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Market Forecasted to See Heavy Volatility This Week

Source: ForexYard

The euro was able to close out last Friday’s trading session with its biggest one-day gain against the US dollar in eight-months. The EUR/USD shot up well over 200 pips after euro-zone leaders pledged to reduce Spain and Italy’s borrowing costs. The pair finished out the week at 1.2651. This week, analysts are warning that the euro’s recent gains could be short lived as investors learn more about the agreement between EU leaders and whether or not it is plausible. Traders will also want to pay attention to this week’s euro-zone Minimum Bid Rate followed by the US Non-Farm Employment Change on Friday. Both indicators could lead to significant market volatility.

Economic News

USD – Risk Taking Leads to Dollar Losses

The US dollar took substantial losses against several of its main currency rivals on Friday, following an announcement that EU leaders have agreed to several measures to combat the euro-zone debt crisis. The news led to risk taking among investors and sent the safe-haven dollar tumbling against both the Australian dollar and British pound. The AUD/USD gained over 215 pips for the day before finishing out the week at 1.0241. The GBP/USD saw gains of close to 190 pips and finished the week at 1.5704.

This week, in addition to any new developments out of the euro-zone, dollar traders will want to remember that the all-important US Non-Farm Payrolls figure will be released on Friday. The indicator is considered the most important news event on the forex calendar, and consistently leads to heavy market volatility. At the moment, analysts are predicting that the US added only 92K jobs in June, which if true, would signal a slowdown in the US economic recovery and could result in heavy dollar losses. That being said, if Friday’s news shows that more jobs were added than originally forecasted, the dollar could reverse some of its recent losses.

EUR – Analysts Warn EUR Gains Could be Temporary

A pledge by euro-zone leaders to actively work to bring down borrowing costs in Spain and Italy, as well as an agreement to establish a single supervisory body for all euro-zone banks, led to significant euro gains throughout the day on Friday. In addition to the over 200 pip gain vs. the dollar, the euro also turned bullish against the yen and British pound. The EUR/JPY closed the week at 100.94, up around 225 pips for the day. The EUR/GBP gained close to 80 pips, reaching as high as 0.8094, before staging a downward correction to finish out the day at 0.8054.

This week, analysts are warning that the euro’s recent bullish streak may be short lived as more details regarding the deal reached by euro-zone leaders are released. There are fears that the EU simply does not have enough funds to bring down Spanish and Italian borrowing costs. Furthermore, traders will want to pay attention to the euro-zone Minimum Bid Rate and ECB Press Conference on Thursday. A pessimistic outlook on the euro-zone economic recovery may cause the common-currency to give up some of its recent gains.

Gold – Risk Taking Leads to Gains for Gold

The price of gold spiked on Friday, as investors shifted their funds to higher yielding assets following positive developments out of the euro-zone. Gold was up over $40 an ounce for the day, and was able to close out the week at $1597.28, just below the psychologically significant $1600 level.

This week, gold traders will want to continue monitoring developments out of the euro-zone, particularly regarding the details of the recent agreement among EU leaders designed to combat the region’s debt crisis. Any signs that the agreement is not feasible could result in risk aversion in the marketplace, which could send the price of gold down.

Crude Oil – Oil Finishes the Week on a Bullish Note

Crude oil was able to benefit from risk taking in the marketplace on Friday and finished out the day up over $6 a barrel. The bullish trend was attributed to positive euro-zone developments which weakened the dollar and made oil cheaper for international buyers. Crude closed at the week at $84.94.

This week, oil traders will want to pay attention to US news, in particular the US Non-Farm Payrolls figure on Friday. Growth in the US labor sector has stagnated over the last several months. Should this Friday’s news come in below expectations, investors may shift their funds to safe-haven assets, which could result in the price of oil dropping.

Technical News


Most long-term technical indicators show this pair range-trading, meaning that no defined trend can be determined at this time. Traders may want to take a wait and see approach, as a clearer picture is likely to present itself in the near future.


While most long-term technical indicators place this pair in neutral territory, the MACD/OsMA appears to be forming a bullish cross. Traders will want to keep an eye on this indicator. Should the cross form, it may be a sign of impending upward movement.


The Bollinger Bands on the weekly chart are narrowing at the moment, indicating that this pair could see a price shift in the coming days. Furthermore, the MACD/OsMA on the same chart appears to be forming a bearish cross. If the cross forms, it may be a good time to open short positions.


Both the Williams Percent Range and Relative Strength Index on the weekly chart appear close to crossing into overbought territory. Traders will want to pay attention to these two indicators. If they continue going up, it may be a sign of an impending bearish correction.

The Wild Card


The daily chart’s Slow Stochastic has formed a bearish cross, indicating that downward movement could occur in the near future. This theory is supported by the Relative Strength Index on the same chart, which has crossed into overbought territory. This may be a good time for forex traders to open short positions ahead of a possible downward breach.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.


Are the Rich Smarter Than You?

Article by Investment U

Are the Rich Smarter Than You?

by Alexander GreenInvestment U’s Chief Investment Strategist
Friday, June 29, 2012: Issue #1805

Growing up, when I got into an argument with my mother, she would sometimes resort to the nuclear option, her tried-and-true conversation stopper.

Putting her hands on her hips and using the worst faux Southern accent imaginable, she’d say, “Well if you’re so damn smart, why aren’t you rich?”

I never knew how to respond to this. Of course, I was 12 at the time and the deadbeats on my paper route kept margins low. Still, it ingrained in me the notion that the rich must have a little something extra going on upstairs, otherwise we’d all be rolling in it. Right?

There is, in fact, some evidence to support this. According to a recent report from the U.S. Census Bureau, there is a strong positive correlation between income and education. Over an adult’s working life, on average…

  • High school graduates should expect to earn $1.2 million;
  • Those with a bachelor’s degree, $2.1 million;
  • Those with a master’s degree, $2.5 million;
  • Those with doctoral degrees, $3.4 million;
  • And those with professional degrees, $4.4 million.

But here’s the rub. Studies show that those who earn the most aren’t necessarily the richest…

How to Determine Real Wealth

To determine real wealth, you need to look at a balance sheet – assets minus liabilities – not an income statement. Just ask Dr. Thomas J. Stanley, the bestselling author of The Millionaire Next Door and perhaps the country’s foremost authority on the habits and characteristics of America’s wealthy. Many of his findings are just the opposite of what you’d expect.

For example, we generally envision millionaires as Bentley-driving, mansion-owning, Tiffany-shopping members of exclusive country clubs. And, indeed, Stanley’s research reveals that the “glittering rich” – those with a net worth of $10 million or more – often meet this description.

But most millionaires – individuals with a net worth of $1 million or more – live an entirely different lifestyle. Stanley found that the vast majority:

  • Live in a house that cost less than $400,000.
  • Do not own a second home.
  • Have never owned a boat.
  • Are more likely to wear a Timex than a Rolex.
  • Do not collect wine and generally pay less than $15 for a bottle.
  • Are more likely to drive a Toyota than a Beemer.
  • Have never paid more than $400 for a suit.
  • Spend very little on prestige brands and luxury items.

This is certainly not the traditional image of millionaires. And it makes you wonder, who the heck is buying all those Mercedes convertibles, Louis Vuitton purses and $60-bottles of Grey Goose vodka? The answer, according to Dr. Stanley, is “aspirationals,” people who act rich, want to be rich, but really aren’t rich.

Many are good people, well-educated and perhaps earning a six-figure income. But they aren’t balance-sheet rich because it’s almost impossible for most workers – even those who are well paid – to hyper-spend on consumer goods and save a lot of money. (And saving is the key prerequisite for investing.)

This notion shocks many Americans. Dr. Stanley recalls an appearance on Oprah when a member of the audience asked the question, one he’s heard hundreds of times before:

“What good does it do to have all this money if you don’t spend it?”

She was angry, indignant even. “These people couldn’t possibly be happy.”

Keeping Up With the Joneses and Smiths

Like so many others, this woman genuinely believed that the more you spend, the better life is. Understand, we’re not talking about people who live below the poverty line. (Clearly, their lives would be better if they were able to spend more.) We’re talking about middle-class consumers and up, those who often live beyond their means and then find themselves under enormous pressure, especially in a weak economy.

Some were overly optimistic about their earning prospects. Others didn’t realize that they are up against an army of the best and most creative marketers in the world, whose job it is to convince you that “you are what you buy,” that you need to outspend – to out-display – others. The unspoken message behind the constant barrage of TV and billboard ads featuring all those impossibly good-looking men and women is that you are special, you are deserving, and you need to look and act successful now.

According to Dr. Stanley, “The pseudo-affluent are insecure about how they rank among the Joneses and the Smiths. Often their self-esteem rests on quicksand. In their minds, it is closely tied to how long they can continue to purchase the trappings of wealth. They strongly believe all economically successful people display their success through prestige products. The flip side of this has them believing that people who do not own prestige brands are not successful.”

Yet “everyday” millionaires see things differently. Most of them achieved their wealth not by hitting the lottery or gaining an inheritance, but by patiently and persistently maximizing their income, minimizing their outgoing and religiously saving and investing the difference.

You Aren’t the Car You Drive or the Watch You Wear…

They aren’t big spenders. They just recognize that real pleasure and satisfaction don’t come from the car you drive or the watch you wear, but time spent in activities with family, friends and associates.

They aren’t misers however, especially when it comes to educating their children and grandchildren – or donating to worthy causes. Although they are disciplined savers, the affluent are among the most generous Americans in charitable giving.

Just how prevalent are American millionaires? According to the Spectrum Group, there were 6.7 million U.S. households with a net worth of at least $1 million at the end of 2009. Very few of them won a Grammy, played in the NBA, or started a computer company in their garage. Clearly, thrift and modesty – however unfashionable – are still alive in some parts of the country.

So while millions of consumers chase a blinkered image of success – busting their humps for stuff that ends up in landfills, yard sales and thrift shops – disciplined savers and investors are enjoying the freedom, satisfaction and peace of mind that comes from living beneath their means.

These folks are turned on not by consumerism but by personal achievement, industry awards, and recognition. They know that success is not about flaunting your wealth. It’s about a sense of accomplishment… and the independence that comes with it. They are able to do what they want, where they want, with whom they want.

They may not be smarter than you, but they do know something priceless: It is how we spend ourselves – not our money – that makes us rich.

Good Investing,

Alexander Green

Editor’s Note: This column was excerpted from Beyond Wealth: The Road Map to a Rich Life, by Investment U and Oxford Club Investment Director Alexander Green.

The book – endorsed by Pulitzer Prize-winner Daniel Walker Howe and Whole Foods Founder and CEO John Mackey – is a fascinating exploration of the intersection between money, personal fulfillment and successful living. Beyond Wealth is available at bookstores nationwide. Or you pick up a copy from Amazon here.

Article by Investment U

BKW: Will the Whopper Make a Comeback?

Article by Investment U

BKW: Will the Whopper Make a Comeback?

If your mind is set on owning a stock for the long haul in the traditional fast food industry, I don’t think BKW is the one right now.

With all the hoopla surrounding Mr. Zuckerberg and the Facebook IPO in the spring, other companies going public were overlooked.

You’d think a brand name like Burger King (NYSE: BKW) would garner some more attention than it did. However, its return to public trading and its background is a little peculiar. But its June 20 IPO passed with very little hoopla. Here’s why:

Back in early April, Burger King Worldwide Holdings Inc. (NYSE: BKC) announced it would go public again. The fast food chain was just taken private in 2010 by New York investment firm 3G Capital Inc. Here are the terms of the deal…

3G will get $1.4 billion in cash to transfer Burger King to special-purpose acquisition company (SPAC) Justice Holdings Ltd.

Justice Holdings will get a 29% piece of Burger King, which gives the third-largest burger joint an equity value of about $4.8 billion. This doesn’t seem like your run-of-the-mill initial public offering – and that’s because it’s not.

Let’s look at some of the deal’s peculiarities:

  1. What’s a special-purpose acquisition company? Well, it’s a publicly traded buyout company that raises money so it can buy a desired existing company. SPACs raise pools of cash for the possibility of a future merger. Most of the time, the SPAC is looking to deal in a specific industry. For this reason, many refer to these types of deals as a reverse IPO. The money is raised first just for the sake of going public. After that’s done, then they worry about a company to buy.
  2. Wasn’t the company just taken private two years ago? 3G Capital Inc. paid $3.3 billion for Burger King about 20 months ago. It’s still the biggest restaurant takeover in the last 10 years.

Trying to Be More Competitive

Right before they announced they were going public again, Burger King introduced its new menu. Now stores offer all types of new foods like salads, smoothies and chicken snack wraps.

Then BKW got rid of its long-running – sometimes disturbing – King mascot last year in an attempt to appeal to a wider spectrum of consumers. Apparently marketing found that a mute King with a permanent creepy smile just doesn’t appeal to women and children…

And finally, BKW tried to remodel their stores to a so-called 20/20 redesign model that gives them a more industrial and contemporary look.

So, is there any indication that the changes made a difference?

Well the jury is still out…

The Vital Points to Consider:

Last Year’s Numbers

Burger King reported to the SEC net income of $107 million on revenue of $2.34 billion. What’s really not good is its seven consecutive quarters of negative comparable sales in the United States and Canada. Sales at restaurants that were open for at least 13 months dropped .5%.

An Increase in Debt

When 3G Capital took Burger King private in October 2010, it had an equity valuation of $3.3 billion and about $700 million in debt. As of the June 20 public offering, the equity valuation is $5.1 billion and total debt is $3.1 billion. Debt has increased by four times in 20 months with little to show for it. It’s of note that many of these private companies will use takeovers as an ATM machine. They takeover the company and rack up a bunch of debt and then reintroduce them to the public.

3G Capital claims that the new debt went into improving Burger King’s operations and competitive positioning. But can you really say that a period of less than two years is a plausible length of time to turn around a company? And where are the vast improvements? Morningstar commented: “This is a pretty quick turnaround to be going public again, especially when a lot of their fundamentals still seem to be lagging a number of their competitors.” Caveat Emptor!

Competitiveness in the Industry

Here are four major points that put BKW at a competitive disadvantage:

  1. Burger King has about 12,512 restaurants, but for years, it struggled against sector leader McDonald’s (NYSE: MCD). To make matters worse, Wendy’s (Nasdaq: WEN) recently took the No. 2 spot in fast-food burger joints. We haven’t even discussed the infringements that companies like Panera Bread (Nasdaq: PNRA) and Chipotle (NYSE: CMG) made on the burger world.
  2. Even with its new menu, Burger King isn’t innovative in the fast food industry. It’s attempting to keep pace with McDonald’s, which already has similar items on its menu.
  3. More than half of Burger King’s restaurants are located in three states: Florida, North Carolina and Indiana. If it hopes to ever get back in the game against old and new rivals, it’s going to have to venture out, not just internationally, but also domestically.
  4. As far as the economy is concerned, things won’t be looking that rosy for the industry. A lack of job creation coupled with economic uncertainty could have an adverse affect on the industry. Input costs like wheat and corn are presently expensive and creeping upwards even more. McDonald’s is strong enough to weather these storms. The jury is still out on Burger King

The Bottom Line

Should you own this stock going forward? Well, the truth is, no one is sure change is around the corner. Attempts at change have been going on for years with nothing to show for it.

If your mind is set on owning a stock for the long haul in the traditional fast food industry, I don’t think BKW is the one right now.

Good Investing,

Jason Jenkins

Article by Investment U

Monetary Policy Week in Review – June 30, 2012

By Central Bank News

    The past week in monetary policy saw interest rate decisions by five central banks around the world, with two cutting rates due to a slowing economy and lower inflationary pressure. The other three central banks left rates unchanged.
    COUNTRY                NEW RATE            PREVIOUS RATE         RATE 1 YEAR AGO
    ISRAEL                        2.25%                        2.50%                               3.25%   
    HUNGARY                   7.00%                        7.00%                               6.00%
    ROMANIA                    5.25%                        5.25%                               6.25%

    CZECH REPUBL          0.50%                        0.75%                               0.75%

    COLOMBIA                  5.25%                        5.25%                              4.50%


    Looking at the central bank calendar for next week, Australia kicks off the meeting schedule but the focus will remain largely in Europe with policy decisions by both the Bank of England and the European Central Bank.
    The Reserve Bank of Australia is expected to keep its benchmark cash rate unchanged at 3.5 percent following cuts in June and May.
    The National Bank of Poland: The fight to curtail inflation is the main factor governing monetary policy decisions in Poland with the bank raising rates by 25 basis points in May to the current 4.75 percent, the fifth rate rise since the beginning of 2011. The bank has said that inflation and growth forecasts will be a factor in determining the decision of the July 3-4 council meeting. In May inflation eased to 3.6 percent from 4.0 percent. The central bank’s goal is inflation of 2.5 percent.
    Sweden’s Riksbank: The Swedish central bank has room to cut rates with economic growth slowing and inflation below the bank’s 2 percent target. However, in April the bank said interest rates were likely to remain unchanged for more than a year. It’s last rate cut was in December 2011 to the current 1.5 percent.
    Central Bank of Malaysia: Expected to maintain benchmark overnight policy rate (OPR) at 3 percent. The committee said at its last meeting in May that it expected domestic demand to continue to grow despite the impact from global developments.

    Bank of England: Widespread expectation that the central bank will keep its interest rate unchanged but raise its target for purchasing bonds by at least 50 billion pounds following last month’s meeting when the nine-member Monetary Policy Committee voted 5-4 to keep the target at 325 billion pounds.

    The European Central Bank: Expectations for either a rate cut, which was already discussed at last month’s meeting, or some form of additional quantitative easing given the recession in the euro area. The ECB’s main refinancing rate was cut to 1.0 percent in December, 2011.

Reserve Bank of Australia
National Bank of Poland
Bank of Sweden
Central Bank of Malaysia
United Kingdom
Bank of England
European Central Bank


LIBOR – The Banking Scandal That Could Cause A Riot

By MoneyMorning.com.au

This is the biggest banking scandal in years – and that’s saying something.

Some of the biggest names in banking are being torn down, and heads are rolling.

The latest scalp is the Chairman of the world’s 4th biggest bank – Barclays Plc.

Barclays faces an industry record fine to boot: $451 million. That’s close to half a billion dollars.

It won’t stop with Barclays.

Many of the other global banking monoliths are heading for the gallows. The world’s 3rd biggest bank, HSBC, and the world’s 11th biggest, Lloyds, are being investigated.

Royal Bank of Scotland (RBS), the 5th biggest bank, is also under the microscope.

This is where things could get really sticky, as RBS is 82% publicly owned. So any fine will be mostly paid by the favourite cannon-fodder of the banking system – the taxpayer.

You’d think that this would be just too bitter a pill for the UK taxpayer to swallow. This is riots-in-the-streets material.

Will your editor’s fellow poms go and sharpen their pitchforks, or have another good old grumble over a cup of tea instead? With the 2012 Olympics around the corner, the last thing the government needs is a mass protest.

But what has amazed me is how little bile the public has expressed over this whole mess. Make no mistake – this is an atomic bomb going off in the banking sector – and yet there is hardly any talk about it at all.

The LIBOR Scandal

I’m talking about the London Interbank Offered Rate (LIBOR) scandal.

This banking scandal makes Bernie Madoff’s antics look like a mild case of teenage shoplifting.

Perhaps the reason no one seems to give a damn is that the term LIBOR means nothing to them. I suspect the less-than-catchy name makes it easier to stop anger from crossing over into mainstream awareness.

Yet LIBOR is the most traded interest market in the world. It is the reference point for $360 trillion in contracts worldwide.

It underpins everything in the global markets from, bond markets, to mortgage rates, and even right down to loans for small-cap mining stocks. For example, the latest Diggers and Drillers stock tip plans to raise its debt financing at a rate dependent on LIBOR.

The idea is that the banks set the rate between them each day according to how much spare cash they have, or how big a gap there is in their balance sheet. In essence it is supposed to use market forces to determine the cost of borrowing any spare cash.

But traders at these biggest banks have been using their firepower to manipulate LIBOR rates in their favour. Traders were tweaking it so they could trade profitably against it.

Some of the banter between these traders beggars belief. Anyone who has the concept that the bond market is full of humourless Swiss banker types may need to reconsider. Take a look at some of these quotes released through the investigation:

‘Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.’

‘[…]if you know how to keep a secret I’ll bring you in on it […]
we’re going to push the cash downwards on the imm day […]
if you breathe a word of this I’m not telling you anything else […]
I know my treasury’s firepower…which will push the cash downwards […]
please keep it to yourself otherwise it won’t work.’

‘This is the way you pull off deals like this chicken, don’t talk about it too much, 2 months of preparation […] the trick is you must not do this alone […] this is between you and me but really don’t tell ANYBODY.’

‘Duuuude… whats up with ur guys 34.5 3m fix…tell him to get it up!!’

Well it’s great to know the core of the financial system is being run by such smart and honest folk.

This outrageous scandal is simply another nail in the coffin for the credibility of the banking system. It sets a new low.

The truth may only be coming out now, but all this went down about 5 years ago, just as the credit bubble was starting to pop. Back in that credit-fuelled euphoria, banks’ trading desks were full of invincible 20-year olds wearing ten-thousand-dollar watches.

The Governor of the Bank of England, Mervyn King, is not having a good week. He just told reporters that thanks to Europe he reckons we are not even halfway through the financial crisis. Now he has the LIBOR scandal on his plate. Over the weekend he said:

‘Everyone now understands that something went very wrong with the UK banking industry, from excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates, we can see that we need a real change in the culture of the industry.’

A real change in the ‘culture’ of the industry? That’s like saying a convicted murderer needs a haircut, a new wardrobe and some elocution lessons.

The Libor Scandal is Just Beginning

What the banks responsible for this need is far more drastic. A few prison sentences for the traders manipulating the biggest interest rate market in the world would be a good start.

One thing is for sure is that this is just the start of the LIBOR scandal. It will drag on for years as more comes out of the woodwork. The only winners will be the lawyers, as always.

But somehow I have a horrible feeling that the jaded public will soon lose interest in ‘this LIBOR business’, and the whole thing will end up as just be another chapter in the ever bigger book of banking crimes. I dearly hope not.

But if so, the banking sector will have got away with it yet again.

White collar criminal: 1, Johnny taxpayer: 0.

Dr. Alex Cowie
Editor, Diggers & Drillers

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‘Super Brussels’ Saves The World Again: Maybe!

By MoneyMorning.com.au

The Pavlovian response of financial markets to the European leaders’ summit of 28th and 29th June 2012 was remarkable. The frugal communiqué of 322 words fired the ‘animal spirits’ of financial markets, which now believe that the European debt crisis has been ‘solved’. As comedian Robin Williams joked, ‘reality is just a crutch for people who can’t handle drugs.’

The summit supported a single regulatory body for all European banks.

The previously agreed €100 billion capital injection for Spanish banks was ratified. Payments will now be made directly by the European Financial Stability Fund (EFSF) and its successor the European Stability Mechanism (ESM) to the banks rather than as loans to the relevant country. Loans will also not have priority of repayment over commercial lenders.

The EFSF/ ESM will take whatever actions are ‘necessary to ensure the financial stability of the euro area… in a flexible and efficient manner.’ This was taken to mean that they will purchase bonds of beleaguered countries like Spain and Italy to reduce the cost.

The European Union will provide €120-130 billion of financing for investment to boost growth.

The language was vague and the details sketchy. After the meeting German Chancellor Angela Merkel told the Bundestag that ‘differing communications’ from various Euro-Zone leaders about the exact agreement had ‘led to a whole number of misunderstandings.’

The initiatives may require complex and time-consuming changes in European treaties.

The German Constitutional Court must rule on some aspects of the current proposal.

In essence, implementation risks remain.


Bank recapitalisation will require the establishment of the EU central bank supervisory body, which should only be ‘considered’ by the Council before the end of 2012. Given issues of national control and sovereignty, the risk of delays and failure of agreement are not insignificant.

Capital injections are subject to unspecified ‘economy wide’ conditions. One potential condition could be that the national government compensate the EFSF or ESM for any losses. This is what Germany sought pre-summit, arguing that the EU could only lend to sovereigns, not foreign banks over which it had little or no control.

Routing funding directly does little to break the deadly nexus between European banks and their sovereigns. It does not address the fact that the banks are heavily exposed to sovereigns and this exposure will increase over time. It does not address the banks reliance on the European Central Bank (ECB) for funding.

The fact that bailout funds will not have repayment priority is not a change. As investors in Greek bonds discovered, the EU can, if they wish, retrospectively change the terms to subordinate commercial creditors in any case.

While the exact terms of any capital injection are unknown, the proposal creates a perverse incentive for the EU, especially Germany, to push for existing shareholders and bondholders in Spanish banks to absorb losses prior to the injection of new funds. This will be resisted by both investors and possibly the government, making it difficult to implement.

The potential for EFSF/ ESM purchases of Spanish and Italian bonds to provide funding and manipulate interest rates was actually agreed last year. It requires a member state to request assistance and execute a Memorandum of Understanding, which involves less onerous conditions than those applicable to a full bailout. The 29th June 2012 statement confirms that any assistance would be conditional.

The ECB already has the ability to intervene by purchasing bonds under its Securities Markets Programme. In fact, bond purchases by the ESM may reduce buying by the ECB, meaning less, rather than more support.

The growth initiative amounts to only 1% of Euro-Zone Gross Domestic Product (GDP). It was a repackaging of existing unspent funds and is unlikely to be operational quickly.

The summit communiqu?did not mention any progress on a Europe-wide deposit insurance scheme to limit capital flight from peripheral countries, although this may be a matter for the new European super bank regulator.

Where’s the Money…

There was no commitment of new money of any kind. Since mid-2011, Germany has succeeded in ensuring that existing bailout facilities are not increased.

The ability of the EU to support the peripheral nations on an ongoing basis is questionable.

The €440 billion of the EFSF is largely committed to the Greek, Irish and Portuguese bailouts, as well as the €100 billion required for Spanish banks. After the new ESM is fully implemented, there will be at most €500 billion available.

Potential requirements include a third bailout for Greece and further assistance for Ireland and Portugal. Additional money for recapitalising European banks may be needed. Spain and Italy have financing requirements of around €600 billion in the period to 2014, mainly to pay maturing debt.

This also assumes that the EFSF (which is backed by guarantees from Euro-Zone Members including Spain and Italy) and the ESM (which will require capital contributions totalling €80 billion from all Euro-Zone members) can finance its activities.

Support from the International Monetary Fund (IMF) is uncertain. The lack of conditions and supervision of loans may be a barrier to IMF participation. Domestic politics within the US in a Presidential year may also limit flexibility.

Arithmetical Impossibility…

The cost of support for the peripheral nations is rising. The ECB has provided over €2 trillion in the form of bond purchases and funding for European banks. Euro-Zone members are directly and indirectly supporting the two European bailout funds -the EFSF and ESM- for around €1 trillion. National central banks in Germany, Netherlands, Finland and Luxembourg have provided more than €700 billion in financing for weaker nations.

Even without agreement on Euro-Zone bonds, mutualisation of debt is already a fact as stronger countries, especially Germany and France, effectively underwrite these facilities. As more financing for weaker nations moves to official institutions, the commitment will increase.

Germany faces potential losses of between €800 and €1.4 trillion (up to 40% of its GDP). France also faces large losses. Chancellor Merkel has increasingly emphasised that Germany’s financial strength is not infinite.

The monetary arithmetic of European debt problems looks unsustainable.

The EU may simply not have enough funds to carry out their programs, unless the bailout funds are increased in some way or the ECB follows the US, UK and Japan into full scale quantitative easing to monetise European sovereign debt. As those countries have found, such measures also do not represent a simple solution.

Political Impossibility…

In the short run, the ECB will probably lower rates and continue to provide liquidity to manage the risk of financial collapse. But the deep seated problems remain.

The real economy – growth, employment, investment, capital flight out of weak nations – will continue to be problematic. The economic performance of stronger countries like Germany will deteriorate. The problems of the financial system – loan losses, funding difficulties – will continue. Weaker sovereigns will continue to face challenges in raising funds at acceptable costs.

The problems are increasingly political.

The June Summit highlighted deep fissures within the Euro-Zone itself. Germany, which is substantially bearing the financial burden of the European debt bailouts, finds itself increasingly vilified and isolated.

Spanish, Italian and French newspapers and political commentary were triumphant, depicting the summit as a humiliating back down by Germany. Northern European countries aligned with Germany have expressed concern about weaker conditions for aid to the indebted European countries. Dutch financial daily Het Financieele Dagblad wrote that ‘the southern euro countries are taking the north hostage.’

While her political position remains relatively secure, the German Chancellor faces increasing domestic criticism for providing assistance without extracting agreement to suitably tough conditions from recipients.

Chancellor Merkel insists that German taxpayers’ money will not be committed without strict conditions. She has reiterated that there was no increase in German guarantees for the Euro-Zone rescue funds and no jointly guaranteed Euro-Zone bonds to finance weaker states.

She insists that the commitment to use the EFSF/ ESM to buy sovereign bonds for countries facing market pressure would be conditional. Spain and Italy’s gleeful boasts of unconditional aid does not square with Dutch and Finnish insistence that any money would require compliance with strict conditions.

Germany and the Northern European countries’ willingness to continue to finance the existence of the Euro-Zone may be weakening.

At the summit, the joke of the day was that Germany lost 2-1 to Italy in the semi-finals of 2012 European soccer championship in Warsaw but lost 16-1 at the EU summit in Brussels! Italian Prime Minister Mario Monto, with uncharacteristic indiscretion, boasted that ‘it is a double satisfaction for Italy’, referring to Italian victories over Germany in both soccer and the debt negotiation.

Spain, Italy and France may well live to regret their triumphalism in antagonising their paymasters. The Euro-Zone itself seems the loser in the longer term.

Real Impossibility…

Despite progress, European leaders refuse to acknowledge that a portion of the debt of the peripheral nations is unrecoverable. None of steps announced improves the sustainability of the debt levels of the affected countries, their access to markets or cost of borrowing in the medium to long term. Ultimately, it is not possible to solve the problem of excessive indebtedness with more debt or by simply changing the lender.

Austerity dooms Europe to a prolonged contained depression as the debt burden is worked off. The alternative, a debt write-off, would result in significant loss of wealth for the mainly European lenders and investors, triggering an economic contraction and prolonged period of economic stagnation. There are now limited policy options available.

For the moment, investors and the non-German members of the Euro-Zone are celebrating. It would be wise to remember American writer Edgar Howe’s observation that, ‘There is nothing so well known as that we should not expect something for nothing – but we all do and call it hope.’

Satyajit Das
Contributing Writer, Money Morning

2012 Satyajit Das All Rights Reserved.

Satyajit Das is author of Traders Guns & Money and Extreme Money.

From the Archives…

The Hard Lesson of a Stock Trader: No Pain, No Gain
2012-06-29 – Kris Sayce

How Gold Prices Look Set to Climb As Banks Crumble
2012-06-28 – Peter Krauth

‘Big Wednesday’ For the Aussie Dollar
2012-06-27 – Dr. Alex Cowie

Three Reasons Why Silver Could Take Off in 2012
2012-06-26 – Dr. Alex Cowie

Who is Winning the Battle Between the Bulls and Bears?
2012-06-25 – Kris Sayce

‘Super Brussels’ Saves The World Again: Maybe!

GBPUSD rebounded strongly from 1.5484

GBPUSD rebounded strongly from 1.5484, suggesting that a cycle bottom had been formed on 4-hour chart. Further rise to test 1.5776 resistance could be expected, a break above this level will signal resumption of the uptrend from 1.5268, then next target would be at 1.6000 area. However, as long as 1.5776 resistance holds, the rise from 1.5484 could possibly be correction of the downtrend from 1.5776, and another fall towards 1.5268 is still possible.


Forex Signals

Central Bank News Link List – July 2, 2012

By Central Bank News

    Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list is updated during the day with the latest news about central banks so readers don’t miss any important developments.