The compromise in aid to Greece, the EU leaders have made at their summit in Brussels last Thursday, might lead to a short-term recovery in the euro exchange rate against the US dollar only and thus also the precious metals might profit merely in the short run. However, a permanent shift towards a stronger euro will appear as doubtful in the light of the compromise found. Since the precious metals react more strongly to the US dollar as the industrial metals, this indicates a better performance of non-ferrous metals over the medium-term. In addition, the recent economic data are a further indication of better prospects for industrial metals.
The German press, especially the mass tabloids, celebrated the relentless attitude of Chancellor Merkel in the question of EU assistance to Greece. But the refusing stance of the federal government, determined by internal politics, has proved as a disservice the euro. In particular, it is negative that Greece has to ask for an IMF-loan first. This means that the EU is not able to resolve its own problems without help from the outside (ie, primarily by the US and China). This does not create confidence in a currency some EU politicians have believed that it could replace the US dollar as a global investment and reserve currency. Not unduly, the ECB is concerned that an intervention of the IMF might interfere with its independence, which is also a negative factor for the confidence in the euro. It also appears doubtful whether the IMF under its statutes is allowed to grant Greece a loan as the problem in Greece is not one of balance of payments, but one of financing of the budget deficit. The third point to add is that the States of the euro area have to establish unanimously that Greece receives no credit in the financial markets any more before bilateral loans can be granted. Given the position of Chancellor Merkel, the stance of "no money from German taxpayers for Greece" could again become a stumbling block for a unanimous decision. The recovery of the euro from 1.327 up to 1.341 against the US dollar is likely to be primarily based on short-term profit-taking and replacement purchases of euro short positions and no medium-term trend reversal signal.
The industrial metals react less strongly to the development of the US dollar than the precious metals. In particular, gold is seen as a protection against a weak US dollar. Although base metals benefit from a weak US dollar, the fundamental factors of supply and demand play a greater role. The economic data, released during the preceding week, were better in the US than expected. It is true that GDP growth for the 4th Quarter of 2009 was revised down slightly, but the data for the current quarter indicate a further recovery of the US economy, which is after all the second-largest consumer of industrial metals. The Richmond Fed index rose from 2 to 6 points, while the consensus expected only a rise to 5 points. The orders for durable goods increased by +0.9% in the core rate, more than the consensus of economists had forecasted. In the euro zone purchasing managers' indices could also increase strongly from 54.1 to 56.3. In Germany, the Ifo index rose from 95.2 to 98.1 and thus has not only recouped the slight decline of the previous month again, but still achieved the highest level since June 2008. Overall, therefore, the economic data point to a further recovery in the economy and thus increasing demand for more raw materials. Therefore, even a less expansionary monetary policy in China would change little of this perspective.
Another important indicator of the economic outlook is the trend in the equity markets. In Europe, key indices reached a new annual high in the previous week and the US indices continued to rise. This suggests all in all that the economic outlook will be judged positively on the stock markets. This should also positively impact on the base metals. They should therefore perform better than the precious metals in the coming weeks.
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