Monday morning was shaping up to become a heck of a hectic day in US markets following overnight routs in European and Asian equity markets. Losses ranging from 1.7% (the FTSE) to 3.8% (Seoul) were recorded in overseas trading action following Friday night's S&P downgrade of the US' credit rating. A wide range of base metals took hits of various sizes as players view the rating event as only possibly adding to the risk of a global-in-scope slowdown.
Crude oil suffered a crude fate as well, shedding more than 3% in early action this morning (it fell to $83.50 per barrel). Gold and silver bucked the trend of course as safe-haven seekers kept bidding them higher despite the former reaching above the $1,700 level for the first time. Dow futures appeared to indicate a poor session in the making for this second Monday of August. Other markets appeared rife for additional intervention (Swiss franc, Japanese yen) as gains due to the aforementioned quest for shelter from the credit storm is pushing them to levels that are deemed as disconnected from fundamentals.
Spot metals dealings started what could be a tumultuous session with (mostly) gains this morning. Gold commenced trading just above the $1,700 round figure (at $1,702.20 the ounce) showing a gain of $38.80 versus its Friday afternoon closing value. Silver added $1.40 to rise to $39.72 per ounce while platinum was ahead by $7 at $1723.00 per ounce on the bid-side. Palladium went in the other direction however; it lost $9.00 per ounce to ease to the $733.00 mark. Rhodium remained bid at $1,935.00 at last check, showing no change.
Heard the one about how the S&P downgrade of US debt will cause a total collapse in the US dollar and a massive disposal of US Treasury holdings by China and other similar buyers? Yeah, so did we. Did not happen. As Monday's markets were set to open, the greenback was trading...higher on the index (0.26 higher at last check, at 74.66) while officials from certain Asian countries (S. Korea, Japan) reiterated their plans to...keep buying US paper. Oops. Asia accounts for roughly half of US debt holdings globally. Even "vocal" Russia (whose leader, Mr. Putin, called the US a "parasite") plans to continue to buy US debt as it does not see the downgrade as impactful for the long-term investor.
Heard the one about S&P saying that what it did late on Friday "should not come as a shock?" Yeah, neither did we. The "shock" did come, and then some. The men (Messrs. Chambers & Beers) who cried "AAAooowwww!" the other day are now seen by many (including Warren Buffett and BlackRock Inc.-the world's largest money manager) as having made a political (in lieu of a credit) decision that smells like pure black tea (party). Mr. Buffett not only said that the US is still AAA-rated in his 'book' but that it actually should be AAAA-rated. If anything -said Mr. B- the event changes his mind about...S&P.
Memo from President Obama to the G.O. [Tea].P.: "Thank you very much; you have managed to bring about the same results [or worse], than an actual default would have. I should have stuck with another course of action." Would-be President-ess, Ms. Bachmann actually blared: "IT happened on YOUR watch, Mr. President." No, Michelle; it was your "teammates" that caused this mess to take place.
Reactions? Plenty to choose from: French Finance Minister François Baroin questioned the S&P's rating move on Saturday, noting that neither Moody's nor Fitch, the two other major ratings agencies, had reached a similar "conclusion." NY Times columnist Paul Krugman remarked that "these are the last people whose judgment we should trust." US Treasury Secretary Tim Geithner also had some harsh words for the rating agency's decision, saying that the move showed "terrible judgment" and "a stunning lack of knowledge" of U.S. budget policy. S&P's "action" may end up hurting the US (and global) economy and comes at a time when neither can easily afford it.
The G-7 pedaled hard overnight to avert a complete collapse in global investor confidence. Their actions followed the S&P's U.S. sovereign-rating downgrade and they came in the wake of a major sell-off in Italian and Spanish debt instruments. The two watershed events have now collectively augmented the risks of a serious setback to the emergent global economic recovery. In last week's CFTC market positions tally, there had already been a noticeable pullback from bullish commodity bets by speculators who fear a global slowdown as being underway. Current odds of a US dipping into another recession are hovering near the 40% level.
The G-7's officials have emphatically stated that they will take "all necessary measures to support financial stability and growth." Member nations and their central bankers "will inject liquidity and act against disorderly currency moves as needed." Speculators can try to call their bluff; we doubt that they will succeed in their efforts; there is way too much at stake in this poker game, you know. The EBC also indicated that it will actively buy Italian and Spanish bonds while Japan signaled that it is willing to make further US dollar purchases in a sign of concern that prices are becoming unhooked from fundamentals. This is war, and wars invariably come with casualties. S&P against the G-7? "Bring it on," says the G-7.
Senior S&P management did not try to even slightly defend the fact that their firm made a $2 trillion dollar (!!!) mistake when it downgraded the US' credit rating. Senior S&P management actually chose to focus on the fact that it was within its "boundaries" of activity to effectively downgrade the US political circus (or "process" as it called it) and actually labeled the US government's performance as not deserving the AAA rating. Gene Sperling, the Director of the White House's National Economic Council, called the [S&P] "difference," totaling over $2 trillion, "breathtaking" and said that "the amateurism it displayed" suggested "an institution starting with a conclusion and shaping any arguments to fit it."
What does the S&P downgrade really mean? Possibly that the USA now joins a list of credit "deadbeats" that includes countries such as...New Zealand and Belgium? It remains ahead of: China (!), and Japan (!!) despite the considerable weight that those two currently pull on the global economic scene. The fact that S&P is being taken seriously about this downgrade is actually mystifying; this is the same agency that, during the height of the financial crisis, assigned AAA ratings to "any pile of junk that was tall enough to reach the doorbell and ask," [according to Rachel Maddow on Sunday's "Meet The Press"].
Why should you (not) care about what S&P says? Well, at the time when they were being relied upon to be an effective "credit cop," all of these agencies, including "S&P, Moody's and Fitch underestimated how far housing prices would fall, and many securities got top ratings but later proved to be toxic. Following the mess, Congress moved to limit the rating firms' importance by encouraging new competition and pushing to reduce instances in which rules cite a need to use bond ratings."
Former Bush (!) speechwriter David Frum has now suggested that the entire American conservative movement has "fundamentally misunderstood" how to manage the economy, in a manner equally blind to reality as the left was when it came to the threat of Communism decades ago. The American right continues to clamor for tax cut extensions and for additional cuts. This, at a time when the US federal tax burden is at a six-decade low. The same faction continues to demand the continuation of a deregulated financial sector. This, despite the excesses that such lack of supervision has brought about- many of the after-effects of those orgies are actually being battled against, as we speak.
...and the Fed meets tomorrow. Can't wait for the gravitas on display at that gathering. But, at the end of the day, as one investment manager remarked, the Fed can do little about what the political "process" (and the S&P thereafter) has wrought: "You cannot hire a carpenter to fix a plumbing problem."
Let the battle rage on. Just be on alert (as in any battle) for "collateral damage." When America sneezes...
Jon Nadler Senior Metals Analyst
Kitco Metals Inc. North America
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