Greek Deal = Fed Hike?: Morning Market Update June 23

June 23rd, 2015 by

Global stocks gained this morning on an apparent breakthrough in negotiations in the Greek bailout crisis, as upbeat economic data in Europe and the U.S. combined with an extremely hawkish statement from a Fed official to send the dollar into orbit.

The sharply stronger greenback is pressuring commodities, including gold and oil, as well as U.S. Treasuries.

Yesterday in the Markets

The NASDAQ Composite posted an all-time closing high Monday, as investors shed safe haven assets as a Greek deal seemed imminent. The 10-year T-note fell, with its yield rising to 2.36%. The 10-year German bund also fell, to yield .88%. Gold lost 1.2% to end back down at the $1,185 support level, the PGMs were hit hard, but silver actually posted a gain of 9 cents (+.53%).

The European Central Bank provided a one-day uncapped bailout of Greek banks through its Emergency Liquidity Assistance on Monday, which was a good thing, as the Greek bank run continued with €1.9 billion euros in deposits pulled out of banks yesterday.

Factors Affecting Gold Today

greek statueThe Greek government has closed the gap with creditors on resuming the bailout of their devastated nation, but now prime minister Tsipras has the unenviable task of selling a deal that breaks the promises of his Syriza party. “Syriza” is the Greek acronym for “Radical Coalition of the Left”, a political party where the Socialists are the right wing. Opposition parties are expected to vote in favor for the deal when it is completed, offsetting defections of the hardline leftists. We expect a no confidence vote to be brought up by the communists and Euroskeptics in the party, to remove Tsipras.

In the meantime, the ECB is providing another day of open-ended assistance to Greek banks, to keep the economy from collapsing as the details on the bailout deal are hammered out.

Despite all the uncertainty and drama over the Greek Situation, the Purchasing Managers Index for EU as a whole rose to 54.1, up from 53.6 in May. This is the highest level in 4 years, and handily beat the slight drop to 53.5 that analysts had expected. The U.S. didn’t get off so lucky, with the June PMI shrinking from 54.0 in May to 53.4. Analysts had expected a gain to 54.2. This is the lowest level for PMI in the US since 2013.

Durable goods orders for May in the U.S. fell 1.8% in June, and has been blamed on companies working their way through unprecedented levels of excess inventory that has piled up over the last several months. Excluding aircraft and defense spending, capital goods orders rose 0.4% after a 0.3% drop in April

rising dollar chartOf course, the big news for gold this morning is the blast-off in the dollar. The U.S. dollar is well above 1% against a basket of currencies, while the euro is down against the dollar by the same amount. Continued quantitative easing by the ECB, combined with the upcoming interest rate hike by the Fed, has some forex experts calling for EUR-USD parity by the end of the year.

Inflaming expectations of a rate hike in the near future, Federal Reserve Board of Governors member Jerome Powell today put the odds of a September rate hike at 50%. However, an interest rate hike doesn’t mean that the gold price is in trouble. This article by Gwen Preston gives solid structural reasons to believe a rate increase would help gold (after an initial, emotional dip).

In other gold news, South African gold miners threaten to strike, demanding an 80% pay raise. While South Africa has dropped to #6 among gold producing nations, they did supply over 164 metric tonnes to the global market last year. On the demand side, China gold demand for the year has been 1,061 metric tonnes, up 20% over last year.

 

looking-aheadLooking Ahead

The two sides in the Greek talks have to reach a complete agreement before the EU leaders meeting on Thursday, so the clock is ticking.  Like the Ukraine crisis did last year, the Greek crisis this year has delayed the usual summer doldrums in gold prices.

Final GDP numbers for the first quarter in the US are due tomorrow, as well as petroleum stockpile reports. Also on tap is the IFO Business Climate Index in Germany, which is the EU leading economy.

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