Daily Market Reports | Jun 22 2011
By Greg Peel
The Dow rose 109 points or 0.9% while the S&P gained a more substantial 1.3% to 1295 and the Nasdaq soared 2.2%.
Whether Wall Street was prepared to back an affirmative vote of confidence in Greek prime minister George Papandreou from his government given earlier indications of such, or whether Wall Street was simply squaring shorts to be neutral ahead of a vote which could go either way, last night's hundred point rally in the Dow was in the right direction.
At 7.50am this morning Sydney time, or almost 1am Athens time, Papandreou got the nod.
The euro had also rallied over the session to over US$1.44 from US$1.43 sending the US dollar index down 0.5% to 74.50. Gold rose US$5.50 to US$1546.50/oz while silver and base metals all posted 0.5-1.5% rallies (except lead which was flat).
Oil markets hadn't read the script – the one where the risk trade goes back on – given Brent crude fell another US74c to US$110.95/bbl while West Texas rose US44c to US$93.70/bbl. The WTI July delivery contract expired last night which does usually add some volatility, but commentators suggest traders are taking the opportunity to crunch down the Brent-WTI spread to a more realistic level (about US$17 instead of US$23) as Brent has fallen on Greek concerns.
US bonds ticked up a couple of basis points in yield as that market awaited the outcome in Athens.
The only piece of US economic news was a 3.8% fall in existing home sales in May, but this met expectations and Wall Street seems to have given up US housing as a lost cause anyway.
The Aussie is up slightly to US$1.0603 and the SPI Overnight gained 35 points or 0.8%, with the physical market having posted a decent relief rally yesterday.
So, what happens now?
While the vote of confidence has staved off default for now, the new round of strict austerity measures required by the IMF still has to pass through the Greek parliament over the next week or so in order for Greece to receive the E12bn tranche of original bail-out money it needs to get it through the next couple of months. One assumes, however, that the vote of confidence is implicit of smooth passage. Some 10,000 Athenians gathered outside the Greek parliament last night to once again vent their anger, but there appeared to be a sense of resignation and so far no violence has erupted.
We will need to do this all again in a couple of months – perhaps not the confidence vote but at least an assessment by the IMF that Greek budget cuts are indeed in train – before the next tranche of bail-out money is handed over. There is no way the Greek government can go to the market to borrow money given the market has cut the rating of Greek sovereign debt to below junk.
And then we are still awaiting an agreement between the EU members, the IMF and ECB on on a E120bn second bail-out fund for Greece which will be needed to prevent default in 2012. In other words, this game is going to be played out over and over for a long time yet unless there is some material change. We will never know whether the IMF et al were going to step in last night anyway if the vote were “no”, unless another similar situation arises down the track. But we can be sure that agreement over the 2012 bail-out package will be an even bigger confidence boost for global markets, despite the fact there are many in the market who still see a Greek default as inevitable.
At the very least, holding off the inevitable gives the likes of Portugal and Ireland, and particularly Spain and Italy, time to get their own houses in order.
If we can take Greece back out of the spotlight for now, we're still left with fears of a slowdown in the US recovery hanging over Wall Street. The Fed will release its next monetary policy statement tonight, but no one expects any dramatic change from that outlined Bernanke's speech a couple of weeks ago. There will be no new talk of Q3. In the meantime, the US Congress has to reach an agreement on the debt ceiling and budget cuts by the deadline of August 2.
As I sign off, the euro is not rallying further at this stage but ticking down slightly. One presumes there will be a close watch on currencies and on the Dow futures in the Asian trading session today.
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