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All eyes and ears on gold & Jackson Hole


When US Federal Reserve Chairman speaks at Jackson Hole, all ears will be trained for confirmation or otherwise that another round of market support is on its way say Mark McFarland.

August 29, 2012 4:06 by

As politicians and market players return from holidays, the next big date in the calendar is 12 September when Germany’s Constitutional Courtis set to decide on the legality of the European Stabilisation Mechanism (ESM).  Plans to pass into law the EUR500bn fund, with responsibility to under-write restructuring on southern Europe, have been undermined by a combination of German law makers, academics and politicians who have challenged its legality under German law. Bundesbank president Jens Weidmann has waded in with opposition to an ECB bond buying programme on the grounds that it would be addictive, like drugs.


Without the passing of ESM legislation in Germany, risk markets would be exposed to the prospect of the existing stabilization fund having only EUR240bn left under management.  Potential plans, vigorously denied by the European Central Bank (ECB) last week, to cap yields on southern European bonds were never going to be acceptable to a northern Europe that continues to expect fiscal accountability in return for bailout funding.  Europe is, and remains, at risk from a short-fall in funding and buy-in from across the political body.  For without funding the ECB will have to go it alone with a bond-buying program than many in the market still expect will be announced at the next ECB policy meeting on 6 September.


At this point it should be noted that the president of the Bundesbank is considerably less media friendly than the ex-investment banker Mario Draghi, who despite slipping up on 2 August with near-promises of stimulus measures, is much smoother in a public forum.  Thus it’s probable that the Bundesbank president will have his way.


Nevertheless, sentiment has indeed improved since the early summer.  US economic and earnings data have shown some signs of stabilizing, and with the prospect of an additional easing programme from the US Federal Reserve now firmly in the offing, there are good reasons to remain optimistic.  Our tactical view remains that equities exposure is best expressed in this environment through maintaining holdings of developed market equities rather than emerging markets; to be precise, G7 holdings should be in US equities.  Emerging Markets equities have been supported in the last few months primarily by flows from developed markets rather than being super-cheap and therefore a great buying opportunity. If Europe does indeed crack, then it will be EM where the vulnerability is most likely to show up.


Looking ahead, a few events are worth flagging up as potentially major inflection points.  On Friday, 31 August, US Federal Reserve Chairman speaks at Jackson Hole.  All ears will be trained for confirmation or otherwise that another round of market support is on its way.  The next day, ECB President Mario Draghi is due to speak at Jackson Hole.  It is this speech that will dominate proceedings.  For Emerging Markets, the main event will be the decision by the central bank of Brazil on interest rates.  The market is expecting the BCB to make its ninth cut in 13 months.  The peak for the Brazilian central bank policy rate was 12.5% in July 2011 and it is expected to drop another 50bps to 7.50% this week as the BCB works to counter poor economic growth numbers.


Lastly, on commodities our view on gold remains positive.  We released our Dual Currency Investment monitor today with pricing on contracts in USD with conversion into gold deposits.  Market signals on gold are somewhat ambiguous; the options market is showing no clear direction, but real interest rates are supportive.  The drop in USD rates since end June and the recent climb in one-year breakeven inflation rates in the US government bond market signal that there is no opportunity cost of holding a zero interest-bearing asset.  Equally, the likelihood of additional stimulus measures and signals from major central banks that they intend to add to their gold holdings, make it likely that the breakout in the price from the summer’s USD1550-1,630/oz trading range will be more robust that the last.

Mark McFarland is the Chief Investment Strategist, Private Banking, Emirates NBD

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