Daily Market Reports | Sep 15 2011
By Greg Peel
The Dow closed up 140 points or 1.3% while the S&P gained 1.4% to 1188 and the Nasdaq added 1.6%.
When will anyone ever learn? So slow are ratings agencies to catch up with what's going on around them that we cannot even be sure Moody's downgrading yesterday of the ratings of Societe Generale and Credit Agricole – two of France's largest banks – was not related to the Second World War. And Moody's in particular has a reputation of being the slowest of the three major agencies, but then again that's like being the fattest bloke on The Biggest Loser.
Ask yourself: why is the Australian stock market down 20% from its April high? Might the answer have anything to do with Europe? Perhaps Greece, and its possibility of default, might be part of that? And who, as we have long known, holds a lot of Greek sovereign debt? Oh yes – the French banks.
Let's take SocGen for one. Since March its share price has fallen 72%. It is a truth universally acknowledged that SocGen will need an injection of capital in order to survive any restructuring of eurozone sovereign debt – haircuts or default, orderly or disorderly. Yet now, and only now, have the Moody's analysts realised perhaps SocGen's credit isn't quite as good as it was. Brilliant! Next they be telling us Enron's looking dodgy.
Why anyone would sell down the Australian market sharply on the announcement of a discredited US ratings agency downgrading a bank or two in France is thus anyone's guess, but then the current market is all about jumping at shadows. The funny thing is that after the close of the Asian session yesterday, when the northern hemisphere sat down to enjoy the next instalment of In Europe Tonight, the producers had cut that bit out of the script. It certainly happened, but wasn't deemed important to the plot. SocGen shares traded higher from the bell, as did Credit Agricole shares.
Indeed France's CAC stock index closed up 1.9% on the session, and Germany's DAX – and don't forget German banks also hold loads of toxic eurozone debt and may well be next in Moody's sights – leapt 3.4%. Oh and shucks, the overnight ASX 200 futures are up 1.8%.
I had noted in yesterday's Report that Merkel and Sarkozy were due to make an announcement last night regarding the Greek situation once they had spoken to Prime Minister Papandreou. It might be safe to assume that while Merkozy weren't yet entirely sure what they were going to say, they weren't going to say “too hard, we give up”. Electing to sell ahead of that announcement was always going to be somewhat of a risk. And it's proved to be so.
The upshot is that Greece does not want to leave the eurozone, and neither France nor Germany want Greece to leave either. Greece will stay in no matter what happens, even if the only option is default. And that option is getting close to being a given. Greece will get its next E8bn bail-out tranche at the end of the month ahead of all member parliaments voting on the EFSF, which will take another month. Once the EFSF is in place it is assumed, albeit not confirmed, that an “orderly” default of Greek debt will follow.
Merkozy nevertheless had stern words for Papandreou, insisting that austerity and asset sale targets must be met or he'll be right back in the Naughty Chair. A contrite Papandreou said that it would be so.
That news was enough to send European stock markets rallying and Wall Street following through. There was a brief stumble early in the New York session when it was thought Austria had just voted against the EFSF, but it turned out that Austria had merely delayed the vote. On that misinterpretation the Dow was briefly down 100 points, but it soon reversed and rallied and by 3.30pm was up 280 points. Volume was light, and short-covering evident, so the last half hour saw a fall-back on profit-taking. Either way, the world did not end last night. And there's more to the story than just the Merkozy announcement.
Speaking at a conference early in the session last night, US Treasury secretary Timothy Geithner said, emphatically, there was “no chance” of financial failure in Europe, a la Lehman. Geithner is off to Warsaw tomorrow to attend the scheduled regular meeting of the EU finance ministers, and it hasn't been lost on Wall Street that this is the first time America has been included in what is normally a Euro-only membership. Why now? Could it be, perhaps, that it was then New York Fed President Geithner who, in 2008, was instrumental in orchestrating the TARP – the near US$1 trillion package used to recapitalise all of America's major banks?
Funny that Larry Fink, BlackRock CEO and adviser to Europe should also happen to suggest, at the same conference Geithner attended last night, that what Europe's now needs is a TARP. The bottom line is that Wall Street rallied last night because everyone knows something decisive has to be done in Europe this time – no more muddling through, bickering and procrastinating – and the obvious answer is to stop trying to prop up the sovereigns to save the banks but to prop up the banks instead and then let the sovereigns deal with it. It ain't rocket surgery.
For more on the TARP option see What To Do About Europe?
The euro closed higher on the session last night, sending the US dollar index down 0.25% to 76.86. The Aussie is down half a cent to US$1.0263 because it was mostly Seppos bailing out of our market yesterday. Gold came off US$13.10 to US$1821.10/oz.
Copper traders have become a bit nervous of late and last night copper was down 2%, marking the biggest fall among the base metals. Brent crude was up US51c to US$112.40/bbl while West Texas lost US$1.66 to US$88.56/bbl.
Having received tepid demand for Tuesday night's auction of US ten-year bonds, last night the US Treasury got away US$13bn of thirty-years quite comfortably, with the 3.31% settlement yield being lower than expected. Foreign central banks bought 39% compared to a 41% running average, maybe because they're now looking seriously at buying rather cheap eurodebt instead.
As noted, the SPI Overnight was up 72 points or 1.8%.
Incidentally, it was revealed last night that US retail sales rose only 0.1% in August, which was a bit disappointing when a 0.3% rise was forecast. But who cares? It's all about Europe. Stay tuned.
Rudi will be appearing on Sky Business today at noon. He'll be presenting on UNSW campus from 6-8pm later on the day.
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