Additional commentary by Eoin Treacy

Consolidated Version of the Treaty on the Functioning of the European Union - Constitutional law is not our forte but given the considerable discussion from various quarters as to how the European Union might act with regard to the financial problems of a Eurozone member, I thought it might be instructive to have a look at some of the relevant text from the Lisbon Treaty which came into effect in December for all members of the Union. Here is a section from Article 126:

11. As long as a Member State fails to comply with a decision taken in accordance with paragraph 9, the Council may decide to apply or, as the case may be, intensify one or more of the following measures:

to require the Member State concerned to publish additional information, to be specified by the Council, before issuing bonds and securities,

to invite the European Investment Bank to reconsider its lending policy towards the Member State concerned,

to require the Member State concerned to make a non-interest-bearing deposit of an appropriate size with the Union until the excessive deficit has, in the view of the Council, been corrected,

to impose fines of an appropriate size.

The President of the Council shall inform the European Parliament of the decisions taken.

12. The Council shall abrogate some or all of its decisions or recommendations referred to in paragraphs 6 to 9 and 11 to the extent that the excessive deficit in the Member State concerned has, in the view of the Council, been corrected. If the Council has previously made public recommendations, it shall, as soon as the decision under paragraph 8 has been abrogated, make a public statement that an excessive deficit in the Member State concerned no longer exists.

13. When taking the decisions or recommendations referred to in paragraphs 8, 9, 11 and 12, the Council shall act on a recommendation from the Commission. When the Council adopts the measures referred to in paragraphs 6 to 9, 11 and 12, it shall act without taking into account the vote of the member of the Council representing the Member State concerned. A qualified majority of the other members of the Council shall be defined in accordance with Article 238(3)(a).

My view - A number of pundits have also cited Article 122 as a key clause which allows for aid to be given to a state following a natural disaster beyond its control. However there is considerable conjecture as to whether a manmade financial crisis qualifies.

I believe these two sections are useful in defining the context through which a country such as Greece can be regulated and/or aided by the various arms of the European Union. Article 122 probably has enough leeway so that if a country is in real financial difficulties some form of aid package can be arranged. Article 126 is quite clear in defining the actions which can be taken if a country is running deficits beyond the Stability and Growth Pact's parameters. Of course since no country is currently within those parameters, investors have focused on the largest transgressors, i.e. Greece, Portugal, Ireland, Spain and Italy. (Also See Comment of the Day on January 29th)

Credibility is at the heart of this crisis. If a country is seen to be acting in good faith by the European Commission, by implementing the agreed deficit reducing measures and supplying accurate, timely progress reports, then the likelihood of an additional aid package being arranged if it is deemed necessary will be considerably improved. However, the uncertainty lies in whether politicians can sell the spending cuts, tax hikes and pay reductions to populations that feel they are not personally responsible for this crisis and question why they are paying for the mistakes of a relatively privileged minority. Eurozone politicians have a tough job ahead of them in making citizens aware of just how deep the problems are. If the Eurozone is to remain intact, they will need to succeed.

Here is a section from an article by BusinessWeek by Meera Louis quoting EU Economic and Monetary Affairs Commissioner Joaquin Almunia:

"I am fully convinced that the EU and the Economic and Monetary Union have instruments enough to cope with this challenge," EU Economic and Monetary Affairs Commissioner Joaquin Almunia told a press conference today in Brussels when asked if the IMF should step in to assist the Greek government in shoring up its finances. "It is what we are doing."

The IMF requires that a country seeking an aid package sign up to a range of fiscal regulations that need to be followed if they the money is to be released. Article 126 and others in the Lisbon Treaty seem to imply that the European Commission is capable of exacting the same concessions from a Eurozone member country in the event of a major transgression. Perhaps Ireland offers an example of where this type of activity has already occurred.

Given the current uncertainty relating to the Eurozone, CDS spreads have increased for just about all members. However, Greece, Portugal and Spain are all pushing significantly higher in an indication of which countries investors are betting the greatest problems lie. These countries (Greece, Portugal, Spain) have also experienced the most aggressive stock market selling pressure over the last three weeks. Upward dynamics are required to check momentum beyond a brief pause and indicate shorts are being pressured and demand returning.

Elsewhere in Europe, Scandinavian markets continue to show relative strength while the Euro Stoxx 600 continues to fall toward its 200-day moving average. However, these markets also require upward dynamics to suggest demand is returning and to limit potential for further tests of underlying trading.

Competitiveness of euro-area economies: Long tradition of tensions - Thanks to Deutsche Bank for this highly relevant piece by Nicolaus Heinen covering the competiveness gap between Eurozone members. It is posted without further comment but here is a section:

In efforts to achieve a coordinated approach within EMU, EU legislation provides for the following possibilities:

The Broad Economic Policy Guidelines, established and updated annually by the Commission and Council for a period of three years, set out the priorities of economic policy for the European Union. Besides listing general priorities for the EU-27, they also define country-specific reform priorities. Member states transpose these targets into national reform programmes which they have to report on once a year.

The Stability and Growth Pact enables economic policy to be coordinated via two mechanisms. First, the multilateral surveillance framework ensures that Eurozone countries give an account of their reform projects in national stability programmes (the other EU states table convergence programmes). If an EU member runs up an excessive government deficit it is subjected to an excessive deficit procedure that, for EMU members, may result in the imposition of sanctions. Deficit procedures are currently under way against 12 of the 16 EMU states - in Greece's case at an advanced stage.

Furthermore, the Treaty of Lisbon has created the option of tighter, sanctions-linked coordination of the Eurogroup within the framework of the Broad Economic Policy Guidelines. However, this option must still be fleshed out under secondary European law.

In the years ahead the gaps between the EU economies will need to be narrowed. This convergence in competitiveness should naturally be based on the laggards catching up with the leaders. Only then is it likely to be in the interest of all parties involved. The countries in the leading group certainly have an interest in the competitiveness gap closing again. The fear of competition is more than outweighed by the dislike and rejection of permanently higher transfers and aid for the laggards which would loom if no further action were taken. And, for the laggards too, a lack of competitiveness would mean that their growth opportunities would be limited in the long run - and thus their ability to get to grips with the crisis-driven ballooning of government debt.

Junior Gold Miners - Thanks to a subscriber for this interesting report. Here is a section:

With the emergence of this mid-cap space we believe that another wave of gold M&A is likely to happen, especially if the gold price remains strong.
Consolidation has started to occur at the micro end of town with many of the junior explorers starting to come onto the radar screen of the mid-cap (eg Avoca for Dioro). We believe that consolidation amongst the space will continue with producers looking to increase in size towards the 500kozpa level through mergers. At the 500kozpa level, the companies start to look attractive for the major international companies.

Also producers that have considerable exploration upside in emerging gold regions such as West Africa (Perseus) or Asia (MML and KCN) provide the production growth and reserve/resource addition potential that the international majors desire.

The Australian mid-tier sector also looks attractive on a P/NPV and earnings multiple basis to their North American and African peers (not so true of LGL and NCM). Therefore deals done at today's near record high gold prices are still likely to be earnings accretive if done on an all equity basis.

The table below looks at the gold stocks in our coverage universe with some commentary on their consolidation (or consolidator) potential.

My view - The recent sell off in gold prices has probably checked upside potential in gold miners for the time being. However, gold at over $1000 is still an impressive price and interest is liable to return to these shares once prices begin to find support

In Australian Dollars gold continues to range in the region of A$1200 and a sustained move above A$1300 would indicate a return to demand dominance. All of the shares mentioned in this report can be found in the Chart Library.

Oceangold has one of the better chart patterns of the shares mentioned in this report. It remains in the most recent range and would need a sustained move below $1.40 to question the consistency of the overall uptrend.

Medusa Mining has lost its uptrend consistency and hit a medium-term high near AU$4.40 in November. It has since reverted to the mean, defined by the 200-day moving average but needs to sustain a move above AU$3.50 to break the short-term progression of lower highs and suggest demand is regaining the upper hand.

Kingsgate Consolidated encountered resistance near the psychological AU$10 in December and has since posted a lower high. It remains within this somewhat lengthier range and has almost completed a reversion to the mean. However, it needs to sustain a move to new highs to offset potential for a further test of underlying trading.

Newcrest retested the 2008 high in December but has since pulled back into the previous range and needs to find support in the region of AU$30 to offset scope for a downward break.

Lihir Gold also failed to sustain the recent upside break and has now returned to test the lower side of the range. An upward dynamic is needed to indicate a significant return of demand.

Dominion Mining remains in a consistent medium-term downtrend and a sustained move above A$4 is required to question scope for further lower to lateral ranging.

Santa Barbara remains in its 19-month base and is currently testing the lower side. An upward dynamic is needed to confirm historic support in the region of AU$2.

Today's interesting charts - The Chart Library has two Search Engines. One searches the more than 17,000 equities, funds and ETFs in the International Equity Library. The other searches through the rest of the Chart Library for indices, commodities, currencies bond prices and yields, ratios, spreads and overlays. You can also customise these charts and save any of them in your Favourites section. Check the Library's Help section for further details.

Sugar - downside weekly key reversal probably caps the uptrend for the medium-term and while there is potential for something of relief rally next week, the risk premium attached the market has increased.

Chile - downside weekly key reversal probably signals that a reversionary move at least towards the 200-day moving average has begun.

Palladium - finding support in the region of the upper side of the previous range and would need to sustain a move below $380 to question scope for some further upside in the short-term. A sustained move above $450 would likely lead to the uptrend being reasserted.

Eoin's personal portfolio: gold long reopened - seeing gold retest the 200-day MA and with the tail on palladium, I decided to nibble at gold paying $1054.20 for the April contract, including spread-bet dealing costs.


Weekend reading - Thanks to a subscriber for this extensive list of academic reports, contributed in the Spirit of Empowerment Through Knowledge:

Treasury: "Minutes of the Meeting of the Treasury Borrowing Advisory Committee" Text, Charts:

Fed: "Using FOMC Forecasts to Forecast the Economy"

Fed: "Controlling risk in a lightning-speed trading environment"

OECD: "A BIRD'S EYE VIEW OF OECD HOUSING MARKETS"

Fed: "A Historical Look at the Labor Market During Recessions"

CRS: "Understanding China's Political System"