LOG L Is For Liquidity, O Is For Oil, G Is For Gold

July 7, 2015 - 5:18pm

 by Gary Wagner

Less than robust economic health in the United States is nevertheless pulling the world train along. It has to by default.

Liquidity is a key issue in all major economic regions, although for very different reasons.

Europe leads the congestion in liquidity. The tale of the Greeks is a well-worn story in the book by now. It still hangs fire as to whether they and the rest of Europe can reach an accommodation. We worry that the well has been so thoroughly poisoned that more human factors like pride are overshadowing pragmatism.

This in turn is driving down the euro against the U.S. dollar, and against other strong currencies such as the yen and Swiss franc. Until the matter is resolved one way or another, Europe will remain paralyzed and financial markets will be hesitant to move.

The U.S. is facing its own much smaller liquidity problems. This is what is keeping equities in stasis. Until new capital sources are found to finance further bidding up of stocks, the indexes will remain range-bound. Start-ups and M&A’s are also sucking up a lot of cash that would normally flow into established companies.

Although some major technical innovation could move the U.S. economy, for now America is like an old-fashioned football team, grinding out a few yards on the ground on each play. The world watches and understands the importance of a healthy U.S..

Asia news is being driven by the meltdown on the Shanghai index of stocks. We’re not big on doom saying but this smells like a crash or near crash. Suspension of trading of selected stocks has yanked 21% market capitalization out of China markets, which totals about $1.4 trillion. When, or if, those invested in the stocks will be able to access their money has become an enormous question mark.

Meanwhile, the situation casts a long shadow on all mainland China equities, which have been spilling red ink, albeit less dramatically in the last few days.

Crude oil has been taking a hit recently, driven by declining consumption, high inventories and the possibility of a deal with Iran. The last item’s successful conclusion would immediately release 40 million barrels sitting in storage tankers offshore. It would also lift Iran’s much-curtailed export output by 700,000 barrels per day. You can add that to the current daily overproduction of between 1.5 and 2 million bpd. Crude was up minimally today after a 3% plunge.

That addition could spell a bad time, if only temporarily, for U.S. shale output, which in turn would act as a drag on the world’s largest economy.

Gold. Oh my. No… oh my, my, my.

While the yellow precious metal has bounced off its staggeringly low lows on the day in the mid-1140s, it is still crawling about in the mid-1150s, a territory that, should gold finish there, could signal steeper losses.

It will remain one of the larger curiosities throughout the Greek crisis once it ends as to why gold has not functioned in the least as a safe haven. One answer is most likely the looming interest-rate hike by the U.S. Federal Reserve. Investors are uncertain about how gold will react. The last thing you want in a haven play is uncertainty.

On top of the uncertainty, more often than ever people are regarding strong currencies as appetizing safe havens.

Today, for instance, the U.S. dollar is up a little against the euro and up and down against the yen. The Swiss franc jumped against the euro but has since settled back a bit in U.S. trading. The pound is also down a bit under 1.00% against the dollar as currency traders weigh the ripple effect of Greece in the United Kingdom.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

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