Gold and Stocks Take a Ride Down Together

Gold is retreating back toward the low end of its well defined range as continued deterioration of the situation in Europe further erodes risk appetite. The EUR-USD has plunged below 1.2600 for the first time since July 2010, taking the yellow metals and stocks along for the ride.Just hours before the latest EU summit commenced in Brussels, Reuters revealed that the Eurogroup Working Group (EWG) had agreed on Monday that each eurozone country “should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro.” Investors seemed to read such contingency planning as a considerable escalation in the risk of a ‘Grexit’. Periphery yields spiked, bund and US Treasury yields fell, the euro tumbled and risk assets in general came under pressure.Eurobonds are likely to be the hot topic at the EU summit today. One has to wonder, if in the face of a complete implosion in Europe, Germany will soften its objections to eurobonds simply to buy a little more time. Here’s the thing though…at some point, time simply runs out and the necessary and painful changes will have to be made.

UBS estimates that if Greece leaves the EMU, that a new drachma would have to be devalued by 75% against the single currency. While it may make Greeks feel good to push back against austerity measures that they feel are being foisted upon them by the troika, they pain of a severely devalued drachma is likely to prove every-bit as intense…if not worse. With a new election coming up in just a few weeks, the Greeks should be careful what they wish/vote for.

• US new home sales +3.3% to 343k in Apr, well above market expectations of 335k, vs upward revised 332k in Mar.
• Canada retail sales +0.4% in Mar, above expectations of +0.3%; ex-autos +0.1%, below expectations of +0.5%.
• Canada leading indicator +0.3% in Apr, in-line with expectations, vs +0.3% in Mar.
• Eurozone current account (sa) €9.1 bln in Mar, vs -€1.2 bln in Feb.
• Italy Consumer Confidence (sa) fell to 86.5 in May, vs negative revised 88.8 in Apr.
• UK Retail Sales -2.3% m/m in Apr, below expectations of -1.0%, vs positive revised +2.0% in Mar; -1.1% y/y.
• BoJ holds steady on rates, no new asset purchases at this time.
• Japan Trade Balance-CC (nsa) -¥520.3 bln in Apr, vs -¥82.6 bln in Mar.
• Singapore CPI rises to 5.4% y/y in Apr, vs 5.2% in Mar.
• Taiwan industrial output -2.3% y/y in Apr, vs -3.4% in Mar.