Daily Market Reports | Sep 26 2011
By Greg Peel
Do we finally have a step in the right direction? It's always a bit hard to tell with G20 finance ministers or leaders meeting because they're always very big on grand statements while scant on detail and questionable on follow-through. “We pledge to do whatever it takes” is a favourite which is often dusted off and rolled out each time. Everyone then goes home and forgets all about it.
So a grain of salt must be added to our assessment of this weekend's developments. The IMF has said it will issue decisive policy actions to shore up the euro and support the global economy. It will review available resources and eurozone members will do whatever is necessary to solve the global debt crisis. Goodo. Of course there was no detail on how this would be done and no mention of whether “whatever is necessary” still means months of individual parliamentary debate and procrastination.
If we move away from the motherhood statements, nevertheless, and listen to what those inside the meeting are reporting, we find that the G20 is preparing for an orderly default in Greece. Side meetings in Washington over the weekend were focused on ways to recapitalise European banks and prepare eurozone economies for default. The time line suggested involves Greece being granted one more bail-out tranche to get it through October and then orderly default following in November.
If this is all true, and the time line is achievable, then hallelujah they've finally figured it out. There was no talk, however, of increasing the size of the proposed EFSF and the current EFSF is still awaiting final approval votes from several eurozone parliaments. One assumes that in order to sufficiently recapitalise European banks and shore them up against the losses they will take (and very much deserve to take) on sovereign default then a lot more than the currently proposed E440bn fund will be needed.
If we are optimistic, nonetheless, we can enter this week feeling a little more positive than we were toward the end of last week.
Anticipation of what has come out of the G20 meeting began on Friday in the Asian session as commentary began to flow from Washington. This allowed the Australian market to recover some of its initial drop following a bad night on Wall Street, and thereafter Wall Street had a quieter session, bouncing around in a tighter range before finishing to the upside. The Dow closed up 37 points or 0.4% while the S&P gained 0.6% to 1136.
The big loser on Friday night was nevertheless gold, which fell US$79.00 to US$1657.20/oz following heavy falls earlier in the week. Gold is now around US$150 below its peak. It's a big move but nobody is really that surprised. Gold's price chart had accelerated away from its longer-term trend line over past months and whenever this has happened in the past, a pullback to the trend line inevitably occurs. Traders suggest another US$100 may have to be lost before we can start again.
The reasons for gold's drop are basically four: (1) Anticipation that the eurozone problems would be more decisively addressed at the G20 meeting following promising early statements on Friday reducing the risk trade element; (2) Operation Twist from the Fed which requires no additional money printing and thus implies no further monetary inflation; (3) aforementioned gravity finally catching up with a very crowded trade and (4) cash-raising to pay margin calls for leveraged stock and commodity positions.
While you might expect gold bulls to be feeling a bit down at heel this morning they won't be, because blow-off corrections like this provide a cheaper entry point for longer term gold investment. We're still wandering through the mine field, and if the recapitalisation of European banks requires monetary stimulus then that monetary inflation trade is still viable. If nothing else, the ECB must currently be rethinking its decision to raise its cash rate earlier in the year in the middle of all the panic.
Base metals also had another bad night on Friday as similar liquidation continued from the speculative side of the market. Copper fell another 4% as did zinc, and lead fell 8%. Nickel, which had fallen 17% on Thursday, managed to bounce 7%. Brent crude fell US$1.52 to US$103.97/bbl and West Texas fell US66c to US$79.85/bbl.
Despite further falls in commodity prices the Aussie managed to recover a bit of ground, rising half a cent to US$0.9787 as the US dollar index fell 0.2% to 78.30. The US ten-year bond yield bounced back 9 basis points to 1.81%.
The SPI Overnight fell 9 points but we should see that reversed this morning on the assumption the news from Washington provides some relief.
This week should see a renewed focus on US economic data if volatility driven by Europe subsides somewhat. Tonight sees the Chicago Fed national activity index and new home sales, Tuesday night the Case-Shiller house price index, the Richmond Fed manufacturing index, and the Conference Board consumer confidence index. Wednesday it's durable goods and Thursday pending home sales, along with the second revision of the US June quarter GDP. Economists are expecting an improvement to 1.2% from the previous revision down to 1.0%. Friday brings the Michigan Uni consumer sentiment measure, the Chicago PMI and personal income and spending.
The US Treasury will auction two, five and seven-year notes over the week which will mark the first auctions following the Fed's Twist announcement.
It's a quiet week for data in Australia, with new home sales on Wednesday and the RP Data-Rismark house price index on Friday along with private sector credit. Today brings another significant load of stocks going ex-dividend before the ex-divs start to peter out over the next couple of weeks. In their place will be a rising tide of Annual General Meetings.
Have we seen the bottom? It's too early to say. Experience has made us cynical about any policy measures being expediently implemented in Europe. If the bottoming script is to play out as it has in the past, we have to drift lower yet on lower volatility before one day a bottom will be put in place and it won't be recognised immediately.
In the meantime the VIX volatility index in the US remains above 40 implying Wall Street is still hedging its bets. It also means, however, that investors have put a floor on their downside.
For further global economic release dates and local company events please refer to the FNArena Calendar.
