-- Posted Wednesday, 19 March 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
March 19, a.m. (USAGOLD) -- Gold has corrected in the wake of Tuesday's 75bp rate cut by the Fed. The recent downside extension is attributed to funds locking in profits on commodity positions ahead of quarter-end. Market chatter suggests they'll be looking to get right back in, implying this is a buying opportunity. The dollar remains under modest selling pressure, retracing yesterday's corrective rebound and has moved little in comparison to the intraday retreat in gold. This lends credence to the aforementioned scenario explaining the retreat in gold.
Rumors are circulating that the Swiss government has been discussing a takeover proposal of UBS with Credit Suisse First Boston (CSFB). This sounds like something very similar to the Fed/JPMorgan rescue of Bear Stearns. The Swiss press has also mentioned Deutsche Bank and HSBC as potential buyers of UBS.
Additionally, trading in Heritage Financial Group (HBOS) were suspended for a time on FTSE following a sharp drop stemming from rumors of critical exposure to a Credit Default Swap (CDS) position. Shares later rebounded when an HBOS spokesperson vehemently denied the rumors.
You may recall that Bear Stearns denied all rumors of a liquidity crisis in the days leading up to their collapse and eventual buyout. The market is understandable edgy and more inclined to believe 'where there's smoke there's fire' these days.
The Fed cut their benchmark rate by 75bp on Tuesday, despite expectations from many quarters (including here) of a full percentage point cut. Somewhat surprisingly, there were two dissenters against the size of the ease. Fisher and Plosser were in favor of a 50bp cut, effectively ruling out the jumbo 100bp ease, hence the 75bp compromise. There haven't been two dissenters to a policy action in nearly 10 years (May-98).
The Fed continues to walk the fine line between risks to growth and price risks. Obviously, the threats to growth continue to carry the day, but the two dissents suggest at least some of the FOMC members are increasingly worried about inflation. That concern was acknowledged in the policy statement: "Inflation has been elevated, and some indicators of inflation expectations have risen."
Nonetheless, the Fed sent a pretty strong signal that downside risks to growth remain, citing that; "the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."
Fed funds futures initially fell in the wake of the Fed announcement, but are back on the rise. The next FOMC meeting is scheduled for 30-Apr and odds are already running at about 40% for an inter-meeting cut ahead of that date. The market has nearly priced in a 50bp cut by the end of Apr. Implied yields on deferred contracts from mid-summer out to Oct remain closer to 1.50%.
The prospect of further rate cuts and positive news from Goldman Sachs and Lehman Brothers sparked the biggest stock market rally in five years (DJIA +420.41). Both Goldman and Lehman posted better than expected earnings; and when I say that, I mean smaller than expected losses. Both highlighted their liquidity positions, easing concerns about any 'Bear Stearns like' contagion. Morgan Stanley reported similar results this morning.
The dollar corrected on Tuesday as well, given the smaller than expected ease. However, the long term fundamentals that favor dollar weakness remain intact: Massive debasing liquidity injections and expectations of more rate cuts should keep the dollar generally soft.
Renewed safe-haven buying of yen and Swiss franc held these dollar rates below 100.00 and 1.000 respectively. The greenback is in the process of retracing the recent upticks, favoring an eventual resumption of the long-term downtrend. The fact that the dollar is not rallying in the face of the recent retreat in gold suggests that the pullback is indeed just fund profit taking ahead of the end of Q1.
We look for gold to find support in the short term and then bullish fundamentals (and the technicals too) should take hold once again. We look for concerns about the US and global banking systems to persist, along with worries over inflation and recession. The expectations of further rate cuts, should keep the dollar on the defensive, which is supportive for the gold market. Additionally, gold supplies are on the decline, while global demand is growing. All these factors bode well for the long-term uptrend in the yellow metal.
Gold Market Movers:
Slight increase in EIA crude oil stocks for the week ended 14-Mar. Gasoline stocks fall significantly.
Dollar slides, yen gains as bank worries weigh
FSA launches inquiry into HBOS share plunge
Stock index futures suggest a lower open on Wall Street.
