24/08/2011: Few thoughts on today's Gold price correction

Following a dramatic rise over the recent weeks, gold registered a correction today. At this moment in time, gold for December 2011 delivery is down 5.76% on the day and is priced at USD 1,754.00 / oz. Here's a snapshot:
Of course, one day movement can be many things:

• A sustained correction (with market settling at lower levels and running along a flat trend)
• A short-term correction (with a return to, perhaps more sustainable, upward trend)
• A bear trap (with relatively prolonged period of downward corrections followed by a return to positive trend) and so on

While it is extremely hazardous to profess any explanations for specific daily (and generally high frequency) changes, here are some of the reasons that are being advanced by various analysts as to the possible drivers of today's correction:

1. The margins theory (see zerohedge comment here): CME raised margins on gold for the second time in the month, having hiked them first 22% and now raising them 27% again (new account margins are now at USD9,450 and maintenance accounts at USD5,500). This second rise follows 26% hike on margins by the Shanghai Gold Exchange (+26%) on Monday to 12%. In theory, margins increases should symmetrically rise costs for short and long positions on gold futures. Which can lead to closing of some positions. In practice, however, two things occur. Firstly, short positions face lower margin exposures than long positions - the difference being small, alas. Secondly, margins increases themselves might be dramatic, but on absolute terms they are still small, unless you are opening highly levered new accounts. The margins theory, in my view, helps explain the physical move in prices, but not the behavioral drivers for investors' reaction. More likely, in my view, is the possibility that two consecutive, short-spread margin hikes signal to the investors that CME is actively trying to prevent gold going parabolic, to contain speculative momentum. If so, current correction is welcome, as it triggers retrenchment of speculative leveraged investors.
2. The talk about Euro area demands for the collateral on Greek (and Portuguese and Irish... and may be Italian and Sapnish...) loans from EFSF/ESM/alphabet soup. FtAlphaville speculates on this (here). There can be indeed a push for such a move, though I doubt it will result in actual sales of gold reserves. Even if the sales were to take place, European peripheral gold will most likely be placed 'discretely' to other central banks and treasuries, plus the IMF in fear of destabilizing official reserves elsewhere. The last thing Europe will want to do is to dent its own (German, French & UK) wealth and anger a bunch of governments in Asia, plus the US & IMF - all of which are deeply into gold holdings.

Incidentally, couple of days ago I commented on twitter that CME margins increases are long-term positive for gold, if they are successful in cooling off speculative leveraged investors.

My guess - and I stress that this is a guess - is that the current correction can turn out to be relatively deep, but it will not alter long term (9-12 months) upward trend for gold. The reason is simple: US, UK, Japan and Europe are poised to print money. In part, this is already factored into previous highs for gold. In part, the uncertainty about the quantities of QE to be deployed, are offering both the upside and the downside scenarios for the gold price relative to peak.

If, however, the global QE does not materialize, stock markets and corporate debt markets will likely to slip into serious bear sentiment. Which will push gold back onto near-parabolic trend up.

As far as today's short-term correction goes, my view is that it was 'helped' by the shifts of liquidity into equities with markets posting another day of strong upsides.

For a longer-term lesson to be learned: today's correction shows clearly the perils (for ordinary investors) of rushing into an asset with a single large-scale purchase. Instead, gold should be treated as a long-term allocation aimed at real wealth preservation and hedging. Such allocation should be built over time, with sustained - volatility-reducing - strategic long positions. Not with attempts to 'time' the market or based on impulsive buy-ins based on expected capital gains.

And, of course, the volatility shown by today's gold price movement, as well as an even more dramatic volatility in equities and fixed income shown over recent months, highlight the need for conservative, long-term investment strategy based on proper risk management and diversification.

23/08/2011: Trade Figures for June - an awesome performance by the sector

Latest trade stats are out for June 2011 for Ireland and the results are, overall, excellent:

• The seasonally adjusted trade surplus increased by 7.54% mom (a whooping 22.45% yoy) to €4,079m. This is the highest monthly surplus ever recorded in nominal seasonally-adjusted terms.
• Compared to June 2009, trade surplus increased 7.48% (+€283.8 million) and compared to June 2010 trade surplus is up 22.45% (+€747.9 million).
• The non-seasonally adjusted trade surplus in June 2011 was €4,473m comprising exports of €8,343m and imports of €3,870m. Per CSO: "This is the highest trade surplus since June 2001.
• Imports came in at a weak €3,821 million in seasonally-adjusted terms in June 2011, down 7.48% on June 2010 and up 2.83% on June 2009.
  
• Exports posted the best seasonally-adjusted performance since February 2011, reaching €7,900 million in June 2011, up 5% (+374.6 million) mom. Exports rose 5.89% yoy (+€439.1 million) and 5.18% (+€388.90 million) on June 2009.

As chart above shows, trade surplus has broken through short-term flat trend that run from roughly speaking January 2009. Which, of course is the good news. Build-up of inputs imports in April 2011 is now exhausted, as indicated by the fact that we have moved to a much more intensive position in exports as determined by imports volumes (chart below). This suggests that trade surplus can shrink in months to come as rebuilding of inputs inventories set in. Regardless, however, June figures are truly spectacular.
For H1 2011:

• Imports stood at €24,934.4 million, up 8.47% (+€1,946.4 million) year on year
  
• Exports were at €46,244.9 million, up 5.43% (+€2,423 million) yoy and
• Trade surplus stood at €21,310.3 million, up 2.29% (+€476.4 million)

The above, of course, provides a backdrop for the claims that our exports-led recovery (which is roaring ahead) is going to underwrite overall economic recovery (which is not happening). Just think, the entire trade surplus increase for 6 months this year would be barely enough to cover 2.6% of our fiscal deficit through June 2011.

Per CSO (using final figures through May) for the first five months of 2011 compared with those for 2010:

• Exports increased by 6% to €38,565m:
• Exports of Medical and pharmaceutical products increased by 14% or €1,362m,
  
• Exports of Organic chemicals rose by 7% or €582m and
  
• Exports of Dairy products increased by 47% or €217m.
• Imports increased by 12% to €21,123m
• Imports of Other transport equipment (including aircraft) increased by 34% or €497m
  
• Medical and pharmaceutical products by 22% or €318m and
  
• Imports of Petroleum rose by 17% or €305m.
  

These figures were achieved against improving terms of trade (lower TT readings) through May (the TT data is lagged 1 month behind the Trade data), as shown in the chart below:
As the result of this, long-term relationship between terms of trade and exports implies that June performance was actually below exports levels consistent with current reading of terms of trade. This suggests that in July and August there is some room for exports increases despite the slight deterioration in the terms of trade month-on-month in June.
On the net, therefore, very positive set of figures on trade from Irish exporters! something truly worth cheering.

23/08/2011: July Banks Survey - Euro area credit supply - Expectations

3 months forward expectations for lending conditions in Euro area, based on July 2011 data from the Banks Lending Survey run by ECB indicate that:

• Overall lending standards by Euro area banks are expected to tighten in 3 months following July 2011 by 9% of survey respondents - a number that has been rising now consecutively for 3 quarters.
  
• Overall lending standards are expected to ease by just 2% of survey respondents, down from 5% reporting back in April 2011.
• The respondents expect virtually no change in lending conditions for SMEs
• Lending to large enterprises is expected to tighten over the next 3 months by 10% of the banks surveyed, while only 3% are expecting lending to ease.

23/08/2011: July Banks Survey - Euro area credit supply - costs & controls

In the previous two posts I looked at the supply of credit to enterprises and the core drivers for changes in banks lending within the Euro area over the 3 months through July 2011. Here is a quick snapshot of what these changes mean on the ground.

The survey question this relates to is: Over the past three months, how have your bank's conditions and terms for approving loans or credit lines to enterprises changed?

• Bank margins on average loans to enterprises have tightened across 19% of the banks in 3 months through July 2011, while 18% of the banks reported easing of the average margins. Thus, overall margins remained largely unchanged across 57% of the banks - same as in 3 months to April 2011. However, in 3 months to April 2011, the percentage of the banks reporting easing of conditions on margins exceeded the percentage of the banks reporting tightening by 3 percentage points. This compares against zero percentage points differential in 3 months through July 2011 (note - these are adjusted percentages, compensating for respondents' errors).
• Number of the banks reporting tightening of margins on riskier loans exceeded numbers reporting easing by 23 percentage points in 3 months to July 2011.
• Non-interest rates charges have tightened in 2 percentage points more banks than eased
• Size of the loans granted tightened in 7% of the banks and eased in 3%, with 84% reporting no change in 3 months through July 2011.
• Collateral requirements have become tighter in 6% of the banks, while the requirements eased in 4%, suggesting de-accelerating rate of collateral requirements barriers growth.
  
• There was tightening of loans covenants reported by 9% of the banks and 6% reported easing. In previous quarter, the comparable numbers were 5% and 4%, implying tighter covenants are getting tougher.

While margins and non-interest rate charges are running at virtually no change since early 2010, there is a slight uptick in pressures in these credit costs. Collateral requirements remain on moderating tighter path, while riskier loans are posting second consecutive quarter of tightening of the margins.

Overall, these responses paint a mixed picture of costs of the bank lending to enterprises and suggests that market funding and capital and liquidity concerns drive banks lending dynamics in the Euro area, rather than costs and conditions structures.

22/08/2011: July Banks Survey - Euro area credit supply - drivers

In the previous post I highlighted some new developments in Euro area banks lending to the SMEs and larger enterprises (post link here). In this post, let us consider the data (through July) from the ECB's Banks Lending Survey for the core drivers of the structural stagnation and renewed weaknesses that have emerged in the Euro area credit supply.

The survey question we are considering here is: "Over the past 3 months, how have the following factors affected your bank's credit standards as applied to the approval of loans on credit lines to enterprises?"

• When it comes to the cost related to the bank's capital position, the percentage of banks reporting tighter (higher) costs was 6%, while the percentage of banks reporting easing of capital cost conditions was zero.
• There were zero banks reporting easing in capital costs conditions in April 2011 and January 2011.
• 2010 average for the percentage of banks reporting tighter cost conditions in excess of those reporting easing of conditions at the end of July (6%) was identical to the 2010 annual average.
• As shown in the chart below, bank's ability to access market funding remains on downward trend for second quarter in a row. At the end of July, the percentage of banks reporting tightening of access to market financing was 9%, same as for the three months through April 2011 and up on 4% in H2 2010.
• At the same time, percentage of banks reporting easing of access to market funding dropped from 2% in 3 months to October 2010, to 1% through January 2011, to 0% in 6 months since January 2011.

And a summary plot of banks access to funding markets, showing new tightening trend:

When it comes to the banks' liquidity positions, the story is also that of continued and deepening deterioration:

• 10% of banks in the survey stated that their liquidity conditions tightened in 3 months through July 2011, up from 8% in 3mo through April 2011 and 6% in 6 months before that.
• Only 1% of banks stated that their liquidity positions have eased (improved) in 3 mos through April 2011, the same percentage as in 3 mos through April 2011 and down from 3% in 3 months through January 2011.
  

Meanwhile, banks competition is now running along a flat trend:

• In 3 months through July 2011, 82% of the banks in the Euro area reported no change in competitive pressures from other banks, up from 79% in 3 months to April 2011, while 1% reported tightening and 8% reported easing of competition.
• The same story, but less dramatic, holds for competition from non-banks and for competition from market (non-banks) financing.
• The percentage of banks that observed tighter expectations of general economic activity in the end of July 2011 was 15%, as contrasted by just 4% that reported easing expectations.

So in summary, despite (or perhaps because of) the regulatory and recapitalization measures deployed, in 3 months to July 2011, Euro area banks continued to shrink supply of credit to Euro area enterprises because their funding conditions, liquidity positions, capital costs and expectations for economic activity were getting tighter. In the meantime, competition in European banking sector, having eased significantly from the peak crisis period, is running at generally depressed levels and along relatively flat trend.

Surely these are not the signs consistent with stable improvement or the end of the crisis?

22/08/2011: July Banks Survey - Euro area credit supply to enterprises

There are rumors circling euro area banks about the impeding liquidity crunch and rising risk profiles. In this light, it is illustrative to take a look at the latest Banks Lending Survey data from ECB to see if there are new trends emerging in terms of credit supply.

This post will look at some data from the Surveys covering lending to enterprises, while the follow up posts will deal with the core drivers of changes and with banks' lending to the households.

First, consider the aggregates (all data through July 2011) - with Chart below illustrating:

• Overall in terms of lending to the euro area enterprises, 8% of banking survey respondents indicated that lending conditions have tightened or considerably tightened over 3 months through July 2011, while 5% indicated that their lending conditions eased or eased considerably.
  
• The percentage of respondents who indicated tightening of conditions remained unchanged in July compared to June, but is up from 5% reported in May. Year on year, percentage of respondents reporting tighter lending conditions dropped by 4 percentage points, while percentage of those reporting easing of conditions rose 4 percentage points.
  
• 87% of respondents indicated that their lending conditions were unchanged in 3 months through July 2011, down from 89%.
• Over 3 months through July 2011, percentage of the banks reporting tighter lending conditions (8%) was below 9.25% 2010 average and significantly below 35% and 49.5% averages for 2009 and 2008.
• The percentage of banks reporting easing of lending conditions in 3 months through July 2011 (5%) was above 2010 average of 3.75% and above 2008 and 2009 averages of 0.75% each.

For SMEs (Chart below illustrates):

• Percentage of the banks reporting easing of considerable easing of lending conditions in 3 months through July 2011 was 3%, which is 3 percentage points above same period last year, but is unchanged from June and down from 4% in both April and May.
• Percentage of the banks reporting tighter or considerably tighter lending conditions was 7% in 3 months through July 2011, up on 6% in May and June, but down from 15% in April. The percentage of banks reporting tighter lending to SMEs in 3 months through July 2011 was 7 percentage points lower than a years ago and at 7% compares favorably against 11.75% average for 2010 and 35.5% and 39% averages for 2009 and 2008 respectively.

For larger corporate loans (Chart below):

• 9% of the banks reported tightening of lending conditions to large enterprises in 3 months through July 2011, which is 6 percentage points below the level of responses recorded in July 2010. However, the current percentage remains relatively close to 2010 average of 10.5%, although it is substantially down from 37.75% and 52.5% averages for 2009 and 2008.
• Month-on-month, tighter conditions in July 2011 (9%) were less prevalent than in June (11%), but more prevalent than in May (7%).
• Easing or considerable easing of lending to large enterprises was reported by 7% of the banks, up from 5% a month ago and 4 percentage points above the same level in July 2010.
• Easing of conditions in 3 months through July 2011 (7%) is now ahead of the same figure for 2010 average (4.25%) and well ahead of both 2008 and 2009 averages of 0.5% and 0.75%.
  

On the net, data shows some stabilizing momentum in credit supply, but this momentum is extremely anemic. Overall, more lenders continue to tighten lending conditions for large enterprises and SMEs.