Weekly Market Recap – February 10, 2012

Greek debt fears and rising tensions in the Middle East boosted the safe-haven appeal of Precious Metals this week. Emerging-market central banks are buying Gold as a means to protect their economies from foreign sovereign debt risk exposure. RBS analyst Nikos Kavalis said, “It’s been a bit of a roller coaster, the relationship between Gold and the Euro. One day it’s positive, one day it’s negative. … For the time being, we see Gold over the next few months appreciating with other commodities. … Risk in the market is one of the supporting factors, but the monetary policy outlook is really the key factor.” There was news this week that China hoarded Gold in record amounts last year. In a note, UBS analysts wrote, “While December’s activity is the lowest since July, it’s still 245.2 percent higher year-on-year. Here’s a statistic that should lay to rest any doubts over Chinese Gold consumption: the 2011 trend of imports from Hong Kong was up 258 percent from 2010.” Gold has been performing well recently, and its rally has been an indication that investors are not particularly interested in holding fiat paper currency.

In Greece this week, after two postponed meetings and ramped-up pressure from the European Union (EU) and the International Monetary Fund (IMF) to come up with an agreement that would enable Greece to avoid a default on its debt, reports surfaced on Thursday that Greek leaders had reached an austerity deal that would allow them to receive a second bailout package and stave off default. The citizens of Greece expressed their frustration that their country’s financial problems have not been resolved in an open letter to Greece’s prime minister posted on  a Greek news website that asked that the prime minister “End this water torture” and put a stop to the “endless bargaining.” Despite Thursday’s reported agreement, the news Friday was that the deal was already starting to unravel, as leaders in the eurozone put the bailout on hold and one of the leaders in Greece’s coalition government indicated that he would be voting against the proposed austerity measure.

This week, the world waited to see if Iran would react aggressively to international sanctions that were implemented in an effort to shrink the Iranian economy and drive down the value of its currency. Iran continued its threatening rhetoric toward the U.S. this week. In a news conference in Russia, Iranian ambassador Seyyed Mahmoud-Reza Sajjadi said, “The Americans know very well what Iran is like and what our potential is. … Iran is in a very good position to deliver retaliatory strikes on Americans around the world.” Towards the end of the week, there were signs that the Iranian sanctions had begun to take hold.  With Iran not able to secure financing for goods that are dollar or Euro denominated, Iranians searched for alternative means to pay for goods (particularly grain, which reports said were being paid for in Gold bullion) as a means to bypass the sanctions. According to the International Energy Agency (IEA), the sanctions on Iran were already diminishing oil flows, even though the European bans on Iranian oil do not take place until July, as it appeared that countries that had been purchasing Iranian oil were already looking to alternative suppliers. Meanwhile, Israel was reported to be in talks to repeat the “operation” it used against Iraq in 1981 and Syria in 2007 on Iran. In both of the previous instances, the countries involved were said to be developing nuclear technology, and the operations involved the bombing of the nuclear reactor sites.

Issues with Syria continued to have large global political overtones this week, as Russia and China vetoed a U.N. resolution on Syria and continued to oppose any steps by the West to remove Syrian President Bashar al-Assad. This is a very touchy situation, as the Russians view these steps as a Western attempt to remove a strong Middle Eastern ally in an effort to isolate Iran. However, despite Russia’s support for Syria, the Russian foreign minister reportedly told the Syrian president, “Every leader of every country must be aware of his share of responsibility. You are aware of yours. It is in our interests for Arab peoples to live in peace and agreement.” Russia’s government holds weight in Syria as a major arms supplier for the country, and Russia has moved in to try to work diplomatically with Syria. Russia and China continue to back the Syrian government, while the rest of the U.N. favors a transfer of power from Syrian President Bashar al-Assad. With bombing continuing in Syria, Turkey looks to be stepping up its effort to secure a united Western, Arab, and U.N backed efforts to remove Syrian President Bashar al-Assad from power. Russia and China oppose that course, and both countries hope for a more diplomatic resolution that would allow Assad to stay in power.

At the start of the week here in the U.S., stocks were weighed down by concerns over the ongoing debt crisis in Europe and the continued failure of political leaders in Greece to come up with a definitive plan for avoiding a national default.  By later in the week, U.S. stock futures were on the rise again, driven by the Greek deal and helped out by the jobless claims report released Thursday morning that showed claims fell by 15,000 the week before, and that the four-week moving average had dropped by 11,000. The four-week average is typically seen as a better indicator of trends, and it was at its lowest level since April 2008. Michael Gibbs, director of equity strategy at Morgan Keegan, commented on the rise of the markets. “We’ve made some significant moves in a short period of time.” However, Chip Cobb, portfolio manager at Bryn Mawr Trust, was not so optimistic, saying it might be better to hold the applause over the Greek situation. “How many times have we been down this path and come out with nothing?” he asked.

In news out of the Federal Reserve, Fed Chairman Ben Bernanke spoke before Congress on Tuesday and reiterated the Fed’s positions: The job market is far from normal, and the long-term budget deficit needs to be reduced. Also from the Fed, John Williams, the San Francisco Federal Reserve Bank’s president, said on Wednesday that the Fed might need to launch a third round of asset purchases with printed money (commonly known as quantitative easing) if the economy slows and inflation remains below 2 percent. He also indicated that buying mortgage-backed securities would be a logical choice. Per Williams, “I expect the pace of economic growth to be frustratingly slow and the unemployment rate to remain high for years to come.”

There was some worrisome speculation this week that the previous week’s unexpected improvement in jobs numbers could result in an equally unexpected tax increase for many U.S. citizens. Doubt began to grow that that lawmakers in Washington will find themselves in another battle over the payroll tax cut, as some politicians may be reluctant to agree to another extension. The last showdown over the tax cut in December ended with an extension almost failing to pass the House of Representatives, despite passing the Senate with bipartisan support.

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