Daily Market Reports | Oct 18 2011
By Greg Peel
The Dow fell 246 points or 2.1% while the S&P dropped 1.9% to 1200 and the Nasdaq lost 2.0%.
German chancellor Angela Merkel channelled Darryl Kerrigan last night as she warned the world, through a spokesman, dreams are building up that the package to be presented to the EU summit on the weekend will mean that everything will be solved and over by Monday. Such a dream simply cannot be fulfilled, she explained, rather a long path is ahead and more steps will follow. Perhaps far into 2012.
Talk about spraying the market with cold water. But then given the speed and extent of the rebound rally, driven on light volume, spraying the market is probably akin to spraying two dogs playing wheelbarrows on the front lawn. Such has been the recent euphoria.
The problem is that European leaders have spent so much time dithering, disagreeing and denying these past two years – fiddling as Rome burns, as the cliché goes – any suggestion of further delays is enough to cause markets to groan, panic, and return to expectations that all hope is lost. Yet ever since the now famous Merkozy announcement early this month there have been plenty of warnings coming from market commentators that if you think this is all going to be fixed in one fell swoop, think again. As Bernanke, Paulson and Geithner learned the hard way in 2008, a three page simple plan must morph into a three hundred page legal document before something as manifest as a multi-hundred billion dollar TARP can be ratified by those whose signature must be sought. And in Europe, as we know, that means seventeen parliamentary votes at the very least.
There are details to add. To simply say “leverage the EFSF, recapitalise the banks and make them take a 50% haircut on Greek debt then we can all get some sleep” is only the beginning. Broad agreement was reached among eurozone finance ministers last weekend, the outlines of the plan will go to the EU leaders' summit this weekend, and the actual deadline for a comprehensive plan to be presented to the world is the November 3 meeting of G20 leaders in Cannes.
Interestingly, we've heard nothing from the eurozone finance ministers post their meeting. Previously, Europe played out its act in public. The extensive volatility of August-September was to a large extent attributable to one European official saying something positive one day and then another countering that positive step the next. It would seem that officials and representatives have now been told, on pain of death, that they must keep their traps firmly shut until Europe can speak with one voice. If that deadline is November 3 we have another fortnight ahead of waiting and wondering.
I think last night's sell-off is a good thing. The more this market had rallied this week on rolling euphoria ahead of this weekend, the harder it would have fallen next week. Merkel has put everyone back in their boxes. Good on 'er.
The notable feature of last night's Wall Street sell-off, which followed 2% falls in the French and German markets, is that the volume was just as light as it has been over the last week of rallies. In August-September, up-day volume was light but down-day volume was sometimes very heavy. That last night's volume was light means a lack of selling commitment. It's just a pullback after a strong run. Notably, the S&P 500 finished right on the earlier break-out level of 1200. That's now support.
Citigroup reported its September quarter earnings last night and beat expectations. Citi's shares initially rallied despite the general sell-off, until analysts noticed why the result was so good. Aside from confidently returning bad loan provisions to the bottom line – something the usually superior JP Morgan was not yet game to do – Citi pulled a little accounting swifty the like of which has been impacting on US bank results ever since 2007.
The value of Citi's debt has been de-rated by the market during recent volatility. If Citi marks that debt to market, its obligations appear to be lower, irrespective of face value. The lower obligation is then taken as a profit. Of course when things improve, such a trick will have to be reversed.
Wells Fargo also reported last night, and it missed expectations despite posting a record profit. Citi's CEO was downbeat in his accompanying outlook, suggesting there was no end in sight yet to macro concerns, while Wells' CEO was quite upbeat about prospects for 2012 when interviewed on CNBC. Citi's shares fell 1.6% on the day, and Wells' shares fell 8.4%.
After the bell, IBM (Dow) posted its result and was pretty much right on the estimate money. But IBM shares have been up 27% this year to new record highs, so that wasn't good enough. They're down 3.7% in the after-market.
The euro fell 1.0% last night, which pretty much set the tone for everything else. The US dollar index rose 0.7% to 77.15, the Aussie fell one and a half cents to US$1.0182, and gold fell US$7.30 to US$1672.50/oz.
LME traders must surely be feeling dizzy at present, as last night metal prices were clobbered once more. Copper, aluminium and zinc fell 1% while lead fell 3% and tin 4%. Only nickel held up.
Brent oil has moved on to the December delivery front month contract, and it fell US$2.07 last night to US$110.16/bbl. West Texas dropped US42c to US$86.38/bbl.
The US ten-year bond yield traded as high as 2.30% last night in the European session before Merkel's spokesman opened his mouth, then closed down 10bps at 2.16%.
The VIX volatility index had only managed a brief glimpse at a calmer life under 30 before last night bouncing back 16% to 32.
The SPI Overnight fell 70 points or 1.6%, which is basically what the ASX 200 was up yesterday.
Today sees the release of China's monthly industrial production and retail sales data, but more importantly its September quarter GDP. Forecasts are for 9.3%. The RBA will release the minutes of its October meeting today but there has been a bit of water under the bridge since, including that surprise unemployment result.
It's a huge night for US earnings tonight, with all of Bank of America (Dow), Goldman Sachs, Intel (Dow), Coke (Dow) J&J (Dow), Yahoo and Apple in the frame.
[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.]
