Investors Wary of US, European Debt Crises

The debate surrounding the raising of the U.S. debt ceiling is fast becoming an issue for the financial markets as the U.S. Congress looks like it might, once again, take the nation to the brink of a government shut down. Republicans and Democrats are also using the issue as leverage in their continuing debate over the budget. There is now less than a month before the United States once again runs out of money to pay its bills. The Treasury Department has been exercising emergency measures since the beginning of this year to avoid a breach of the $16.4 trillion debt limit. Treasury Secretary Timothy Geithner has said that he expects the emergency measures will no longer be effective come mid February to early March.

The European debt crisis is likely to re-establish itself in the international investor psyche after preliminary figures released by the German Federal Statistics Office indicate that the largest economy in Europe may have shrunk on the final quarter of 2012. The office in Wiesbaden said that the economy slowed to 0.7% growth in 2012 from 3% in 2011. The figures mean that even mighty Germany is on the brink of recession. Luxembourg Prime Minister Jean Claude Juncker has precipitated a plunge in the euro to 1.3263 after he said that the exchange rate was dangerously high. The common currency opens the morning at 1.3300.

U.S. stock markets were lackluster as investor nerves were frayed by the debt ceiling issue and manufacturing in the New York region contracted for the sixth consecutive month. Four out of the ten industry groups in the S&P 500 fell led by technology stocks. Apple stock continues to fall while Facebook lost 1.6%. The S&P 500 has closed the session 0.11% higher at 1,472. Earlier in Europe, bourses were mixed with the DAX falling 0.69% while the FTSE gained 0.15%

Commodities were lower despite precious metals recording good gains. The UBS Bloomberg CMCI lost 0.23%. WTI crude fell from four month highs to open this morning at $93.30. Precious metals gained with gold rising 0.7% to $1,679 while silver gained 0.85% to $31.38. Platinum surged to three month highs on production cuts in South Africa. Agricultural commodities were mixed although grains continue to rise with wheat higher by more than 2%. Copper gained 0.1%.

Gold rallied on the back of comments from Federal Reserve Chairman Ben Bernanke that gave the stimulus junkies hope that an accommodative policy may be more persistent than the last FOMC minutes suggested. Bernanke said that while the U.S. economy is indeed responding to monetary stimulus, there is still "quite a way to go." We maintain our bullish medium term outlook for gold while maintaining a neutral outlook in the short term. We believe that gold will remain trapped within a $1,620 to $1,750 for now and we will continue to take advantage of any intra session trading opportunities that may arise. For today, we have sold gold at $1,679 with a stop loss at $1,685 and will be targeting $1,668. In an interesting development, platinum prices are once again higher than that of gold as production cuts in South Africa see platinum prices surge.

Compass Direction
Short-Term Medium-Term
NEUTRAL BULLISH

US Oil (WTI) fell as investors become increasingly nervous about the U.S. debt ceiling and the lengths that Republicans and Democrats will go to when leveraging on the situation in their debate over the budget. President Obama fired a shot at the Republicans yesterday as he said he would not negotiate with them over the debt ceiling and that there should be separate discussions on spending cuts. The possibility of the U.S. defaulting on its obligations is now once again making investors nervous. We expect to see a round of U.S. strength on safe haven buying and this will impact negatively on the crude price. In conjunction with fundamentals that still point to a lower WTI price, we will see WTI below $90 in the next week. We remain short from the $93.30 level. We expect that there will be a cascading of stop losses imminently to see the price drop below $90.00.

Compass Direction
Short-Term Medium-Term
BEARISH BEARISH