Gold Prices broke above a tight 1% range as the US opening drew near on Wednesday, while global stock markets continued to bounce after four months of losses in response to yesterday's historic "crisis action" from seven of the world's biggest central banks.
Short-term Dollar lending pressures eased in London, but the cost of borrowing Euros continued to rise. The US currency fell towards a new record low vs. the Euro at $1.5490, and crude oil prices held just below $109 per barrel.
"Any perceived improvement in US economic fortunes" due to Tuesday's action "should support the Dollar and therefore weigh on Gold," reckons James Steel at HSBC in New York.
"It calms financial markets and boosts equities, reducing the need to purchase bullion as a safe haven."
Yet despite the central-bank action, however, "all metals appear to be well bid this morning," says today's note from Mitsui, the precious metals dealer.
Gold Bullion owned outright with no counterparty risk has risen by more than 47% since the global banking crisis began in August last year, and while "a short term consolidation [in Gold] does look possible," says Mitsui, "the bullish fundamentals should push things higher again soon."
On Tuesday morning the US Federal Reserve – acting in concert with the central banks of Europe, Japan, the UK, Canada, Switzerland and Sweden – offered to lend New York dealers a total of $200 billion in government bonds for up to 28 days at a time.
The aim was to ease short-term interbank interest rates, which recently neared fresh seven-year highs and sparked a rash of hedge-fund failures and investment bank losses despite coordinated central-bank action in mid-December.
In return for the extra $200bn in short-term funds, the Fed will now take higher-risk assets as collateral, accepting mortgage-backed bonds (MBS) that are not insured by government agencies Freddie Mac or Fannie Mae.
But the Fed's action "takes the US central bank a step closer to the nuclear option of buying mortgage securities in its own right," says the Financial Times today, because the Fed is effectively creating a market for mortgage-backed bonds in the absence of any free-market trading.
It also echoes the European Central Bank's action during the last three months of 2007, when it accepted all $80 billion of new mortgage-backed bonds issued by Spanish banks as collateral against short-term loans because the open market "shut down" in the words of one bank trader.
Early Wednesday, open-market Dollar lending rates in London showed short-term pressures easing, with the gap between three-month Dollar swaps and three-month interbank Dollar lending rates narrowing to 0.65%, down from last week's 0.80% spread.
That gap hit 0.95% when the UK's Northern Rock mortgage bank collapsed in Sept., and it peaked again at 1.05% just before the first joint-central bank action in December according to Reuters data.
But interbank rates charged on Euro loans continued to rise this morning for the seventh day running, taking three-month Euribor prices to 4.61% – the highest rate since Jan. 7th.
What's more, the AAA-rated bonds the Fed will now accept as collateral for its 28-day loans are not be safe "investment grade" assets they first appear, according to Bloomberg.
"Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut [their credit ratings on] the ones that matter most," says the newswire today – "AAA securities that are the mainstays of bank and insurance company investments."
One mortgage-backed bond floated by Deutsche Bank in May 2006, for example, is still rated "triple-A" by both S&P and Moody's. Yet 43% of the mortgages underpinning it are now delinquent.
"The Fed is basically accepting busted securities as collateral for loans," says Ian Shepherd, senior economist at High Frequency Economics in London. "I don't ever remember central banks co-ordinating globally like this. It should scare the hell out of everybody."
Within the US banking system, more than one third of America's smallest banks now have commercial real estate concentrations exceeding 300% of their capital, according to their regulator, the Comptroller of the Currency, John Dugan. Nearly 30% of these "community banks" have construction and development loans exceeding 100% of their capital.
As for the broader US stock market, "between the close of business Thursday and Tuesday, the Fed’s extra $352 billion in liquidity enhancing measures bought a 1.3% increase in the S&P500," says Sean Corrigan at Diapason Commodity Management in a private note to BullionVault today.
"Since we need a 19.4% rally to regain the Suckers’ High of 1576 in October, we might need another $4.8 trillion in new measures to do the trick. Neatly, that would equate to the Fed buying out the outstanding total of Agency/Government-backed mortgage pools, with enough room to nationalize Freddie and Fannie at current market value, into the bargain.
"Over to you Ben..."
Asian stock markets took their lead today from yesterday's 4% surge on Wall Street, rising everywhere but China and closing the session 0.9% higher on average.
Here in London, the FTSE index of 100 blue chips added 114 points to Tuesday's 61-point gain, taking it back towards last Thursday's closing price.
Government bond prices meantime slipped further in Tokyo, Frankfurt and London. US Treasuries rose, however, pushing the returns offered by two-year bonds seven basis-points lower from Tuesday's 12-year record jump to 1.78%.
"Money-market stresses seem to remain high," says Laurence Mutkin, head of European fixed-income strategy for Morgan Stanley in London. "Credit and counterparty concerns are not being removed by central bank actions."
Outside the hedge funds and investment banks loaded with failed mortgage-backed bonds, "a surge in the default rate is imminent and almost unavoidable" for European corporate debt says a new report from strategists at Dresdner Kleinwort.
Almost 40% of Europe's business debt will need re-financing within the next 12 months, says the report, and these "rapidly accelerating borrowing needs may cause supply fears, or cause a shortage of available funding, especially when liquidity is already tight."
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