Day Traders Play Gold as EU "Burns Down"

Markets

Italian Referendum Implications are Far Reaching

"What we got was a very clear message that people will not tolerate the status quo and are willing to burn the house down" - BBG

"Those trading Gold now, and for that matter most markets, are doing so because they have to, not because they want to."

In comparison with the UK

  1. Italy votes "No" despite its economy being under water- The UK is a maker, not a taker
  2. This will discourage private investors from participating in the Italian bank bailout.
  3. Italy will lose its lifeline to the EU, whereas the UK is a lifeline provider
  4. Monte Paschi will beat Deutsche Bank in Race to bottom.
  5. It Emboldens other Countries to leave

Remaining in Denial is Good for Gold

  •  "the market reaction seems to have moderated somewhat as traders remember this result is what was expected" -BBG

And that is what we also notice. But it is very notable that Italy is basically on the dole, taking aid from Germany and the UK. Yet, they still are voting to leave. We understand the "Atlas Shrugs" concept of theUK vote. But Italy leaving is like nationalist pride overturning financial aid.

In our previous post tonight, we mentioned to not be surprised if Gold actually dropped. Since then Gold has turned negative on the evening. We are not concerned and note this is all about flow/ short term day trading now.

Gold and Hot Money, FWIW

People trading gold are doing so because they have to, not because they want to. Therefore, you will not likely see much volatility to the upside as traders have squared their spec books for the year for the most part. It's the hottest and smallest money in Gold now. Fickle, small, players and day traders will move the market on light volume until new asset allocations are made at investment houses. When new moves happen on bigger volume, we will pay more attention to follow through potential.

  1. Gold rallied on Brexit along with the USD
  2. Gold gave back its gains as the USD continued to benefit
  3. Liquidity issues force sales of profitable trades and assets that are not 100% able to be collateralized (Gold)
  4. Italian Vote happens after EOY asset allocations are done, and faith in Gold as a LIQUID store of value drops in hot money's eyes
  5. Traders who overestimated Gold's exit liquidity are now avoiding it as a "safety" valve.
  6. That sits fine with us. Things of value will continue to be mispriced to raise USD, and the US is not making the $ as liquid at the swaps window as it did during Brexit.

Fire sales in everything that can be converted to cash at banks are trumping "flight to safety" concepts.

  • We would be remiss if we did not mention  Paul Krugman's tweet on the Italian referendum

"Hoo boy. Time to game out possible euro crises."-Paul Krugman stating the obvious on the Italian referendum

Here it is with a comment by MarkeSlant contributor Vince Lanci

 

Here are some takes from other financial observers:

  • Doug Casey thinks the 5 Star Party will take control. Then extrapolates the end of the EU

December 4 referendum fails >> M5S comes to power >> Italians vote to leave the euro currency >> European Union collapses

 

  • The Wall Street Journal Games out the Next Steps in Italy

New Renzi Government:

Italian President Sergio Mattarella could ask Mr. Renzi to reshuffle his cabinet and form a new government. However, Mr. Renzi has said in recent days that he is unlikely to accept such an option, given that he would be in a much-weakened position following the vote.

A Caretaker Administration:

Mr. Mattarella could ask someone else to lead a new government with a limited mandate to oversee the drafting of a new electoral law and pass the 2017 budget. One candidate is Economy Minister Pier Carlo Padoan, who could help soothe markets that have been nervous about political instability following a no vote. Others include Pietro Grasso, speaker of Italy’s Senate, and Dario Franceschini, the current culture minister.

Electoral-Law Snarl:

Major political parties are pushing to change an electoral law passed last year that would give extra seats in Parliament to any party winning 40% or more of the vote. That measure was intended to make for more stable governments. Establishment politicians now worry that it could help the populist 5 Star Movement gain power and want to rewrite the rules before any new national election.

 

  • Italian Bank Bailout in Jeorpardy

WSJ:

"when markets open Monday morning, all eyes will be on Banca Monte dei Paschi di Siena, Italy's troubled No. 3 lender, which is considered particularly vulnerable to fallout from a 'no' vote, which could complicate its plans to raise capital. Investors will be watching closely for any signs of a run on the bank, a situation that could force the government to move quickly with emergency measures."

 

The FT:

Monte Paschi and advisers JP Morgan and Mediobanca will meet as early as Monday morning to decide whether to pull a plan to go ahead with a E5bn recapitalisation, according to people informed of the plan, Rachel Sanderson in Milan reports.

Senior bankers will decide whether to pursue their underwriting commitment or exercise their right to exit the transaction due to adverse market conditions, these people said. In the event the banks drop the capital plan, the Italian state is expect to nationalise the bank, say senior bankers.

 

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