Will the Accord by the ECB-EU Politicians Pave Way for the Big Bazooka?

Amazing volatility.

Graphics from Bloomberg

European markets appear to skyrocketing (after yesterday’s deep slump) on the proposed accord by the ECB and EU politicians.

From Bloomberg, (bold emphasis added)

After 2 1/2 years of incremental crisis management and false starts, a bargain is beginning to emerge between Europe’s politicians and central bankers over how to calm bond markets and end the debt tumult that threatens the euro’s survival.

The European Central Bank sketched out its side of the deal yesterday, offering to buy Italy’s and Spain’s bonds on the market as long as the euro governments’ bailout fund makes purchases directly from the two countries’ treasuries and ties them to tough conditions.

ECB President Mario Draghi offered only a glimpse of the new strategy, with the actual interventions weeks or months away and a host of obstacles standing in the way before Europe can claim to be on a path out of the crisis that emerged in Greece in late 2009. Investors looking for a quicker fix pushed down the euro, European stocks and bonds of at-risk countries.

“All of the announcements, if transferred into actual activity, would be close to the big bazooka approach that the markets are looking for,” said Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London. “Market disappointment is hardly surprising in this context but we may well find this lays the groundwork for the grand plan in coming weeks.”

The conditions set by the ECB on EU governments, again from the same article…

A bond-buying program would require Italy and Spain to make austerity and economic-reform commitments -- or potentially only restate the ones they’ve already made -- and submit to international monitoring. Spain has already gotten over the stigma of relying on outside help by tapping a 100 billion-euro program to shore up its banks.

Draghi’s pledge took the ECB further away from its roots as a politically autonomous central bank, modelled on Germany’s Bundesbank, with prime responsibility for containing inflation and only a lesser focus on the broader economy and the stability of the banking system.

The Bundesbank’s leader, Jens Weidmann, was alone on the ECB’s 23-member policy council in expressing “reservations,” Draghi told the press. For now, Weidmann stayed silent, contrasting with the objections to the ECB’s original bond- purchasing program that were immediately voiced by his predecessor, Axel Weber, in May 2010.

I really doubt if the prospective deal will be complied with.

The political institutions of the EU have broken much of the self-made/imposed regulations (e.g. Maastricht criteria, changes in collateral eligibility rules and etc...) to accommodate the interests of the political authorities and the banking cartel.

Yet such agreement seems as justification for the deployment of ‘big bazooka’ inflationism, perhaps through the reactivation of the Securities Markets Programme (SMP) that would only defer on the day of reckoning or to buy time for whatever political reasons.

And I also think that the team Ben Bernanke and the US Federal Reserve may not be pulling the trigger for QE 3.0 perhaps until after the ECB-EU’s joint actions.

More from the same article,

One reason Draghi had to buy time is that European governments won’t be able to act until at least mid-September, the earliest possible startup date for the planned 500 billion- euro permanent rescue fund, the European Stability Mechanism. It faces a German supreme court ruling on Sept. 12.

Until then, Europe’s only rescue vehicle is the European Financial Stability Facility, with as little as 148 billion euros left over after last month’s approval of Spanish bank aid.

So the likelihood is that the deal will likely prompt Spain and or Italy to access the EFSF (temporary fund) first, from which the ECB may provide bridge financing until the ESM (permanent fund) is ready. Yet political authorities seem to optimistically think that these would be enough to deal with the crisis. They are most likely to be mistaken.

It’s just incredible to see how financial markets respond like a pendulum—swinging from one extreme end to another—in the collision of expectations from promises to inflate as against the reality of unsustainable arrangements and of the ongoing economic recession in the EU.

One might just easily generalize that financial markets have almost been rigged by the central banks.

Nonetheless, all talk about the prospective actions by the ECB-EU seems to have scarcely influenced on the price actions of gold and oil. While both are up signifying a return to the risk ON mode, the degree of gains have not been the same as the equities. Could gold be sensing something else?

Be careful out there.

China’s Oil Imports Slump, Gold Imports Soar

A slump in oil imports could also be an indicator of slowing economic growth and perhaps the end of China’s hoarding of strategic reserves.

Notes the Zero Hedge, (bold original)

Following months of ever higher Chinese imports, no doubt predicated by stockpiling and hoarding reserves, in June Chinese crude oil imports plunged from over 25 million metric tons to 21.72 MMTs, the lowest since December, or about 5.3 million barrels a day, down over 10% from the previous month's record import. While the number was still quite higher than the 19.7 million tons, the sudden drop is concerning, especially since the price of Brent slid materially in June, and if anything should have resulted in even more imports if indeed China was merely stockpiling crude for its new strategic reserve facilities. Which begs the question: was the demand actually driven by the economy, and just how bad is the economic slowdown over the past month if not even stockpiling at preferential prices can offset the drop in end demand?

From Dow Jones:

China's refineries may process less crude in the third quarter due to weaker domestic demand for diesel, which has led to persistently high stockpiles and steady exports from the country's largest refiner, China Petroleum & Chemical Corp, or Sinopec Corp.

The country's crude throughput declined in both April and May, falling 0.3% and 0.7%, respectively, compared with the corresponding months a year earlier.

Weaker demand for diesel, a primary driver of refinery output, has tracked China's economy, which has slowed for five consecutive quarters. Manufacturing activity in June grew at its slowest pace since November.

Meanwhile gold imports through Hong Kong has been soaring

Again from Zero Hedge (bold original)

There are those who say gold may go to $10,000 or to $0, or somewhere in between; in a different universe, they would be the people furiously staring at the trees. For a quick look at the forest, we suggest readers have a glance at the chart below. It shows that just in the first five months of 2012 alone, China has imported more gold, a total of 315 tons, than all the official gold holdings of the UK, at 310.3 according to the WGC/IMF (a country which infamously sold 400 tons of gold by Gordon Brown at ~$275/ounce).

From Bloomberg:

In May, imports by China from Hong Kong jumped sixfold to 75,635.7 kilograms (75.6 metric tons) from a year earlier, Hong Kong government data showed. The nation “remains the most important player on the global gold market,” Commerzbank AG said in a report. The dollar fell from a five-week high against a basket of currencies, boosting the appeal of the metal as an alternative investment.

“Higher physical demand in China is good news for the market,” Sterling Smith, a commodity analyst at Citigroup Inc.’s institutional client group in Chicago, said in a telephone interview. “The mildly weak dollar is also positive.”

The World Gold Council has forecast that China will top India this year as the world’s largest consumer because rising incomes will bolster demand.

And those looking at the trees will still intone "but, but, gold is under $1,600" - yes it is. And count your lucky stars. Because while all of the above is happening, Iran and Turkey have quietly started unwinding the petrodollar hegemony. From the FT:

According to data released by the Turkish Statistical Institute (TurkStat), Turkey’s trade with Iran in May rose a whopping 513.2 per cent to hit $1.7bn. Of this, gold exports to its eastern neighbour accounted for the bulk of the increase. Nearly $1.4bn worth of gold was exported to Iran, accounting for 84 per cent of Turkey’s trade with the country.

So what’s going on?

In a nutshell – sanctions and oil.

With Tehran struggling to repatriate the hard currency it earns from crude oil exports – its main foreign currency earner and the economic lifeblood of the country - Iran has began accepting alternative means of payments – including gold, renminbi and rupees, for oil in an attempt to skirt international sanctions and pay for its soaring food costs.

“Iran is very keen to increase the share of gold in its total reserves,” says Gokhan Aksu, vice chairman of Istanbul Gold Refinery, one of Turkey’s biggest gold firms. “You can always transfer gold into cash without losing value.”

Turkey’s gold exports to Iran are part of the picture. As TurkStat itself noted, the gold exports were for “non-monetary purpose exportation”. Translation: they were sent in place of dollars for oil.

Iran furnishes about 40 percent of Turkey’s oil, making it the largest single supplier, according to Turkey’s energy ministry. While Turkey has sharply reduced its oil imports from Iran as a result of pressure from the US and the EU, it is unlikely to cut this to zero. The country pays about $6 a barrel less for Iranian oil than Brent crude, according to a recent Goldman Sachs report.

According to Ugur Gurses, an economic and financial columnist for the Turkish daily Radikal, Turkey exported 58 tonnes of gold to Iran between March and May this year alone.

None of these looks anywhere a good news.

Gold prices, at present, may partly have been driven by the Iran sanction dynamic but I think that China may have been insuring themselves from risks of a currency crisis through the stockpiles of gold and oil.

Nonetheless I am not sure if the slump in oil imports represents an anomaly or an indication of a deepening slump in the economy and or may have redirected some of that money to the stimulus directed towards state owned enterprises.

As Oil Prices Slump, China Imports Record Amount of Oil

China has not just been buying RECORD amounts of gold, it seems that China has also been gobbling up RECORD amounts of crude oil.

From Bloomberg,

China, the world’s second-biggest oil consumer, increased crude imports in May to a record high as refineries raised processing rates and oil prices declined.

The country bought a net 25.3 million metric tons, or 5.98 million barrels a day, more than it exported last month, according to data published today on the website of the Beijing- based General Administration of Customs. That compares with the previous high of 5.87 million barrels a day in February.

The jump in oil purchases helped spur a 12.7 percent gain for the nation’s imports last month, exceeding economists’ estimates. Refineries boosted processing rates last month as some facilities resumed operations after scheduled maintenance while Brent oil in London entered a so-called bear market on June 1 after sliding more than 20 percent from this year’s peak.

“International crude oil prices have been falling in the past two months, so more crude was probably shipped in to fill commercial and state emergency stockpiles” as prices could rise again, Gong Jinshuang, a Beijing-based senior engineer at China National Petroleum Corp., the nation’s biggest oil company, said by telephone.

Purchases cost an average $120 a barrel, compared with about $123 in April, Bloomberg calculations from the customs data showed. China’s imports of crude were 25.48 million tons in May, while exports were 180,000 tons

A chart of soaring oil imports from Zero Hedge who rightly points out that this means China seemingly has not been hoarding the USD

Gold and oil functions as benchmark commodities or as lead commodities.

And as I recently pointed out

It could also be possible that China’s quickening pace of gold hoarding could be as insurance against a potential cataclysmic currency crisis that could be unleashed from political responses by major central banks to avert a global recession.

Add oil to the insurance factor or “flight to real value” on the increasing risk of a crack-up boom (currency crisis)

As the great Ludwig von Mises explained

with the progress of inflation more and more people become aware of the fall in purchasing power. For those not personally engaged in business and not familiar with the conditions of the stock market, the main vehicle of saving is the accumulation of savings deposits, the purchase of bonds and life insurance. All such savings are prejudiced by inflation. Thus saving is discouraged and extravagance seems to be indicated. The ultimate reaction of the public, the "flight into real values," is a desperate attempt to salvage some debris from the ruinous breakdown. It is, viewed from the angle of capital preservation, not a remedy, but merely a poor emergency measure. It can, at best, rescue a fraction of the saver's funds.

By the way, I have been reiterating the point that financial markets will be faced with sharp volatilities in both direction but with a downside bias.

Yesterday oil spiked up on the news of Spain’s bailout, but got smashed at the end of the trading session.

Clearly boom bust dynamics at work.