Market Overview

Precious Metals and Swiss Franc Rise Strongly as Debt Worries in Europe and the United States Continue

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Precious metals and the Swiss franc are the clear winners in Monday's early trading, as there is little improvement in the debt ceiling negotiations in the United States, while at the same time the market euphoria over the EU agreement on Greece is fading. At around 5:40 GMT, the euro moved one step closer to parity with the franc as the European currency lost 0.73% of its value to trade around 1.1678, while the greenback slid 0.8% to 0.8126. At the same time, gold was pushed to new heights as the yellow metal passed through the $1,615 mark. At the moment, gold is trading around $1,615.65, or 0.81% above previous close. Silver is trading over the $40 barrier once more. Currently, silver stands at $40.55, or 1.16% above previous close.

Precious metals and the franc are traditionally seen as safe-havens by investors, as shelters to turn to in times of big crises and uncertainties. World is moving towards another crisis as the U.S. debt ceiling talks fail to progress. Over the weekend, the two sides were unable to break the ideological deadlock between them. Republicans still want to reduce the massive U.S. deficit through spending cuts, while Democrats are more comfortable with taxing the rich than with slashing spending on social welfare programs for the U.S. elderly and the poor.

As the negotiations approach August 2, the day when the U.S. government will not be able to repay its debts and will be forced to shut down, the stakes are rising. Rating agencies have warned they will slash their triple-A rating on the U.S. government bonds if shutdown takes place. However, rating agencies have also warned that the only way to safeguard the highest rating for the U.S. bonds will be to reach a credible plan to reduce the U.S. budget deficit.

Other countries are becoming increasingly agitated over the failure to reach a debt ceiling agreement. Vince Cable, U.K.'s Business Secretary, has attacked the U.S. Republicans over their failure to compromise with President Obama. Speaking in a BBC show, Mr. Cable placed the blame for the current stalemate on “a few right-wing nutters in the American Congress”. It remains to be seen how Republicans and the U.S. public will respond to a strong criticism of the G.O.P. by the member of a foreign government. However, other governments should fear the U.S. government shutdown, since it is likely that the effects will be felt across the globe.

U.S. Treasury Secretary, Tim Geithner, remains confident that the last ditch efforts will be made and the worst case scenario will be avoided. Many traders still seem to believe the same, as the U.S. dollar is holding ground against its main rivals on Monday. At the moment, the U.S. dollar made a small retreat against the Japanese yen, falling 0.17% to stand around ¥78.41. At the same time, the euro added only 0.01% to its value against the greenback to trade around $1.4359.

The European currency is again under attack as the euphoria over the second Greek bailout eases. Rating agencies have warned that any “voluntary” participation of the private sector in the Greek bailout will be viewed as selective default and now they are starting to act on their promises. Fitch was the first to confirm it will put Greece into a “restricted default” rating.

On Monday, Moody's slashed its rating on Greece by three notches from Caa1 to Ca, citing serious medium term insolvency problems. Policies agreed by the Europeans and the Greek government, which include privatization and austerity cuts, remain deeply unpopular among the Greek people. Many analysts are therefore rightfully worried that the Greek government will have huge difficulties in implementing the agreed reforms.

ACTION ITEMS:

Bullish:
Traders who believe that the two U.S. parties will not be able to reach an agreement by August and that Greece will falter in implementation of the agreed reforms, which should send the value of safe-havens skyrocketing, might want to consider the following trades:

  • CurrencyShares Swiss Franc Trust ETF (NYSE: FXF) is a long play on the franc. FXF should rise if the franc appreciates.
  • iPath Dow Jones-AIG Precious Metals Total Return Sub-Index ETN (NYSE: JJP) is a long play on precious metals. JJP is expected to rise if prices of precious metals increase.
  • E-TRACS CMCI Gold ETN (NYSE: UBG) is a long play on gold. UBG should rise if the price of gold increases.

Bearish:
Traders who believe that there is enough pragmatism among the U.S. political elites to reach a compromise and that the European determination will eventually prevail over its debt problems may consider an alternate positions:

  • ETFS Short Swiss Franc Long US Dollar ETC ETF (SCHF) is a short play on the franc. SCHF should rise if the franc depreciates.
  • PowerShares DB Gold Short ETN (NYSE: DGZ) is short play on gold. DGZ should rise if the price of gold decreases.
  • ProShares UltraShort Gold ETF (NYSE: GLL) is another short play on gold. However, GLL should rise more than DGZ if the price of gold decreases.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Eurozone FitchNews Commodities Currency ETFs Forex Economics ETFs

 

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