Monday, July 31, 2006

Peace in Our Time - Just Kidding

EUR/USD 1.2769 / 72 Hi 1.2785 Low 1.2738
USD/JPY 114.30 / 34 Hi 114.85 Low 114.17
AUD/USD 0.7649 / 53 Hi 0.7676 Low 0.7641
EUR/JPY 145.95 / 99 Hi 146.57 Low 145.72

Just as it looked like we could all get happy clappy, the Israeli defense minister told the world that Israel would "expand and strengthen" its attack on Hezbollah. Well that's a surprise, not. While Bush and Rice distract the American public with press conferences, and courtesy calls to the Middle East, Israel is back in the business of pulverizing Lebanon. The 48 hour cease-fire which Israeli called was only meant to allow Lebanese civilians the opportunity to leave Southern Lebanon. After which, anyone left in the area REALLY will be deemed a terrorist. And now the cease-fire has been cancelled.

War crimes aside, where is this going? What do we know? First, Israel is bleating on about the Iranian and Syrian-made missiles used by the Hizbollah in the current conflict. Let's leave aside the need for independent verification for a moment. According to this logic if the Hizbollah find that U.S.-made missiles are being used by the Israelis then ipso-facto the U.S. becomes a legitimate target for the Hizbollah. Right? And Israel has been armed to the teeth by the U.S., which makes the U.S. party to this conflict. Got that? The never ending War on Terror coming soon to a town near you. Sound good to you? Not that anyone in Lebanon has sought to make that particular connection. Yet. But what's good for the goose is good for the gander.

That's not the point, though. What is the point is that Israel is working on its public justification for an attack on Syria. Syria is on high alert. Cross border skirmishes are already taking place between Syria and Israel. Israel is mobilizing thousands of reservists and Bush and Co. are making the appropriate noises about Peace being a great idea in principle, only NOT YET. The fix is in. LINK The widening of the conflict is expected to happen within days. Though it does seem that some sort of provocation will be required. SPECIAL OPS anyone??

Syria is first on the list. Iran comes later. The guys behind this know that they have to move fast before public opinion in the West becomes too enraged, or before anyone at the U.N or anywhere else can cobble together a viable PEACE PLAN. So it will happen fast.

Meanwhile Tony Blair has touched base with his minders in California. Rupert Murdoch (aging Media Mogul with a plan, king maker extraordinaire, the guy who had Yo Blair as his special guest at the News Corporation shin dig on Hamilton Island before his tabloids famously instructed the compliant British Public to "Vote Labour") is pleased with his boy. Tony is sticking to his lines. The need to delay a cease-fire in the Middle East is being explained, obfuscated, spun..... whatever it takes. The reasons to justify an escalation will come later. Gulf News

Back in Britain there is unrest in the house but everyone remembers what happened to Robin Cook, the guy who resigned over Britain's decision to join the Coalition of the Willing's attack on Iraq: he's dead. There may be dissent in The Labour Cabinet but no-one is stepping out of line quite yet. Once-upon-a-time the British had back bone, but that was long before tits on page three.

Meanwhile the data looks mixed. U.S. GDP numbers released Friday failed to match up to expectations, but the market is making the best of it. Focus is relentlessly on the FED pausing in August. Though some are hinting at market manipulation ahead of the U.S. elections in November. LINK Can this get any better? The best spy novel in history is being written in real-time!! Maybe the PPT is better at its job than we think.

Overall data in the U.S. is pointing to weakening economic conditions with talk of a 2007 recession. The U.S. consumer is getting crushed by the rising cost of financing a massive debt burden. And higher OIL prices don't help. Company Profits have held up fine so far but there is a limit to how far you can squeeze wages, even if you let the entire Mexican population cross the border (which is not an election-winning policy). Other inputs costs are rising (you may have noticed what has happened to commodities lately), housing is in trouble, domestic demand is folding...... with elections due in early November (even with the PPT on the case) the Bush Administration will be leaning hard on Bernanke to hold his fire. And it doesn't look like you have to lean too hard on Ben to make him keel over. So that's that. It doesn't mean a pausing FED can save the U.S. economy. Stock market bulls really have their work cut out for them.

In Europe the ECB is expected to move rates higher this Thursday. With the market expecting the FED to stand pat, the shift in interest rate differentials will bolster the case for USD bearishness. This shift in itself will not be enough to see the EURO/USD break through recent highs. Buy the rumour, sell the fact, but don't think any EURO weakness is a new trend. The USD downtrend was briefly interrupted by the FED in 2005 and it will take a lot more than interest rates this time 'round to get USD bulls to come out to play. The long term USD downtrend is far from over.

Oil 73.94
Gold 647.80

The mess in Lebanon and Iraq, which now appears likely to spread to Syria and Iran in fairly short order, is not helping the bearish case for OIL. Hugo Chavez, the democratically elected leader of Venezuela - OIL exporter and potential target for U.S. aggression - has just placed a rather large weapons order with Russia. LINK If you are going to be pre-emptive these days, you may as well be pre-emptively defensive. Things being as they are.

So the chances that another source of cheap oil becomes available in the short term is small. And GOLD stays bid. Which is not a surprise, given current circumstances.

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