- We begin, as usual, with the Greek News: Greece has approved cuts in pensions and healthcare. There has, of course, been rioting. But no one likes their pensions cut. Link: Greek Parliament approves pension cuts. At the same time, the Greek PM, Lucas Papademos, has rejected calls from Luxembourg for the appointment of a EU Special Commissioner to oversee the recovery of the Greek Economy. Which makes sense – it seems extremely unlikely to me that one commissioner is going to make much of a difference. Unless, obviously, that commissioner is Meryl Streep acting as the Iron Lady. Because then, well, obviously: a happy ending for Greece in 10 years time, and an unwelcome resignation for her Ironness. And an Oscar. Link: Papademos rejects call for special EU official.
- Ben Bernanke chatted to Congress yesterday, and affirmed that US interest rates are to remain low, whilst saying absolutely nothing about more rounds of quantitative easing. However, he did say that inflation remained subdued, so the Fed would be continuing its accommodative monetary policy (which is a euphemism for “trying to keep the money supply flowing by encouraging borrowing”). This is expected to go on until at least 2014. Link: Bernanke affirms low rate pledge. He also said that the Volker Rule won’t be ready by the July 21 deadline. The Volker rule, which is part of the Dodd-Frank Act, is meant to stop the banks from investing with their own money – rather than their customers’ money – in order to make a profit; whilst still permitting short-term trading when the banks act as market-makers. Link: Bernanke says Volker Rule won’t be ready.
- The price of Gold Futures fell dramatically yesterday after the announcement. Speculators were expecting Bernanke to announce further rounds of quantitative easing, so many bought gold futures hoping that the future price of gold would rise as a result of people buying more gold as a store of value. One speculator described Bernanke’s silence as almost deliberate – as it takes the wind right out of the sails of gold speculators. Ben – high fives if that’s the case. Link: Gold falls.
- China’s Manufacturing has improved for the third month in a row. People tend to watch manufacturing indices as they’re meant to be good indicators of economic growth and/or decline. So it seems that the Chinese economy is recovering. On the other hand, improved manufacturing could just be a sign of Chinese factories taking advantage of the looser monetary policies of the Chinese Central Bank, and building up inventories. Which would make this a bit of a false hope. We shall see. Link: Chinese Manufacturing Gain.
- The Wall Street folk are suffering after having their bonuses cut. PLEASE – everyone do themselves a favour and read this article: Wall Street Bonus Withdrawal means swapping Aspen for coupons. It’s surreal. But I totally get it – everyone spends to their expected income. You rely on that awesome bonus, so you buy giant houses and commit to renovations and send your three kids to private schools that cost more than Harvard. And your dogs cost you $17,000 a year, because they need dog-walkers and good food and regular trips to the dog parlour. That’s your lifestyle: you spend what you earn. Then you earn less. Sadly – you’re still committed to the renovations and the car repayments and the private school fees. F%#k. Let me just say that poverty is hard – but no one sinks into crisis as quickly an over-committed rich man. Life is eminently fair.
- And the Africa Business News in brief. Link: ABN Briefs. The highlights:
- The Zimbabwean minister responsible for indigenisation has lashed out at Impala Platinum, announcing that he is “sick and tired” of the group’s failure to comply with indigenisation laws. Oh dear. Not boding well for them sorting something by the week after next?
- Uganda’s growth is forecasted at 6.2% for the year, thanks to oil and hydroelectric production projects. Ugandan inflation has also dropped to 25.4%. Such a far cry from First World inflation.
That’s all for now.
Have a great Thursday.
Gareth Crosland March 1, 2012 at 15:05
Please can you explain this dramatic drop in gold yesterday?
I understand speculators were expecting an announcement on quantitative easing from the Fed so they went out and bought gold futures (when? surely we would have seen a price rise as demand increased?) hoping the price would rise as a result of more ppl buying gold.
Did they all then sell their gold futures subsequent to the announcement resulting in an increase in supply and a sharp decrease in price?Reply
Jayson Coomer March 1, 2012 at 15:24
So you're happy that this was a dramatic drop in the price of gold futures, hey?
Well – the higher price was bid up on the assumption that the Fed would announce quantitative easing. If the Fed had announced quantitative easing, investors would have expected higher inflation as a result, and therefore would have attempted to move their holdings into assets that act as a store of value. Right now, in the market, that store of value is gold. Mainly because other stores of value, like bonds, are perceived as risky owing to the world's current perception of debt. A quantitative easing announcement would therefore have pushed up the spot price of gold.
But there was no announcement of quantitative easing, there is no longer an expectation that people will move their holdings into gold in the near future. And therefore, there is no longer an expectation that the future spot price of gold will rise as a result of today's announcement. Speculators suddenly have less demand for gold futures (I suspect that this is more a demand issue, rather than a supply issue). Therefore, anyone selling has to do so at a lower price.
I reckon that the best way to think about this is a rebalancing. Technically, a futures contract should be attempting to lock in today's gold price, with delivery only taking place at some point in the future. Thus, to get a futures price, I would take today's spot gold price, impute interest on it to delivery date, and that should give me the trading price of the future. However, if I expect the spot gold price to go up, I would be willing to pay more than just the current spot price plus interest. Which is exactly what the speculators were betting on – thereby pricing in an adjustment for an expected increase in the gold price.
When that expected increase became unlikely, the calculated value of the gold future was repriced by the market to exclude the anticipated increase in the spot price.
At least, that's the way that I see it. Does that make sense?Reply
Gareth Crosland March 1, 2012 at 16:13
Yip it does! Thanks Coomer…..
Considering I am going to speak to commodities and resources people tomorrow, I need to know this stuff!
Did you see ISDA anounced that the ECB's Greek bond swap to avoid the implications of any CACs is not deemed to be a credit event ito of the CDSs? So many acronyms…aren't you proud?Reply
Jayson Coomer March 1, 2012 at 18:18
You know it! 😀Reply