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Gold Traders Look to the EU Stress Test to Gauge Market’s Health

Gold Traders Look to the EU Stress Test to Gauge Market’s Health

2010-07-17 00:55:00
John Kicklighter, Chief Currency Strategist
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With the primary driver in mind, we reflect on the past week’s developments in sentiment. While there was a general build in equities that culminated in an aggressive tumble Friday; gold traders were more interested in the underlying conditions. Specifically, the perceived health of the Euro-area’s financial markets was colored by a constant round of updates. News that Portugal’s sovereign debt rating was downgraded and private Spanish banks borrowed a record amount of euros from the ECB in June was overlooked in favor of successful debt auctions. If Europe’s situation were to deteriorate into an imminent crisis, the most likely catalyst would be a failed debt auction. Therefore, robust demand for debt auctions by Greece, Portugal, Spain, Italy and Germany can be construed as evidence that a conditions are returning to normal. On the other hand, this ignores the fact that they are paying significantly higher rates for capital; and economic conditions are deteriorating such that the dependency on funding will increase with time. This week, we will see whether demand can maintain its vigor with Greece offering another 1.5 billion euro auction of 13-week bills on the 20th. 

A far more important stressor for Europe’s financial health and investor sentiment worldwide is the results of the EU’s stress tests performed on regional banks. Expect the data to be portrayed as positive; but the lack of coverage for underperformers, an optimistic ‘worst case scenario’ and the lack of capacity for market confidence will offer dramatically different results than are recorded. Ultimately, it matters where investor confidence lies when the results are released. It wouldn’t be difficult to easily accept an optimistic façade or see through the confidence policy officials must voice.

The bearing of Europe isn’t the only potential threat to the backdrop of investor confidence and thereby the value of gold. The United Kingdom will facilitate sovereign credit interests with public debt figures and heat up global growth forecasts with a 2Q GDP reading. Another announcement that may overlooked is the BoC rate decision. Monetary policy from this central bank will tell us whether inflation is a valid threat in the strongest performing economies and just how concerned over a future global crisis officials really are. -  JK

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