Daily Market Reports | Jun 21 2011
By Greg Peel
The Dow rose 76 points or 0.6% while the S&P gained 0.5% to 1278 and the Nasdaq added 0.5%.
As noted in yesterday's Monday Report, Friday night saw Germany back down on its insistence of forced Greek bond restructuring and the Greek prime minister formed a new cabinet. By Sunday the EU-IMF had delayed a decision on the new 2012 bail-out fund which only fuelled uncertainty, but right at this moment what matters is the E12bn tranche of the 2011 bail-out fund Greece needs to pay its immediate bills and avoid default. And that is dependent on passing new austerity measures through the Greek parliament, and that is dependent on Papandreou surviving a confidence vote tonight.
I also pondered whether the EU-IMF would really let Greece go down were the vote to be “no” given the potentially disastrous knock-on ramifications.
On that point, last night it became apparent that the IMF had softened its stance. Said Barclays capital, “it is very likely that Greece will receive the next tranche of funding no matter what the outcome of this week's [tonight] confidence vote”. That was confidence booster number one. Confidence booster number two came in the form of apparent resolve among the new Greek cabinet and agreement that the austerity package simply had to be passed. Greece's tourism minister (bearing in mind that tourism is about all Greece has left as an economic driver these days) spoke on CNBC last night and was highly confident that Papandreou will receive the support he needs tonight.
If you had to pick the trend in Europe with regard to Greece, it is that the posturing and politicking is now giving way to stark realisation and reluctant agreement. The potential ramifications of a Greek default are too much to contemplate. Greece might be the smallest economy in the eurozone but that would only be relevant if Greece had its own currency. Indeed if that were the case, Greece would have defaulted a year ago. But all eurozone members share a common currency with Greece, meaning if Greece slips into a crevasse the rope connecting all climbers will drag a lot more of them down. Lehman was only the fifth biggest investment bank in the US, and we know what happened there.
It was somewhat surprising that the ASX 200 traded up strongly in yesterday's morning session given the uncertainty of Sunday night's developments. Then someone obviously realised the map was upside down, and the reversal was significant. Last night's developments had Wall Street feeling a lot more positive than it might have been, albeit volume was very thin. The VIX fell 8% to be a shave under 20, indicating an easing of fear. The ASX 200 should at least head back to square again today if a 35 point jump in the SPI Overnight is any indication.
The euro had fallen initially last night in European trade, down to US$1.4190 from US$1.4290, but the more positive news sparked a turnaround which saw a close of US$1.4305 in the New York session. Wall Street came in on the bounce and followed suit. There was some positive micro news – increased sales guidance from Caterpillar, Microsoft ready to launch its new cloud service, Wal-Mart's winning a victory over a class action in the courts – which offset both some weaker estimates for the financial sector and another fall in energy stocks.
Wall Street is slowly coming to the realisation that it is Brent crude driving global energy prices now, including US gasoline at the pump, and Brent has been falling steadily this past week on Greek concerns. Last night it was down US$1.52 to US$111.69/bbl. West Texas fell early to just above 91 but recovered over the session to be up US45c to US$93.46/bbl, although fewer traders are paying attention any more.
Base metals remained in limbo on European uncertainty and were again mixed on small moves, while the US dollar index was steady at 75.02. The euro bounced against the dollar last night but not against the safer havens of the Swiss franc and the yen. Gold was almost unchanged at US$1541.00/oz and silver was up 0.5%.
The Aussie has lost 0.4% to US$1.0582 and as noted, the SPI Overnight is up 35 points.
We go into tonight assuming a “yes” vote of confidence for Papandreou would spark further relief and at present that is the expected outcome. A “no” vote may not now imply no funds and thus default, but it would still likely spook the markets. The question would be as to how quickly the EU-IMF can step in if the vote were “no”.
Observers are expecting that the square in front of the Greek parliament in Athens will see by far the biggest crowd of protesters gathering tonight to vent their anger at further austerity. Pictures of mass protests do not sit well with financial markets, particularly if the protests turn ugly.
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