Daily Market Reports | Apr 28 2010
By Greg Peel
The Dow fell 213 points or 1.9% while the S&P fell 2.3% to 1183 and the Nasdaq fell 2.0%.
"We believe that the [Greek] government's policy options are narrowing because of Greece's weakening economic growth prospects, at a time when pressures for stronger fiscal adjustment measures are rising," said credit ratings agency Standard & Poor's last night. "Our updated assumptions about Greece's economic and fiscal prospects lead us to conclude that the sovereign's creditworthiness is no longer compatible with an investment-grade rating."
With that, S&P downgraded Greek sovereign debt from BBB+ to BB+ and thus to below what is considered “investment grade” or, colloquially, to “junk”.
One is reminded of the coward in a group of any hooligans who, when his associates have gang-beaten some hapless victim to the ground, only then joins the fray and delivers a swift kick to the head. Prior to 2007, S&P and other agencies took money in exchange for AAA ratings on sponsored toxic mortgage instruments. By 2008, all agencies were swiftly downgrading the credit ratings of any institutions holding those toxic assets, now that the credit crunch was underway. Each downgrade was another knife to the stomach and only served to exacerbate liquidity issues. The ratings agencies ultimately downgraded Lehman Bros to death.
Now it's Greece's turn. If Greece's sovereign debt is no longer investment grade it means most investment institutions can no longer hold it and must sell it. It means it cannot be used by Greece to lodge collateral with the European Central Bank, and it means that Greek banks will have a great deal of difficulty finding funding. The only saving grace, probably momentarily, is that all ratings agencies must declare the debt to be junk before it is seen to be junk – not just one. But that will just be a matter of time. Credit downgrades that follow prior market de-rating (selling of those bonds) are simply self-fulfilling.
The downgrade comes at a time when Greece is negotiating its rescue package with the EU and IMF. A time when EU members have to pass legislation through their respective parliaments to contribute to the rescue. A time when the Greek government has to risk riots in the streets by imposing even stricter budget cuts. S&P did not deem it appropriate, or even reasonable, to wait for an outcome.
But S&P wasn't finished yet. It also lowered Portugal's credit rating two notches from A+ to A-, suggesting that under its revised base economic growth scenario Portugal will struggle to stabilise its debt ratio before 2013. The agencies have clearly decided Portugal is the next country due for a good kicking.
Ratings agencies aside, there have been many in the market happy to shrug off Greece in particular and Europe in general just as they shrugged off a few subprime defaults in 2007 and declared the end to the crisis when Bear Stearns was rescued in 2008. Even as Greece appeared inevitably sliding towards default, US stock markets were making new highs. But there have also been many in the market expecting a pullback sometime soon.
The Greek downgrade last night sparked the sort of “flight to quality” we haven't seen in some time. The German stock index was down 2.7%, the French 3.8% and the British 2.6%. The euro plunged to US$1.3145 – its lowest level in twelve months. The US dollar index jumped 1.2% or a full point to 82.32.
Such a bounce in the dollar is usually bad for the US dollar gold price, and in recent times the first reaction of investors is to sell gold to raise cash at the first sign of trouble. But last night gold jumped US$15.40 to US$1158.40/oz, no doubt led by buying out of Europe.
Commodities were trashed. Oil fell 2.1% or US$1.76 to US$82.44/bbl. Lead and zinc fell 3%, copper and tin 4%, nickel 6%, and aluminium a massive 7%.
The Aussie fell over a cent to US$0.9153.
If ever there was a good night for the US Treasury to sell bonds, this was it. But despite the shorter two-year T-note being the world's safe haven of choice, and despite the previous auction of longer dates being remarkably well bid, demand at the auction was only reasonable, not outstanding. Foreign central banks bought only 31% of the issue, down from the running average of 41%. Nevertheless, the general market piled into US Treasuries, sending the benchmark ten-year yield down 12 basis points to 3.68%.
While all this was going on, Goldman Sachs executives were being grilled by a US Senate committee over the allegations of fraud in particular and Goldman's activities before and during the credit crisis in general. Goldmans shares have been hit hard since the news broke, which is probably why last night they finished 0.7% higher while all financial peers were seeing their shares heavily sold.
Heavy was the operative word, with selling across the board sending the total NYSE volume up from its anaemic levels of around 800-900m of recent times to 1.6bn. The only Dow stock to actually rally was Post-it note purveyor 3M, which added 0.5% after a strong earnings result. Dow colleague Dupont also posted a good result but could not hang on.
Lost amidst the carnage was the monthly release of the Case-Shiller 20-city house price index, which showed a fall in February of 0.1% from January but a 0.6% rise from February 2009. That's the first rise since December 2006. But eleven of twenty cities showed declines, and compilers were quick to suggest the index is not necessarily now turning around and indeed is still vulnerable to further falls.
The Conference Board measure of US consumer confidence rose to 57.9 in April from 52.3 in March when economists had expected 53.5. That's the best read since September 2008.
The Richmond Fed manufacturing index also posted a strong, indeed remarkable result. The Richmond index tends to be overshadowed by its cousins, the New York and Philadelphia Fed indices, but the fact is the Richmond area employs more workers in manufacturing than either of the other two*. It is also a zero-neutral index rather than the 50-neutral indices used elsewhere. The index registered 6 in March but has jumped to 30 in April. That's an all-time high, and marks a recovery from near -60 in mid-2008. Typically, the index fluctuates in a band between 20 and -20.
*[I know this because when I brushed off the Richmond index recently I received a very polite and friendly explanatory note from the Richmond Fed itself. It's not every day an Australian gets an email from the Fed.]
These positive data were nevertheless completely overshadowed by the goings on in Europe and the world's reaction to them. If anything, they incrementally bolster the case for a Fed rate rise sooner rather than later. The US dollar is already responding in kind.
The VIX volatility index on the S&P 500 last night jumped 30% to 22.8. That's the first time the index has been over 20 since mid-February.
The SPI Overnight lost 90 points or 1.8%.
For what it's worth, the Australian CPI is out today.
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