The Daily Market Report: Gold Defensive at Low-End of Range, as Dollar Firms
16-Jul (USAGOLD) — Gold remains defensive at the low end of the range, weighed by recent dollar gains. Movement in Greece toward a third bailout may also be prompting some unwinding of safe-haven positions.
Keep in mind though, that even with the Greek Parliament’s approval of the new austerity deal last night, it only allows for negotiations on the third-bailout to begin. A lot of things could still go wrong.
Perhaps most significantly is that the backtracking on austerity by PM Tsipras leaves his Syriza party, and the coalition he built, fractured. The government may very well collapse before all is said and done.
A new government may just be disinclined to adhere to the austerity measures passed yesterday. You may recall that when Syriza came to power in January, they made it quite clear that their intent was to renege on the austerity agreed to by the previous government, which ultimately led to the current crisis.
Not that they weren’t in crisis prior to that. Pretty much everyone agrees that Greece’s crushing debt load is unsustainable. However, the Germans remain adamantly opposed to any debt forgiveness as long as Greece remains a member of the eurozone.
If Greece does in fact secure its third bailout in five years, all they will have done is kicked the can down the road. In three-years time, we’ll be talking about bailout number four.
Fed chair Yellen continues to suggest that rate lift-off might be appropriate this year. However, with growth still generally anemic and inflation well below the central bank’s target, I suspect there won’t be the supporting data to warrant such a move by year-end.
Nonetheless, markets seem to think the odds for tightening improve each time Yellen issues her caveat laden assessment as to the appropriateness of a rate hike. Going all the way back to the 1990s, every time the BoJ lifted the discount rate off the zero-bound they had to quickly reverse course and go back to zero. I think we will find that to be the case as well.
Hiking rates, only to turn around and cut again, risks undermining the Fed’s credibility. However, Janet Yellen may be thinking that a hike is necessary to maintain some semblance of credibility.
The ECB held steady on policy today and Mario Draghi reiterated his commitment to fully implement the QE program:
It is likely that the ECB is a very long way away from raising the refi rate, which remains just above the zero-bound. There may be more QE in the offing and by the time September 2016 roles around, Europe will be more than a third of the way along to the next Greek crisis.
