Give Greece and growth a chance

Many commodity analysts currently recommend gold based on the argument that quantitative easing by central banks in industrialized countries would lead rather sooner than later to accelerating inflation. Only a few days ago, commodity analysts from Germany’s number two bank, Commerzbank, gave such a recommendation. But how is this compatible with the development of last Friday? Gold lost 0.76% on the day and ended the week near the low. Silver and platinum lost around 1.75% and palladium even plunged by almost 3.5% on the day. This all happened on the same day the US Department of Labor released the producer price index of finished goods for September jumped by 1.1% mom, which was far above the consensus forecast of 0.8%. This divergence could not be explained by a buy the rumor sell the fact behavior as precious metals weakened already during the whole last week. However, it underlines that inflation fears are currently not the main factor behind the demand for precious metals. It is still more the swings between risk aversion and risk appetite of investors, which move the price of precious metals.

However, also the reaction in the US Treasury market appears as not being rational. The core PPI remained unchanged in September. We have pointed out several times in this blog that there is a difference between inflation and change in relative prices. Thus, the core PPI figure indicates that there is no inflationary pressure in the pipeline. But this is not an argument for buying instruments with a fixed nominal coupon. In order to preserve the purchasing power of the capital invested, the return should be sufficient to buy the same basket of goods in the future. This is currently not the case in the US Treasury market. Yields on conventional 10yr T-Notes are even below the core inflation rate. Investments in US Treasury paper produce losses in real terms for a broad range of maturities. That investors buy T-Notes indicates that investors’ risk aversion is increasing currently.

Two factors contribute currently to the higher risk aversion. First, the World Bank presented its forecasts for global growth, which had been revised down surprisingly more than expected. Also the IMF lowered its forecast for GDP growth in its Global Economic Outlook ahead of the IMF autumn summit, which took place this weekend in Tokyo. The track record of official forecasts from the two Washington twin-institutions is not the best one. Quite the opposite, they usually are ranked in the lower quarter. Political considerations seem to have an influence on the forecasts. Currently, the IMF recommendation is to reduce deficits further, but not at a pace that strangles economic growth. This is also reflected in the recommendation of the Tokyo summit to the US and Europe.

In this context also Greece is back in the spotlight. Last week, the German economic research institutes presented their semi-annual expert report. Beside lowering the GDP forecast for this and next year, they also commented on Greece. Several members voiced the opinion that Greece would not manage to solve its problems and would have to leave the eurozone. Also Sweden’s finance minister Anders Borg talked about a Greek exit on Saturday. However, already last Tuesday at a visit in Athens, German chancellor Merkel affirmed that Greece would be kept in the eurozone. This Sunday, also German finance minister Schaeuble rebuffed speculations on Greece leaving the eurozone. Furthermore, he stated there would not be a Greek default on government debt.

The recent comments indicate that Germany softens its stance on Greece. The German government appears now determined to provide further support to prevent a Greek exit. Thus, Germany might follow the advice from IMF head, Christine Lagarde, to give Greece the time of two more years for reaching the budget target. However, this would also require that the IMF delegate of the troika softens the demands for further austerity measures. Contrary to statements of former ECB chief economist Stark, fiscal austerity in a recession is not leading to a recovery. This has been demonstrated by the development in the eurozone periphery. It has also been shown with empirical evidence in a recent IMF working paper. It is time that finance ministers recognize this fact. Giving Greece more time would be an important step to solve the debt crisis. At the IMF summit, there was also talk that Spain would apply for help from the ESM in November, which would pave the way for the ECB to buy Spanish debt in the secondary market.

Another interesting proposal came from ECB council member Asmussen. He recommended Greece to borrow fresh money and to buy back old outstanding debt. This proposal is not new and had been made already last year by the head of the ESM, Mr Regling. If official holders of Greek government debt would sell the bonds back to Greece at current market prices or even book entry levels, Greece could reduce its outstanding debt significantly. A volunteer sell back at book entry values could hardly be classified as illegal government financing by the ECB.

The second factor has been the start of the earnings season. Alcoa usually kicks the reporting season off and beat earnings expectations after adjusting for one-off items. However, the outlook, which Alcoa gave for the aluminum market, weighed on market sentiment. This also explains the pressure on aluminum prices at the LME and the Shanghai Futures Exchange. But not only Alcoa, also other companies provided a more cautious outlook for the current and future quarters. This lead to a series of losing days at Wall Street and also other major international stock markets. Also that Apple lost a trial against Samsung on patent violations dragged stock prices lower.

Stock markets have ignored positive economic data released in the US but also in other economies since the start of this month. It is also a traditional behavior of companies in uncertain times to paint a more cautious outlook. However, the recent economic data indicates that the economic situation is improving, not only in the US but also in several European countries as rising industrial production figures in Italy, Greece and France underline.

The comments from the German government on Greece avoiding a government default and remaining in the eurozone are positive. It could be expected that the EU will provide further support to Greece. Also the hints that Spain would ask for help from the ESM should be positive for risky assets. And the recent economic figures indicate that economic activity might get traction again, just at a time when institutes revise growth forecasts lower. Thus, we expect that investors risk appetite will increase soon again. This would be also positive for the precious metals. The current consolidation is probably a buying opportunity and not the start of a trend reversal.