode. The S&P 500 has closed 2.11% lower at 1,234 continues to find resistance at the 200 day moving average. Shares in McDonald’s bucked the trend with with sales growth driven by strong demand in China and Japan. Earlier in Europe, the DAX sank 2% to 5,874 while the FTSE fell 1.14% to 5,484.
Commodity prices fell as the ECB dampened speculation that they would increase asset purchases. WTI Crude fell the most in 3 weeks losing 2.15% to $98.34. Precious metals fell with gold losing 1.9% to $1,711 while silver gave away 3% to trade at $31.65. Soft commodities were broadly lower while copper lost 1.7%. The CRB has lost 2.12 points to close at 307.95. Today we have the release of Japanese GDP figures and CPI, PPI, Industrial Production and Retail Sales out of China.
GOLD fell sharply in offshore trade as ECB President Draghi ruined what was ultimately looking like a good session as the ECB cut rates by 0.25% and US unemployment claims fell which saw markets rally. The announcement by the ECB that it is not planning to buy more bonds to spur growth in the region lead to heavy selling in all risk assets and this included gold as the USD gained for the first time in nearly a week and equities crumbled. Gold finished US trade weaker by 1.80% at $1,713. Last night was not a good night for global financial markets as European leaders and central bankers continue to say things that we just do not want to hear right now and no matter what, they should be spinning positive rhetoric so that investor sentiment improves not deteriorates. Gold is not just a safe-haven asset so when we see nights of risk reversal gold will be hit as there is a race to liquidity. We remain bulls in the bigger picture but it is only prudent to be cautious at these levels. We do remain a keen buyer of dips though and major shortterm support at $1,700/02 is on focus and if this level holds in early trade today we would consider buying with stops at $1,695. Below the level $1,665/75 comes into focus as the last level of support. Offers are strong towards $1,711 with a break opening a move to $1,720.
AUD/USD rallied as risk sentiment improved during the European session as the ECB cut rates by 0.25bps and lifted the inflation outlook for the 2012 year. AUD spiked on the positive news to 1.0380 as weaker stops caused a short squeeze across the markets. However, the tone was to change quickly as ECB president Draghi spoke about the markets desire to see ECB bypassing the IMF and being the lender of last resort. However, when he signalled that the ECB wouldn’t take that role and that they would not lend to the IMF the risk sentiment changed quickly with the new bulls getting crushed as the AUD collapsed to be closing the day over 200 points lower than the day’s highs. With it being a data free Friday and the markets having a risk off tone thanks to the overnight events the AUD could finally make its way back towards parity by the end of the day. There will be medium level support between 1.0075 and 1.0125 but a move to 1.0055 is the next big target.
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