The 11th hour approaches for Europe

2011-DEC-08

Precious metal prices crept higher yesterday on hopes of a new fiscal structure for the eurozone. US stocks rose, though Asian shares have settled lower today – emphasising the uncertain nature of markets at the moment. Crude oil prices were up again yesterday, with WTI crude looking to consolidate above $100 a barrel. Good news out of Europe today and tomorrow should lead to further gains in oil prices.

Growing unease about Iran could also bolster crude prices, with the Iranian government warning that any moves to sanction its oil trading and central bank operations could send oil prices ”above $250 a barrel”. While such claims from them should be taken with a pinch of salt, previous oil shocks emanating from the region have seen prices double, with notable inflationary consequences for economies. This is the last thing the global economy needs right now – amid all the doom & gloom of the “europocalypse” and serious banking issues James Turk highlights in his latest King World News Blog interview – but then there’s no law that says bad things can’t happen in packs.

Investors are expecting the European Central Bank to announce another interest rate cut of 0.25% today, when ECB president Mario Draghi addresses a press conference at 13.30 (GMT). Hinde Capital’s Ben Davies has also discussed the possibility of the ECB loosening its collateral requirements on two-year loans to banks. This would ease lending in the interbank market and help these banks to recapitalise. Of course, as Ben notes, “the balance sheet of the ECB will rise” as a result of what he calls this “qualitative easing”, as the new money banks will be borrowing will have come straight off of the ECB’s printing press.

This move would be a subtle form of debt monetisation, and once that could perhaps get around the objections of Bundesbank hawks. The fact remains that the kind of structural fiscal reforms that Merkel and Sarkozy have been discussing in recent days will need to be approved by national parliaments, in what could be a messy process. The ECB could very well turn out to be the eurozone’s last line of defence against serious problems in the bond market – especially now that the credit-worthiness of the entire EU is being called into question.