Daily Market Reports | Oct 11 2011
By Greg Peel
The Dow rose 330 points or 3.0% while the S&P jumped 3.4% to 1194 and the Nasdaq soared 3.5%.
Wow. After two years of indecision, infighting, disagreement and dithering, of multiple plans, of band-aids, and of denial, all Europe really needed after all was was for the chancellor of Germany and the president of France to come out and declare “we have a coordinated plan”. Never mind the caveat of “but we're not going to tell you what it is yet”.
As noted in yesterday's Monday report, this was the news on the weekend. Angela Merkel and Nicholas Sarkozy met in Berlin on Sunday and supposedly agreed on a Final Solution to save Europe, details of which will be revealed in time for the G20 meeting at the beginning of next month. This had the Australian market excited yesterday, but that was nothing compared to the 2% rally in London and France overnight and the 3% rally in Germany, along with the 3.4% rally on Wall Street last night.
My assumption would be that Merkozy met and realistically just agreed on one thing – that the bickering must end now and and Europe must be seen by the world to be on the same page with a plan to resolve its debt issues. The important factor is for the world to know Europe is now coordinating. As for the details, well we've got a month to come up with those.
If this is what will actually eventuate, then it is good news. If the Merkozy plan is revealed and immediately met with resistance from one of the other seventeen eurozone members, or the EU, or the ECB or even IMF, then we'll be back where we were. All we can do is hope that this time Merkozy is for real. And in the meantime, cover our shorts.
Short-covering, and little much else, has been driving this extraordinary week of rallies. Sure there will have been some optimistic buying, as well there should be, but we have to be a bit careful here in the shorter term. Last night in the US, for example, was the Columbus Day bank holiday and volumes on the NYSE were very light. The Dow merely opened about 250 points higher and stayed there for most of the day before kicking up on thin air at the death.
If we look at a chart of the S&P 500 index over the last three months, we can see the relevant picture. After plunging through July and into August all we've done since is bounce around in a range marked by fleeting optimism on the top side and Omigod on the bottom. The lines I have drawn here loosely define that range and we note a couple of attempts to break out either way.
We're now back toward the top again, and a break of 1200 would be encouraging. A break of 1220 might even bring in the real buying. And we can never forget that the non-trading world – the actual investing world – is short, short, short equity by virtue of being very overweight cash and fixed interest instead in portfolios. By the same token, common sense would suggest that when the dust settles on hedge fund short-covering we will probably dip down again, at least in the interim. And we have to wait at least until the EU summit next Monday and perhaps all the way to the G20 meeting beginning on November 3 before we know for sure a workable and effective European solution is in place. And then, one presumes, everyone has to vote on it.
While we're waiting, we'll have the US September quarter result season to digest. And the best one can say about current opinions on how results will look is that they are split. There's also the pessimism or otherwise of guidance to deal with.
Let us also not forget that the beginning of November is important for another reason. It's when the Congressional so-called Super Committee reports on its plan to reduce the US budget deficit. We forget that the trigger to all the turmoil of the last couple of months was not actually Europe at that point, but the US. A failure to reach a decision on the debt ceiling and budget policy, and a downgrade form S&P, set this whole thing in train. Are we about to see Obama and Boehner come out arm in arm with big smiles on their faces, laughing off earlier disagreement? I wouldn't bet on it.
Currencies were the main driving force last night – equities merely followed. The euro jumped around 2% on the Merkozy news, sending the US dollar index down a solid 1.5% to 77.51. The Aussie is up 2.2% since Friday's close to a tick under parity. There was no trading in US bonds last night as those markets were closed for the holiday.
Commodities were open however, and they enjoyed the combination of optimism in Europe and a weaker US dollar. Copper rose 2.5%, and all base metals were up 2-3%. Brent crude jumped US$3.07 or 3% to US$108.95/bbl, and West Texas matched it with a US$2.43 rise to US$85.41/bbl. Gold also has a double-whammy going on, with the weaker greenback meeting the expectation that the Merkozy plan cannot avoid involving money printing. It was up US$41.40 to US$1678.90/oz.
The Australian market had a head start yesterday, but the SPI Overnight added another 55 points or 1.3%.
Today NAB will release the results of this month's business survey, and tonight Alcoa will kick off the US results season. This week features some important data in Australia, including unemployment on Thursday which will help inform RBA policy, and by late in the week the US banks will begin to report how they're actually getting on in a flat yield curve environment.
And all the while we can only guess what Merkozy might have in store.
Rudi will be appearing on the Switzer program on Sky Business tonight at 7pm.
[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]
