Daily Market Reports | Jul 13 2011
By Greg Peel
The Dow closed down 58 points or 0.5% while the S&P lost 0.4% to 1313 and the Nasdaq fell 0.7%.
European bond markets opened last night in the same mood as they closed on Monday – one of abandoning southern eurozone debt in exchange for northern eurozone and US debt. The yield on the US ten-year bond had fallen another 12 basis points to 2.80% before markets opened in New York and Chicago. It seemed a slippery slope to hell.
EU officials and eurozone finance ministers meeting in Brussels then released a statement suggesting they are ready to adopt further measures to ensure Greece's sovereign debt crisis does not spread to other parts of the EU. This would involve more flexible facilities, lower interest rates, maturity extensions etc, etc.
Hello? Guys have you seen the screens? The debt of Portugal and Ireland is already junk and right now Spain and Italy is heading down the same path! Contagion? It's happening right now!
Apparently Italy was not discussed in the meeting which was primarily called to sort out the Greek situation. It was, however, acknowledged. The announcement is typical of an EU administration which is forever all about talk, all about what could be done, what might be done, in the fullness of time, and rarely about expedient action. In the meantime, Nero is tuning up.
But then a funny thing happened. The Italian Treasury went ahead with a scheduled auction of E12bn of 12-month bills and lo and behold it was oversubscribed. At a yield of 3.67% the debt cost the Italian government 150bps more than the last such auction in June, but the result could have been a lot, lot worse. A rumour had run around the market, being that the ECB was in buying. Suddenly, everything changed.
The rumour was denied by the ECB but that didn't stop US ten-year bonds reversing about 14bps to be higher on the day as the US markets opened. US stock markets, which were threatening to fall again, stabilised and bounced along the flatline.
Then it was time for the US Treasury to conduct its scheduled auction of US$32bn of three-year bonds. Unsurprisingly, with Europe on the skids, demand was solid with foreign central banks sticking to a 34% running average of purchases. At 0.67%, the settlement yield was the lowest since November. But then the Fed chimed in.
The Fed released the minutes of its last policy meeting last night, revealing a central bank committee suffering from a multiple personality disorder. As had been the case in the previous meeting, the FOMC discussed just what its exit strategy would look like – that being the ultimate cessation of all reinvestments, the raising of the cash rate, and eventually the sale of assets. But the exit strategy was not what caught Wall Street's eye.
What Wall Street focused on what was the suggestion by some committee members that were unemployment reduction targets not to be reached, then further monetary stimulus would be appropriate. In other words, the Fed took one more step towards QE3. And the meeting was held before Friday's shocking jobs number.
Stocks jumped on the news, and immediately the Dow was up 60 points. They struggled to hold those levels however, and there was still one more bombshell to land in the session of pandemonium. At around 3.30pm, Moody's announced it had downgraded Ireland to junk. That was enough for a fragile market, and down we went to an ultimately weak close.
Moody's did exactly the same thing a couple of weeks ago with Portugal, and then, as now, market commentators pointed out that the markets had downgraded Ireland to junk months ago, as reflected in bond yields. This was hardly new news. But Moody's also did something remarkable. In its accompanying statement the ratings agency suggested Ireland was on negative watch due to expectations that Greek debt would be partially defaulted (that's the way discussions are heading) and this would imply the same for Portugal and Ireland.
Good God. A ratings agency applying foresight.
So where does all of this leave us? None the wiser, it would seem. Perhaps the SPI Overnight summed it up by rising one solitary point as an end result. The overriding conclusion has to be that the EU and all involved will jump in and save the day one way or another – it has little choice – but that if it dithers as usual all of Europe could implode.
The VIX volatility index last night jumped another 8% to just under 20.
Where did that leave commodities? Well, commodity markets closed before the Fed and Moody's, that is when things were looking brighter. So on short-covering, base metals were all up 1-2%, as was silver. Brent crude rose US51c to US$117.55/bbl and West Texas rose US$2.30 to US$97.45/bbl.
Spot gold, which doesn't close, was a different story. The US dollar index rocked and rolled last night before settling little changed at 76.01, while the euro bounced around as well before finishing lower. Whichever excuse you choose – Italy, QE3, Ireland – gold was up US$12.90 to US$1567.30/oz.
The Aussie is down 0.5% to US$1.0597, with yesterday's weak NAB business survey a factor.
As has often been the case so many times in the past two years, we're poised. Something has to happen, but at this stage that something is uncertain. And don't forget the US earnings season has started, with JP Morgan and Citigroup set to report later in the week. In March 2009, it was the US banks which turned the market around from the GFC lows.
Rudi's weekly appearance on the Sky Business program Lunch Money has been rescheduled to today, rather than tomorrow, at 12pm.
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