- US bipartisan budget deal unimpressive, but could signal a new spirit of practical co-operation
- Markets take profits on taper speculation, but gold gets some temporary respite
- European finance ministers still have their work cut out to secure banking union deal
Unimpressive US budget deal triggers taper speculation
A bipartisan budget deal has been reached that will likely be passed by Congress over the coming days. It is not a very impressive deal. It increases government spending modestly over the next two years, while this is paid for by a hike in fees on airline passengers and higher federal worker pension contributions. So the deal does not make a major change to the fiscal stance, which is in any case set to become much less of a negative for growth. Still, the deal might signal a new spirit of more practical co-operation in Congress, taking away the threat of a shutdown and other fiscal fiascos that have unnecessarily damaged the economy. Since the deal, there have been some modest wobbles in financial markets on the back of the view that the Fed may already taper next week. This is because fiscal uncertainties were mentioned by the FOMC as a reason not to taper in the past. Emerging market currencies gave back some of their recent gains, and we also saw some easing of equity, bond and commodity markets. Our central view remains that tapering will likely not come until March and that, in any case, tapering and positive investor sentiment will go hand-in-hand over the coming months.
Gold prices set for some respite, but likely temporary
Investors have been trying to push gold prices towards this year’s low of USD 1,180 per ounce and to even force a break of this level on the back of the stronger US employment report. When they realized that they would not be successful in doing so, they quickly closed some of their short positions resulting in a gold price recovery. Furthermore, China’s demand for gold has picked up recently, which was visible in China gold imports via Hong Kong. Finally, market conditions have tightened. Despite some mild softening on the December taper speculation, we judge that these factors will support prices up until the end of this year. However, for 2014 and 2015 we expect investment demand to be in the driver’s seat and position liquidation to continue. More attractive returns on other investments, the outlook for lower prices, an environment of low inflation risk and positive investor sentiment will result in investors reducing gold positions. Indian’s jewellery demand will likely remain weak. We expect Chinese jewellery demand to increase modesty but it will unlikely compensate for India’s shortfall. We keep our year-end forecasts for 2014 and 2015 at USD 1,000 and 800 per ounce, respectively.
Finance ministers still have work to do on banking union
The meeting of European finance ministers to discuss the single resolution mechanism (SRM), did not reach a final agreement. Ministers will try to round things off next week, before the summit on 19-20 December. Some points have already been agreed. Most importantly, in case of a bank failure, a minimum level of losses equal to 8% of total liabilities including own funds would have to be imposed on the shareholders and creditors before access could be granted to the resolution fund. In such an event, eligible deposits from natural persons and of micro, small and medium-sized enterprises would have preference over the claims of ordinary unsecured, non-preferred creditors and deposits from large corporations. The contribution of the resolution funds would be capped at 5% of a bank’s total liabilities. According to the Ecofin agreement, in the extraordinary circumstances where this limit has been reached and after all bail-in possibilities have been exploited, the resolution authority could seek funding from “alternative sources”. But the agreement does not specify what these sources would be and whether funds from the ESM could be used. All in all, a number of key issues remain, such as who would get the power to close down a bank, the EC or the Council of the EU, and the distribution of voting power for decisions on the release of common resolution funds. Finally, countries have to decide about what financial backstop would be operational during the 10-year period in which the EUR 55bn single resolution fund will be filled up and the possible use of the ESM.