Eurozone Leaders Surprise the Markets

Good day, and a Happy Friday to one and all! I’m dragging the line this morning for sure, so I doubt I’ll be my normal self as I write. By missing yesterday, I missed out wishing what was once my little buddy, Alex, a happy 17th birthday! And a Happy Anniversary to darling daughter Dawn and her husband Jerry. Yes, they got married on Alex’s birthday. He thought the reception that night was his birthday party!

Front and center this morning, there’s been a development in the eurozone summit that needs to be addressed. In a move that surprised the markets, the eurozone leaders agreed to allow the bailout funds to recapitalize banks. This has been a real bottleneck for the eurozone, and now that it’s behind them, they can go about shoring up the troubled banks of Spain and Italy. Hey! Don’t look at me that way! No, this isn’t what Chuck would do. But the markets seem to love it as the euro (EUR) has rallied from 1.2444 yesterday to 1.2580 this morning…

What would Chuck do? Just here in the U.S. four years ago, I would have let the banks that made bad decisions fail. But there needs to be deposit insurance. Yes, things would have gotten really ugly. But in a couple of years, this would all be behind them and a “real recovery” could take place. But as I said, the markets like it.

They also like the news that the eurozone leaders have agreed to have just a single supervisor to oversee the eurozone’s banks. Is this the first step of a debt union to come? Maybe. But I still think Germany would roll over and play dead before they agreed to issue a eurozone bond.

Speaking of rolling over, with Germany’s loss in the Euro 2012 tournament, it will be an all PIIGS final of Spain and Italy.

The good thing about this tapping of the bailout funds is that when they shore up the banks in Spain and Italy, they won’t be adding to debt. So does all this meet the requirements that I put on the eurozone leaders to save the Union? No. But at least it’s a step in the right direction. And with that decision, not only has the euro recovered 1 cent, but gold has recovered $17 this morning on the news, and the commodity currencies are soaring as I write.

So we end the week with the markets happy with the eurozone decision and the risk-aversion campers are crawling back into the walls from which they came. So it’s a risk-on day for the risk assets of currencies, metals and stocks. I’m not seeing much slippage in the U.S. Treasury 10-year yield right now, so this must have been cash just sitting on the sidelines waiting to see what the eurozone leaders would do.

Did you see that the U.S. first-quarter GDP final reading was +1.9%. But remember, in the first three months of this year, we were still rocking and a rolling from all the easy money and stimulus. As the effects of all that stimulus began to fade, the second quarter has been much slower, the economic data continue to be weaker and the job creation has dropped like a bad habit. I know this is a bit premature, but I’m going to go out on a limb here: Don’t worry, I’ll pick out a big fat one to hold me and say that the second-quarter GDP will be less than 1%.

We might get an indication of the weakness in the second quarter this morning when two of my fave economic reports print. Personal spending and personal income. I think we’ll see personal spending will have dropped like a rock in the month of May. And for the first time in a month of Sundays, we will make more in May than we spent. But I doubt it’s going to feel good. The first preliminary report on second-quarter GDP won’t print for about a month. So go cool off by the pool until then!

But the backside of the financial storm is growing closer to our shores, for sure! While we’re talking about U.S. economic data, the weekly initial jobless claims that print every Thursday printed yet another stronger-than-forecast number of claims for last week and revised upward the previous week’s total to 392,000. These data have cooled off some in the first quarter, but have steadily risen in the second quarter back to the number of claims we were filing a couple of years ago.

A week from now, while most traders are gone as they stretch the Fourth of July holiday into a multiday mini-vacation, the Jobs Jamboree will print for June — and this is that proverbial fork in the road, folks. Will the June jobs data be weak like the April and May reports? Or will it find some legs? Remember: 1) It’s an election year, and 2) The BLS has added over 400,000 jobs to the monthly reports the past two months. Without those additions, April and May would have been negative months of job creation. So there are two wild cards, like one-eyed Jacks, for the Jobs Jamboree next Friday.

Right now — and I know, I know, it’s a week away — I think the number will be less than 100,000. And that will be disappointing, for sure! And I’ll be one of those traders that are stretching the holiday next week. So I need to start talking about the Jobs Jamboree now.

In the U.K. this morning, Bank of England (BOE) Gov. King told reporters that the banking sector was deteriorating. So the state of mind in England doesn’t change: constant doom and gloom. But the coming Olympics are going to give the U.K. economy a shot in the arm, and what they do with that remains the question going past the Olympics.

As I said above, the commodity currencies soared on the news from the eurozone summit. The Australian dollar (AUD) and New Zealand dollar/kiwi (NZD) have taken off this morning. The A$ is up over 1 cent, and kiwi is up nearly 1 cent. All the movement higher in these currencies has come as a result of the announcement at the eurozone summit. And while I would normally get to lathered up by something like this, I do have to say that it’s nice to see the rally take place, for the selling this week has come from the perceived disappointment that would come from the eurozone summit. So we’re back to where we were before all the “perceived disappointment” set in.

And gold. I told you earlier that it was up $17. Well, in that hour since I’ve been writing, gold has added another $7 and is now trading up $24 this morning. And it looks like one of those days that’s going to just give the price manipulators a rash, for gold looks to be on a mission from God, as the Blues Brothers would say.

So I touched on the eurozone summit’s decision that surprised the markets this morning and got things rolling. So what does Chuck think about this? It was low-hanging fruit for the eurozone leaders, so why not pick it? The fruit high up in the tree is the finalization of the blueprint or road map, if you will, toward fiscal integration. Other than something like that being done today, I doubt this is a lasting love affair for the euro. It certainly isn’t a game changer! So be careful out there!

Mom! He’s doing it again! China is taking another step toward a wider distribution of their currency by announcing that they plan to further develop the offshore renminbi/ yuan (CNY) market in Hong Kong. But then Australia knocked on the door. It’s Australia and they want to establish an offshore market for the Chinese currency!

Again, folks, you won’t see this stuff on the cable news or in the newspapers, because this is not good news for the dollar. These are baby steps that China is taking, but they are taking all the right baby steps. And then I saw a report by Larry Edelson, a well-respected analyst, who claims that China’s commercial banks have been given approval to dump and sell short U.S. dollars.

Yes, to me, there’s been no question whatsoever that the Chinese have gone well down the road to removing the dollar as the reserve currency of the world. It will take time — lots of time — but the Chinese have awaken from their slumber, and everything they’ve put their minds to they’ve accomplished. They wanted to be the biggest exporter, and now they are. The wanted to pass Japan as the second-largest economy in the world, and they did. And the list goes on. If you haven’t woken up to smell the coffee yet, here’s a hot cup of java for you!

Then There Was This: I was reading over stories this morning, trying to pick our TTWT story for today, and while a lot of the stuff centered on the health care announcement yesterday. I’m just not going to go there. So I decided to print this story that was on MarketWatch that talks about inflation and gold. So here you go!:

“Is inflation a good or a bad thing? It might sound like an easy question. But actually, it depends on who you are and what your portfolio looks like.

“If you have lots of debt, and own equities, property and commodities, then inflation is pretty good. If you are a creditor, and own mostly bonds, then it is a bad thing.

“Most of the time, there is a global argument going on between the people who want inflation and those who don’t. Whether prices rise or not depends on who wins.

“Until recently, the balance has been about even…

“But right now, that power balance is shifting. Europe and Japan are about to switch to inflation. That will have huge implications for the markets. Such as? Property and blue chip equities will do well. Bonds will do badly. Most of all, gold will spiral up into the next phase of its bull run.”

Could today be the beginning of that next bull run for gold? It’s now up $31 on the day, up $7 more since just half an hour ago!

To recap: The eurozone leaders surprised the markets and announced that the bailout funds would be allowed to recapitalize the troubled banks of Italy and Spain. This was HUGE for the markets, and they have gone on a risk-on day tear! The currencies led by the euro and commodity currencies are soaring, and gold is up $31!!!! Everything today is all about the eurozone summit, so continue to look for news coming out of Brussels.

Chuck Butler
for The Daily Reckoning