Stocks Rally as Europe Unveils Crisis Plans

U.S. markets on Friday cut loose from the anchor of European debt that has weighed them down for months. The Dow Jones industrial average jumped more than 200 points in early trading after European leaders agreed to easier bank bailouts and regional oversight for their troubled financial sector.

Leaders in Brussels unveiled a plan to funnel money to banks directly from a regional bailout fund. They also agreed to ease austerity measures that have been causing political unrest and agonizing recessions in Greece and other nations that have received bailouts.

The news out of Brussels also lifted energy prices, on the theory that a cure to Europe's debt woes will remove one of the major drags on global growth. Benchmark oil jumped 5.5 percent, or $4.30, to $81.98 a barrel on the New York Mercantile Exchange, a day after hitting an eight-month low.

Industrial and energy stocks rose the most of the 10 industry groups in the S&P 500. Those companies would benefit from higher oil prices and faster global growth.

The two-day summit in Brussels is the 19th meeting for European leaders since the debt crisis emerged, and leaders have repeatedly clashed over how best to address it. European Council President Herman Van Rompuy called Friday's agreement a "breakthrough."

Consensus in Europe was reached after borrowing rates in Spain — where unemployment is approaching 25 percent — and Italy hit unsustainable levels. The fear was that the weaker economies of Europe would drag the entire continent into recession, or worse.

Stocks around the world surged Friday, with markets in countries on the front line of the crisis doing particularly well. Italy's FTSE MIB and Spain's IBEX indexes each rose more than 4 percent.

Perhaps more importantly, the yield on Spain's 10-year bond dropped by 0.46 percentage points to 6.44 percent. Italy's was down by 0.26 percentage points to 5.82 percent. The decrease reflects greater confidence by investors that the countries will be able to service their debts.

Gold Climbs, But Still Worst Quarter in 8 Years

Gold prices rose on Friday after leaders at a European Union summit struck a deal to cut borrowing costs for Spain and Italy, but stayed on track for their biggest quarterly drop in eight years after a dire performance in May and June.

The metal has fallen 5.87 percent since the end of March, its worst quarter since the three months to June 2004, as the dollar benefited from safe-haven flows and hopes faded that the Federal Reserve would launch another round of U.S. quantitative easing.

After a widely celebrated eleven-year bull run, which took gold prices to a record $1,920.30 an ounce last September, it is now little better than flat on the year and has averaged just over $1,650 an ounce in the first half.

"After 11 years it is only natural that gold stops and pauses for breath before taking the next step higher," Saxo Bank vice president Ole Hansen said. "The worry is obviously that momentum has been completely lost and leveraged players (such a hedge funds) have left the building."

"They will come back, but the market needs to reassert itself before that happens, as they are more followers than instigators of trends."

"The event that could trigger the spark that put some life back into gold is however difficult to find at the moment, so before we move higher, there is a risk that we need to clear the table which could be triggered by a move below $1,500."

Spot gold was up 1.3 percent at $1,570.20 an ounce at 1003 GMT, while U.S. gold futures for August delivery were up $20.20 an ounce at $1,570.60.

Financial markets have rebounded strongly from Thursday's losses. The Euro STOXX 50 volatility index, Europe's main gauge of anxiety, sank 10 percent to a one-week low of 25.25 as investors' appetite for risky assets recovered following a deal at the EU summit.

Euro zone leaders agreed to take emergency action to bring down Italy's and Spain's spiraling borrowing costs and to create a single supervisory body for euro zone banks by the end of this year, a first step towards a European banking union.

European shares were up 1.5 pct, the euro was up 1 pct versus the dollar, and the cost of insuring Spanish and Italian debt against default slid.

But analysts warned the bounce would likely be short-lived.

"I'm afraid... this news.. is no more than a sticking plaster on an amputation, and as such while the markets will for the moment react favourably, in the long run we still have a long way to go," Marex Spectron said in a note.

Physical gold buying in major consumer India picked up a little on Friday as prices fell. Weakness in Indian demand has undermined spot prices this year, with Indian gold prices currently near record highs due to rupee weakness.

Traders in India are waiting for monsoon rains to pick up, which is vital to farm productivity and profits. Rural areas contribute to about 60 percent of gold imports.

Quarterly sales of gold American Eagle coins by the U.S. Mint also fell to their lowest in four years at 127,500 ounces, down more than 39 percent from the previous quarter and by more than half year-on-year.

Among other precious metals, silver was up 1.8 percent at $26.82 an ounce.

Its outperformance helped pull the gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, back from its highs of the year to 58.5.

Spot platinum was up 1.5 percent at $1,404.75 an ounce, while spot palladium was up 1.2 percent at $567.57 an ounce. Both metals have fallen to their lowest this year in recent days, at $1,378 and $556 respectively.

"There were no obvious catalysts," UBS said in a note. "If anything U.S. data prints should have been marginally helpful."

"Overall, the market's behaviour was not all that different from what we've seen all week: price action comes in sweeps, mostly on Comex, and stops get triggered along the way, amplifying the move," it added. "Today, it's no great surprise that silver and PGMs are leading the move higher, with both easily outpacing the euro move."

JPMorgan's Potential $9 Billion Loss May Be Bullish

According to the New York Times, JP Morgan's losses from the infamously misguided "hedge" could be as high as $9 billion. If true the loss will be 3-times what was originally expected; possibly enough to cause the bank to record a loss for second-quarter. $9 billion is a staggering total but can't be considered a huge surprise to those who've been watching the story unfold.

On May 10th JPM CEO Jamie Dimon said the losses stood at $2b with another $1 billion or so possible. Dimon didn't offer any specifics, simply that the volatility would be large and JPM would attempt to maximize the economic value by taking its time unwinding.

Within days of the conference call, the rumor mill pegged the total losses at $4b, give or take. Now we're looking at potentially $9b, which can be assumed to be a best guess and not an official statement. It's a huge number; more than $1 billion more than the unrealized gains Dimon said were on JPM's books as of March 30th and a 4% hit on the $200b Chief Investment Office's portfolio. This would be a hard hit for a small hedge fund. For a deposit bank supposedly hedging, a $9b loss on one complicated trade is unthinkably enormous.

Ignore the drop in JPM shares last week because in the bigger picture the NYT story is great. If JPM didn't plant the story, then it should have. As Nesto says in the attached clip, JPM's goal now is managing the stock. In that regard putting a huge number "out there is brilliant."

Here's how Friday's news will make losing $9 billion an upside surprise for JPM:

1) It Changes the Conversation

Per Mr. Dimon's May 10th statement, JPM's CIO had at the time more than $200 billion in investments of which $8b was unrealized gains as of March 30th. If the NYT is right those gains have been wiped out in one trade. Reported profits from the CIO were over $4b in the last 3 years, accounting for 10% of JPM earnings.

$4b in profits over 3 years isn't a lot of money. Small gains are a good thing because the CIO was supposed to be hedging, not speculating. The revised figures and what little we know about the trade in question suggest the CIO was putting huge amounts of money at risk to systemically pick up small gains. Bet a lot on what's regarded as a low-risk trade, collect pennies, and repeat often. If one trade can wipe out three years of gains, it means JPM miscalculated risk in a massive way. It also means they were obviously placing prop bets. If the question is whether or not this can happen again, the answer is yes. In fact it's a wonder the loss wasn't larger.

For Jamie Dimon personally and the banking industry as a whole any conversation about what this trade suggests is unpleasant. The inferences above may all be wrong but banking execs would rather not explain why. Given the numbers at hand there is no "good" explanation for how JPM created the losses. JPM wants to dwell on the final tab because it's better than talking about how they got there.

2) Losing $8b Becomes an Upside Surprise

It's not a great way to find out, however everybody now knows the bogey is $9b. Unpleasant news, but water under the bridge. Yesterday $9 billion was stunning. As of tomorrow anything less than $9 billion is great. More than $9 billion is just more evidence that JPM's hedging strategy was horrific, which we already know. $9 billion on the nose isn't even newsworthy.

3) JPM is Getting the Trade Off the Books

JPM's stated gameplan was to unwind the trade slowly. The point of doing so is to reduce the incentive of betting against the firm. As Dimon said on May 10th:

"We're going to manage this for economics. Hopefully, by the end of the year, it's the hope that this won't be a significant item for us. We want to maximize the economic value of these positions and not panic to do anything stupid. Therefore, we're willing to bear volatility."

Upon further review JPM seems to have decided that prolonging the agony of unwinding this giant wad of misery was stupider than dumping the positions. In effect JPM is paying to get this trade out of their way. The firm may or may not have been able to lessen the loss had they been willing to endure the reputation and financial risk involved with maximizing value. JPM took the hit and is trying to move on with their lives.

4) It Disseminates the Information on a Huge News Day

Did you hear about the Supreme Court? Yes you did. If you got to work late today you didn't hear anything about JPM losing $9 billion. The news is just sort of "out there" and already forgotten.

The smart play for traders may be to cover on this news. For a short to work there needs to be a negative catalyst worse than what is already known. Barring a collapse of the global financial system, a headline loss of $9 billion is going to be hard to beat.

Oil Jumps, Still Faces Deep Quarterly Loss

Oil rose on Friday, but both U.S. and Brent benchmarks were still set for their deepest quarterly losses since 2008.

Euro zone leaders agreed to bend their aid rules to shore up banks and bring down the borrowing costs of stricken members, in a sign the bloc is adopting a more flexible approach to solving its two-year old debt crisis.

"I think the expectation was it would take the EU most of the weekend to reach an agreement, so I think this has taken the market a bit by surprise," said Thorbjoern Bak Jensen, oil analyst at Global Risk Management.

Some consolidation was to be expected after the oil market had seen the steepest quarterly losses since the financial crisis, he added.

Both contracts were on track to post a quarterly loss of around 20 percent, and traders cautioned the rally could run out of steam over the weekend.

"Spectacular is a good word (to describe the rally). Not really sure it's justified myself. Apparently Europe's woes are cured, well until Monday probably," Tony Machacek, an oil futures broker at Jefferies Bache, said.

Bargain-hunters may also have helped reverse some of the previous session's losses, analysts said, after a steep drop of as much as 3 percent on Thursday.

"Oil had a dramatic fall last night and there's bound to be some short-covering and bargain hunting," said Ben Le Brun, a markets analyst at OptionsXpress in Sydney.

While overall global oil demand is still expected to grow this year, the pace is now expected to be the most sluggish since the financial crisis, a Reuters poll showed on Friday.

Slowing growth in China will only just offset falling demand in developed economies, forecasters said.

On the supply side, the spotlight remained on Norway where industrial action in the petroleum sector has cut oil production by as much as 18 percent, according to workers.

Norwegian trade unions decided not to escalate the ongoing strike, leaders told Reuters after a meeting on Friday, but further meetings are planned next week to evaluate the situation.

The impact on oil markets has been limited so far, given that an excess supply of North Sea grades is expected to cover for any interruptions until well into July.

"As production losses mount, it may take perhaps two weeks before losses are sufficient to bring the North Sea crude market back to being closer to balanced," J.P. Morgan analysts said in a note.

Attention also remained on flows of oil from Iran, which will be subject to both U.S. and EU sanctions from July. But the focus, for the moment, is on oversupply, rather that the loss of Iranian oil.

Iraq's Deputy Prime Minister told reporters on Friday that OPEC should consider a production cut if the oil surplus continues much longer.

"The market now is oversupplied, and if the surplus continues much longer, OPEC will need to revise oil production levels," he said.

The United States has said it will exempt all 20 of Iran's major oil buyers from sanctions for the next 180 days, but trouble insuring vessels is expected to curb deliveries to Iran's major clients.

Asia's top buyers of Iranian oil cut imports by more than 250,000 barrels per day in the first five months of the year.