Gold & Oil Lead Jittery Markets Higher as Global Central

Joined : 23 Dec 2007 Posts : 241 Location : Nigeria

Today's commentary is by Chuck Butler, President of World Markets at EverBank.

Good day and a Terrific Tuesday to you Very Happy

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In the news: The U.S./Iran confrontation at the Strait of Hormuz yesterday pushed gold up to a record high.

The confrontation also drove oil prices higher. That alone was enough to put the giddy-up in gold prices for the day. The move was a moon shot! Gold rose US$17.84 on the day, or 2.1% to US$876 affraid

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Eurozone Inflation Is On the Rise

And don't look now, but Eurozone inflation is rising! I predicted it would, given oil prices. Also, the European Central Bank (ECB) would have to drag its feet to cut interest rates. Inflation for the 13-nations that make up the Eurozone, rose 3.1% in November. Whoa Nellie! That's way too high, given the ECB's ceiling of 2%!

Does this mean the ECB will have to go back and raise rates again? It's possible. What else can they do? They have a mandate from the Maastricht Treaty to maintain price stability. Not promote growth, like some willy-nilly central bank might want to do. (Read that Fed Reserve!) This really puts ECB President Trichet on the hot seat.

The one thing to think about here is that should the ECB decide to raise rates, and the Fed decides to keep cutting rates (recall the discussion about the possibility of 50 BPS this month from the Fed), then the euro would be enjoying a positive rate differential. You think the euro was popular as an offset currency to the dollar before? Wait till that happens (if it does of course)!

Central Bankers Are Always
Behind in the Game…
In the U.K. this morning, the latest Retail Sales report printed, and it wasn't a pretty sight. Retail Sales in the U.K. rose at their slowest pace since March 2006. That’s a wicked piece of data for the Bank of England to digest. I would look for a rate cut from the Bank of England (BOE) at their next meeting.

The Fed Speak began yesterday with the Fed Atlanta's Lockhart telling his audience that "negative signs on the economy are increasing." He also said he expects "weak" growth in the first half of this year. Hmmm...nice to see Mr. Lockhart has returned from his trip to Neverland. He should have been telling the people this stuff six months ago!

And that's the problem with the Fed. These guys see things too late! They are always late to the game. And yet the markets think they are wise. I don't get it. And neither should the markets!

Have a Terrific Tuesday!

Chuck Butler, President

EverBank World Markets

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Making 'Cents' of the Headlines
Eurozone Producer Inflation Rises!

What's Happening:

Inflation at the producer level, known as the Producer Price Index (PPI), rose on Monday. It came in at 0.8% vs. 0.7% expected. Also, the previous month’s inflation level got revised upward too.

Meanwhile, the European Central Bank (ECB) stands ready to raise interest rates again if inflation at the producer level keeps rising.

On Thursday, we’ll find out what they’re going to do in the near term. The interest rate decision will come out at 7:45am EST (NY time). Economists don’t expect them to raise interest rates and the European Central Bank is not known for surprises.

However, inflation has been on the rise and is outside of the ECBs comfort zone even now. So it will be interesting to see if they are patient and hold rates steady this time to see if the economy slows enough to take care of rising inflation or not. If not, you can almost bet they’ll raise rates next time around.

The Bank of England will announce its rate decision even before the ECB does. This will happen at 7am EST. They aren’t expected to raise rates. However, the Bank of England is known for its surprises. But when they don’t make any changes, they generally do not make any additional commentary either. So the market doesn’t get much additional information.

What I Say:

ECB President Trichet speaks later at 8:30am EST that morning. The market will be listening close to every word he says to see if they can guess what his next move will be. If they can do that, there’s a lot of money that can be made. But he’s been doing this a long time. So he usually doesn’t lay his cards on the table. He would only do that in order to “talk the currency down” from its present high levels.

The ECB has a hard task. On one hand, the ultra-high exchange rate is hurting Eurozone exports. On the other hand, the ECB can’t afford to let inflation expectations get out of hand. One thing is certain: more money tends to run to a currency with rising rates. Then it pushes the EUR/USD exchange rate painfully higher. So the ECB, like the Fed, is stuck between a rock and a hard place in my opinion. It will be interesting to see how they wiggle out of this one

Get out the popcorn! It should be entertaining bounce

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