Financial Worries Boost Gold to $1900

Early optimism in US trading was wiped out on fears of cash shortfalls and legal troubles at US financial institutions. NZD was the top performer on the day followed by AUD; the laggards were CHF and JPY. The upcoming session features data on New Zealand inflation expectations.

Revelations that Bank of America will not be able to sell its full stake in China Construction Bank renewed the markets flight-to-safety after early optimism sent the S&P 500 higher by 20 points at the open. Sentiment worsened in the final minutes of trading on a report that Goldman Sachs CEO Blankfein has hired a high-profile defense lawyer. The S&P 500 gave up all its early gains to close flat at 1124. FX risk trades followed a similar arc as they peaked at the US open. Gold and silver were the beneficiaries of the uncertainty as gold touched a fresh record only a few cents below $1900 and silver gained 3.3% to $43.85.

The worries about Bank of America are based on analyst research suggesting the embattled bank must raise $40-50 billion. The failure to sell assets in China may mean BoA will have to break itself apart and sell parts of its core business or dilute shares.

The possibilities from the Goldman Sachs news are endless. It may be nothing, but at worst it is part of an agenda for US prosecutors to go after credit-crisis era fraud.

Moves in the forex market were small, partly due to the summer slowdown and partly because the financial news is unlikely to affect the underlying US economy. The lone data point was MBA mortgage delinquencies, which rose 8.44% in Q2, higher than the 7.76% expected and 8.32% in Q1.

The euro gave back its earlier gains and closed at 1.4360 after Greeces finance minister said the economy will contract more than expected this year, endangering austerity. Output is now expected to fall 4.5-5.3% compared to the -4.5% previous estimate.

USD/JPY traded in a 15-pip range throughout New York trading and it appears more than likely that someone is working to minimize volatility.

The lone economic data point in the Asia-Pacific region is inflation expectations from the Reserve Bank of New Zealand. The prior was 3.00% and there is no consensus. The outsized move in NZD Monday makes us suspicious of a high reading.