Daily Market Reports | Jul 19 2011
By Greg Peel
The Dow closed down 94 points or 0.8% while the S&P lost 0.8% to 1305 and the Nasdaq dropped 0.9%.
As noted in yesterday's Monday Report, the European Banking Authority has conducted stress tests on 90 European banks and found only eight have failed, suggesting more capital will be required under the test's heightened debt crisis scenario. However, markets were critical that the tests were too benign and that the parameters had been set before the Italian blow-out and before talk of Greek partial default.
For example, the EBA's test assumed a write-down of Greek sovereign debt of only 15% while the credit default swap market has Greek debt trading at 50 cents in the dollar, or a 50% write-down. So over the weekend the world's large investment banks, including Goldman Sachs, SocGen and others, conducted their own stress tests based on the now disclosed information.
Factoring in greater losses on peripheral debt, Goldmans suggested 18 banks would fail. Add in a 10% write-down of Spanish and Italian debt and 27 banks fail. Other houses used other combinations of parameters for their own tests and the bottom line is all concluded that many more European banks would need more capital, with results ranging from E26bn to E80bn in total.
What's more, the disclosed information revealed not just the level of sovereign debt held by banks, but the significant level of interwoven private sector loans. What has really irked the market the most is that were the European officials serious about resolving the debt crisis, and not just trying to make light as they have done ever since early 2010, then European banks would already be raising fresh capital and disaster may by now have been averted. Disaster is not yet upon us, but European bank shares have been falling steadily all year, accelerating this month, and last night were down substantially once more. To raise capital now is to face significant shareholder dilution.
Euro officials will meet on Thursday to discuss suggestions of a partial Greek default, as well as consider the wider contagion issue. At this stage all parties seem resigned to partial defaults but the ECB stands unhelpfully rigid, continually noting that it can't hold even partially defaulted debt as collateral. At this stage, a resolution still seems some way away, and in the meantime the global financial markets, and the world, are becoming increasingly angry at the failure of US politicians to reach a debt ceiling and budget cut agreement.
The critical word there is “politicians”. When it's all said and done, the EU GDP is sufficiently large to cope with resolving all of the eurozone's debt issues without too much difficulty, and the US can always just print money like it always has. China may not like it, but then China wants a resolution too. But all across Europe, and in the US, the stumbling block for debt resolution is not finance, but politics. The world's fate is not in the hands of what were once revered statesmen, but in the hands of the self-serving, incompetent, unintelligent, career-focused electoral suck-ups that dominate parliaments all over the globe.
With the collective global value of fiat currency continuing to sink into the sunset, last night gold hit a new psychological, blue-sky benchmark at 1600. It's up US$11.00 to US$1605.10/oz. Silver rose 3% to US$40.55/oz.
Given the debt problems on both sides of the Atlantic, there was little relative move in the EUR-USD. The dollar still came out a winner on its index, rising 0.3% to 75.37, but the safe haven du jour is the Swiss franc, and even the yen is seen as a better bet. The fate of the Aussie has been more parochial of late, but it's down 0.3% at US$1.0608.
At present, real commodities are playing a waiting game. Brent crude was down US$1.21 to US$116.05/bbl in its new September delivery front month, while West Texas lost US$1.09 to US$96.15/bbl. Base metals were yet again mixed on small moves.
The financial sector dominated the drop on Wall Street last night, sending the Dow down 180 points by midday. At that point buyers were unearthed, leading to a less drastic close. Tonight is a big night for US corporate earnings in a season that is now being overshadowed by pan-Atlantic debt issues. Bank of America (Dow), Goldman Sachs and Wells Fargo all report tonight, along with big techs Apple and Yahoo and big consumer staples Coca-Cola (Dow) and Johnson & Johnson (Dow) to provide a broad spectrum assessment.
IBM reported after the bell this morning, beating on earnings and revenue and on next quarter guidance. Its shares are up 1.8% in the after-market.
The SPI Overnight fell 22 points or 0.5%.
The RBA will release the minutes of its July policy meeting today which will be closely scrutinised in light of the first economist back-flips on rate expectations. Bear in mind the July meeting pre-dates Italy joining the fray, as well as the very weak consumer and business sentiment data in Australia and the big profit downgrades now flowing from the retail sector.
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