Daily Market Reports | Dec 01 2010
By Greg Peel
The Dow closed down 46 points or 0.4% while the S&P lost 0.6% to 1180 and the Nasdaq fell 1%.
The eurozone continued on its slippery slope last night. A meeting of EU finance ministers attempted to water down Germany's insistence on bondholder haircuts after 2013 and in so doing simply introduced further uncertainty. The bail-out fund is looking increasingly inadequate.
We recall that the US Treasury and Fed saved Bear Stearns in 2008 but decided Lehman was one step too far, given Merrill Lynch, Morgan Stanley and ultimately Goldman Sachs were lining up behind it. This proved a mistake, and the TARP was rapidly brought in after the fact.
The EU-IMF have now saved Greece and Ireland and told Portugal it should accept a bail-out before it's too late. But in these three, we're talking small economies. It's a big jump up to Spain, and then a much bigger jump again to Italy. We recall that the G7 is the group of largest industrialised economies. Italy is a member.
The Spanish ten-year bond yield continued to blow-out last night to 5.63%, to be more than 3% above the equivalent German bund (2.68%). Greek and Portuguese (7.15%) bonds are already well above this level. Italian bonds blew out to 4.77% in a worrying sign and even Belgian bonds – Belgium has to date been roped in with Germany and France as a “safe” eurozone economy – have reached 3.97%.
At 4% over German bunds, it is considered the point of no return has been passed. Refinancing of existing budget deficits at that price is so costly that a nation can only continue to go backwards, no matter what austerity measures are put in place. Either a bail-out is required, or bondholders have to take haircuts. The EU seems determined that no defaults or even restructuring will occur, but then the Treasury-Fed had thought it had saved the world by saving Bear Stearns. Once you're on the slippery slope, it's very hard to get off. Only the bravest of the brave would hold eurozone debt in a contrarian risk-trade. It was tried in Russia in 1998, and failed.
How far can EU-IMF bail-outs stretch? And the next question is: how many of the European banks which hold the bulk of eurozone sovereign debt are themselves sufficiently solvent to cope with serious haircuts on their investments, were they to transpire?
In the meantime, Wall Street is quietly beginning to have more faith in gradually improving economic data, albeit what was 2009's “green shoots” looks a bit like 2010's “clutching at straws”. For starters, Wall Street has decided to call Black Friday a “win” on shopper numbers despite the fact actual spending growth was tepid.
Yet last night's Conference Board consumer confidence survey showed a rise to 54.1 from 50.2 in October when 53 was expected. This was seen as great news, despite the fact a truly “confident” result would be in the 90s on this measure. The Chicago purchasing managers' index (PMI) rose to 62.5 from 60.6 in October when 59 was expected. This makes it four out of five wins for the major regional manufacturing indices, suggesting a good result on tonight's national manufacturing PMI.
These positive data releases were nevertheless tempered by the release of the Case-Shiller 20-city house price index, which fell by 0.7% in September. Year-on-year this index is still in the positive, but the September annual rate has slipped to 0.6% from August's 1.7%. The annual index is threatening to slip into the negative. When will Obama reintroduce first home buyer tax credit stimulus?
The supposedly positive data allowed Wall Street to recover from a Europe-led opening, in which the Dow was down 110 points, to a slightly positive Dow movement by lunch time. But as the afternoon wore on, the sellers returned. It was the last day of the month so close-outs may have been a factor.
Another day, another 1% drop in the euro which has now slipped to under US$1.30. The US dollar index rose by 0.6% to 81.31 in response. The Aussie lost another 0.4 of a cent to US$0.9595.
Gold has been a little quiet of late, but it has followed a familiar pattern. Having run hard up to US$1400/oz in a speculative frenzy, the euro-related bounce in the US dollar saw the weak longs bail out in a hurry. This is when true gold believers stand aside, and so we had a rather violent sell-off. Now that that dust has cleared, European concerns are sending the buyers back in despite the strength in the greenback. Gold was up US$18.40 last night to US$1384.80/oz. Silver jumped 3.4%.
For once, the base metal market is trading along true demand-supply lines rather than simple commodity fund speculation. Despite Europe's woes, and despite the stronger US dollar, copper jumped 2% last night as December inventories threaten to be very tight. The other metals rallied in sympathy. Expectations of a solid US manufacturing PMI also helped.
But there are also concerns as to what the equivalent Chinese PMI might be when it's released today. A solid number might be positive, but it also increases the likelihood of another Chinese rate rise. To me this would be a zero-sum net result, but to markets any concept of a Chinese rate rise seems to spark irrational fear.
Lord only knows what's going on in oil at the moment. After Monday's counter-market jump, oil fell US$1.62 to US$84.11/bbl last night.
The US ten-year bond also continues to tick down in yield as money flows out of Europe and into the ironic safe haven, albeit moves have only been modest. The yield fell 2 basis points to 2.81%.
No doubt looking to commodity price increases, the SPI Overnight fell only 2 points.
It's a big day for Australia today with the release of the September quarter GDP. As at yesterday economist consensus had the forecast at 0.4% growth. But there is a bit of a spread.
The Australian manufacturing PMI is also released today, before China, the UK, EU and US follow suit as the earth turns. The other highlight tonight in the US will be the ADP private sector unemployment number for November ahead of Friday's official unemployment data.
Well whaddya know – it's December already.
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