Daily Market Reports | Nov 09 2011
By Greg Peel
The Dow closed up 101 points or 0.8% while the S&P gained 1.2% to 1275 and the Nasdaq added 1.2%.
These episodes of In Europe Tonight are really starting to get quite dramatic.
Filming has now moved to Rome but there are still some loose ends of the plot to tie up in Athens. There it is believed the new Greek prime minister will indeed be Lucas Papademos and his leadership of Greece's new unity government is expected to be confirmed shortly. Papademos is the popular choice given his former role as ECB vice-president.
Over in Italy it was a night of high drama and, yet again whenever Europe is concerned, of contrasting news flow.
It was early in the Wall Street session when the Italian parliament voted on a simple housekeeping bill, being the rubber stamping of previous national accounts. While normally such a bill would sail through without fuss, this time a number of members elected to abstain. The bill was passed, but without an absolute majority of the Berlusconi coalition. It was a deliberate tactic designed to trigger a mandatory confidence vote.
Given Berlusconi has one more than 50 such votes while in office, markets became nervous. The euro fell and the Dow dropped to be down 66 points just before midday, having been up about 50 points earlier on. But then the news came through after lunch that Berlusconi had offered to resign. This was the news the world had been hoping to hear.
He will not, however, resign immediately, but rather wait to see the important 2012 budget bill passed through parliament next week. This is the one that contains the strict new austerity measures required by the EU. Once that bill is passed, he will step down, he says. The news was enough to send Wall Street off and running again and spark reversals in various markets.
Not everyone is convinced, however, and would rather have seen Berlusconi concede his leadership immediately. There is also the question of whether Italy's fractious collection of small parties can band together to pass the budget bill or whether politics will again prove a stumbling block. If Berlusconi is taking a leaf out of Papandreou's book in making the sacrifice, but not before ensuring necessary financial measures are in place, Italy may also take a leaf out of Greece's book in forming some sort of interim “technical” government to see it through this crucial period.
The major concern nevertheless remains the Italian bond market. The news of Berlusconi's resignation sent the euro higher, stocks higher and gold lower, but the yield on the Italian ten-year moved very little. On a net basis it is again higher after last night's session, at 6.8%. It was at 7.0% that both Ireland and Portugal hit the bail-out button. There's not enough money in the EFSF to bail out Italy.
We seem right now to be in a very, very delicate and potentially perilous position. One might say that after two years of European Crisis we have reached the point of “crash or crash through”. It is noticeable that US stock movements, for one, have been much less pronounced in volatility terms this week with Italy in the spotlight compared to the last couple of weeks when Greece was centre stage. Yet Greece is a minnow and Italy is a whale. I suggest this lack of volatility (and last night the VIX fell 7% to 27) reflects the belief that if we can just get Italy through this then suddenly the gate to the upside should be opened. If the Italian 2012 budget bill passes without incident next week then maybe, just maybe, we're out of the woods. It won't be all over by any means, but there will surely be light at the end of the tunnel.
Perhaps stable unity governments in both Greece and Italy could provide the rest of the world with enough confidence to think about investing in the EFSF.
The US dollar index fell 0.4% last night to 76.60 and the Aussie is slightly higher at US$1.0392. Gold fell US$11.60 to US$1784.40/oz as the pressure eased. Base metal traders have decided just to watch from the bleachers it would seem given price movements were again inconsequential.
While oil traders are also keenly watching Europe, oil is now under the influence of unique factors. Last night OPEC increased its global oil demand forecasts and the International Atomic Energy Agency voiced its concerns that Iran has now mastered nuclear weapons capability. Brent rose US47c to US$115.08/bbl and West Texas rose US$1.46 to US$96.98/bbl.
The SPI Overnight was up 64 points or 1.5%.
It looks like we now have another deadline to wait nervously for, that of next week's Italian budget vote. In the meantime, today sees the monthly Chinese data dump with inflation in the spotlight, while Myer ((MYR)) will release its quarterly sales result and Qantas ((QAN)) will hold a Strategy Day.
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