Silence is golden, Mrs. Merkel

Sir Isaac Newton once said he would be able to calculate the orbit of planets, but not the movements of stock markets. While many investment banks employ physicists nowadays, some graduates of this science still have difficulties to understand how financial markets work. One of them is the German chancellor, Mrs. Merkel. And what is even worse, she is stubborn to learn from past mistakes and to draw the right conclusions. However, commodity consumers outside the eurozone profited from her comments last week, which sent commodity prices lower. Among the metals, precious metals held well, but base metals ended the week lower as measured by the LME metals index.

At the start of the new trading week, markets welcomed that Ireland asked the IMF and the European Financial Stability Facility (EFSF) for a bailout, in particular to increase the capital of its nationalized banks. However, this request came at a high price for the Irish prime minister. His junior coalition partner only approve calling the IMF for help if snap election will be held. But the initial market reaction was as we expected in the blog article published on November 21. Also many fixed income strategists of investment banks pointed out that Portugal and Spain might be next to be bailed out. Nevertheless, even the Credit Default Swaps of these countries came down on Monday. Thus, precious metal prices rose at the start of last week but base metals pared earlier gains as stock markets came under pressure as contagion fear send jitters especially among US investors.

Geopolitical risk factors also played a role on Tuesday, as North Korean troops fired at a South Korean island. But this had only a temporary impact as prices recovered after an initial drop in Asian trading. But then came Mrs. Merkel into the spotlight and send the euro sharply lower against the US dollar by stating that the current crisis could lead to the end of the Eurozone and the EU. The firmer US dollar had a negative impact on base metals, but gold profited from its safe haven status. The German chancellor should have known what the impact of this statement on financial markets would be. The next day, at a meeting of the German association of industry (BDI), she bashed banks and repeated the demand that in future, private investors would have to contribute to bailouts of sovereign debtors in the eurozone. Of course, this has been another knock for the euro, sending the single currency further down against the US dollar.

 Mrs. Merkel lacks the skills of political leadership. She is not able to convince law-makers of her own party, the political commentators in the media and the population by sound arguments. Only by populist arguments like bashing the banks and by painting a bleak outlook if her policy would not be approved, she can get the support of law-makers being members of the government parties in Berlin. The results in markets are a catastrophe. The EFSF was intended to calm investors by demonstrating that there would be support for eurozone member countries. EU leaders even expressed the view that there would be no need for a eurozone country to ask for a bailout. However, by her populist policy, the German chancellor triggered a flight out of Irish government bonds. She even ignored the warning from ECB president Trichet. The strongest economy of the eurozone is expected to play the role of a political leader. The biggest problem of the euro is currently that Germany lacks a political leadership and a sound knowledge of economics.

As long as the crisis in the eurozone prevails, the euro is at the peril of weakening further against the US dollar, despite QE2. As gold is regarded as a safe haven, it might perform best among the metals. Industrial metals are likely to suffer, especially silver and palladium might correct stronger as it has already been the case last Friday. Among the base metals, the biggest losers are expected to be those metals with rising inventories and the highest speculative interest. This might also be negative for copper. However, as the market had been already in a 360K tons supply deficit in the period from January to August according to the latest report by the ICSG, which also expects a high deficit in 2011, such a correction of the copper price would present a good opportunity for consumers to hedge their exposure.