Daily Market Reports | Nov 08 2011
By Greg Peel
The Dow closed up 82 points or 0.7% while the S&P gained 0.6% to 1261 and the Nasdaq added 0.3%.
A new Greek prime minister is expected to be announced tomorrow night but it is as yet unclear as to who that might be. It won't be Papandreou and it won't be opposition leader Antonis Samaras. The new leader of the transition coalition will not be aligned to either of the two main parties, and current front-runner is former ECB vice-president Lucas Papademos.
However, it doesn't really matter all that much – it matters only that the new government moves swiftly to pass the required bills to bring the new European plan into action. The world might have been able to enjoy some relief from this encouraging development, but it hasn't.
One might picture Crocodile Dundee being confronted by a young New York mugger brandishing a Greek sovereign debt crisis. “Call that a European sovereign debt crisis?” laughs Dundee, as he pulls an Italian sovereign debt crisis out of his belt. “This is a European sovereign debt crisis!”
The Italian ten-year bond yield last night reached 6.68%. Yields of 7.0% for Ireland and Portugal led to both having to be bailed out. The bottom line is that if sovereign debt is rolled over into new debt costing that high an interest rate, the economy of the borrower will not provide enough to make the payments given the extent of debt held. Were the economy a corporation, default would follow.
Italy's economy is the third biggest in the eurozone and the eighth biggest in the world. It is six times bigger than Greece's and one and a half times bigger than Australia's. Italy is carrying E1.9trn in debt and some E30-40bn of that is due to be refinanced before year-end.
European markets opened weaker last night as the Italian situation deteriorated, until a rumour went around prime minister Silvio Berlusconi was resigning. This sparked a rally, until such time that markets noticed Berlusconi had denied the rumour on his Facebook page. It's been a frustrating month so far for Berlusconi who has already had to postpone the release of his album of love songs.
Markets on both sides of the Atlantic chopped around all session on rumours, headlines and speculation. The Dow was up 70 points early and down 100 at lunch time before closing up 80 on low volume.
This week Italy has to vote on the budget bill and there is talk that while opposition parties will not vote against the bill they may abstain en masse, thus forcing Berlusconi to a confidence vote. He has previously survived no less than 50 confidence votes. Is this the one? Clearly global markets, and Italian markets, are hoping so.
Meanwhile the EFSF held an auction last night to raise E3bn to fund the ongoing bail-out of Ireland. That's E3bn of the intended E400bn which is to be leveraged up to E1trn. Demand was tepid, and the yield settled upon in excess of 3.5% – higher than the previous auction tranche. If this is the world's response to investing in the EFSF, then soon it may be the EFSF that needs bailing out. Perhaps more enthusiasm will be shown if Greece is finally put to bed and Berlusconi is shown the door.
China where are you? That's what everyone's been wondering, particularly in Europe. Previously China had been touted as a potential large investor in the EFSF but since last weekend's G20 meeting it has become apparent there is no one much around the world prepared to take the plunge.
Instead, governments around the world are preparing for what might transpire. News out of China yesterday is that Beijing has injected RMB 1 trillion (US$158bn) into deposits at Chinese banks. Those banks are expected to lend RMB 7.5trn in 2011. There had been rumours Beijing was now looking to begin easing monetary policy after a couple of years of tightening, in the face of the expected global economic slowdown. This fiscal measure is effectively an indirect form of monetary easing.
It would also suggest that Beijing is choosing to circle the wagons rather than offering to help out the natives in Europe.
If the global economy is to slow no one has bothered to tell the oil markets. Last night Brent crude rose US$2.64 to US$114.61/bbl and West Texas rose US$1.70 to US$95.96/bbl. Traders suggest all that is happening in Europe is pointing more and more to money printing, including QE3 from the Fed. Such currency devaluation implies commodity price strength.
Which is also no doubt a factor behind last night's US$40.60 rally in gold to US$1796.00/oz. Gold is giving off signals it's ready to move again, as safe haven status meets expectations of fiat currency devaluations and commodity price inflation. Base metals were otherwise quieter, falling 0.5-1.0%.
All of these movements last night occurred without much net movement in currencies. The US dollar index is little changed at 76.93 and the Aussie is off slightly from Friday to US$1.0374.
The SPI Overnight rose 17 points or 0.4%.
And so the saga continues. Tune in tomorrow for the next episode of In Europe Tonight. In the meantime, Australia's monthly trade balance is released today, NAB will release its business confidence survey and Westfield ((WDC)) will provide a quarterly update.
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