Gold Up Only Slightly, Oil Craters, Euro To U.S. Dollar Spread Grows on Greece Uncertainty

Today has been a trying and troubling day in world markets as everyone awaits the next move in the European-Greek drama. We’re hard-pressed to see how it can turn out well for anyone with any exposure to Greece’s debt.

That includes just about the whole world. Oil prices have been the first serious casualty of the week. Prices have tumbled over 7% on the belief that the world’s economy will slow down and less oil will be used because of Greece. We think the reaction in crude markets has been extreme, however. A price hovering just under $53 a barrel for West Texas Intermediate and $57.50 for Brent North Sea will almost immediately drive out even more marginal producers. Those operators had just begun to find their footing as prices stabilized at $60 for WTI.

While U.S. equities markets are meandering at modest loss levels, Europe – the DAX and CAC, have taken a meaningful blow. Both mainland exchange indexes are down, 1.5% and 2.00%, respectively. The FTSE is more in line with U.S. equities on its loss for the day.

In equities, it appears that the real loser on the day is Shanghai even though Chinese officials have pledged $25 billion in “buy up” money to prop up the tumbling index. On a normal day in a normal week, it certainly would have helped. In the face of the Greek turmoil it has given the mainland China stock market a boost, although not as much as might have been expected without the financial crisis in Europe.

Gold has taken off on a semi-positive flight. Like last week, though, on fundamentals, it seems the upside should be limited. The main headwind it faces is from a weaker euro/stronger U.S. dollar.

We will hear very sober pronouncements tomorrow about the high impact of the Greek faceoff. On the other hand, we will hear a choir saying it doesn’t mean all that much.

Tragically, all parties involved have backed themselves into their corners and have little wiggle room. Greece can thumb its nose at Europe, but it has no real alternatives to paying off, or somehow making an accommodation for, its $85 billion debt.

The rest of Europe – specifically its core – is also in a bad spot. If they relent, (on humanitarian grounds as some are suggesting), the central banking mechanism will look weak to other tipsy monetary union members like Portugal, Spain and to a lesser degree, Italy. (Italy has the money and economy to pay its debts; it’s simply not collecting enough taxes.) A good start would be for the EU players to give Greece some humanitarian aid for elders and children as an act of good will.

Meanwhile, we’ll watch the euro slip a little bit more and the dollar grow stronger. But the dollar’s upside will be limited by even more flight to the yen and Swiss franc as havens. How long the currency haven move will last we shall see by mid-week.

Also in the haven basket we must also place gold. Yet gold is up only 2.20 on the day at 4 o’clock in New York.

Wishing you as always, good trading,