Daily Market Reports | Nov 29 2011
By Greg Peel
The Dow rose 291 points or 2.6% while the S&P added 2.9% to 1192 and the Nasdaq jumped 3.5%.
A report came out over the weekend that the IMF was preparing a E600m line of credit for Italy but the IMF has since denied that rumour. There was also a suggestion that in the absence of a eurozone bond, the zone's AAA-rated countries – Germany, France, the Netherlands, Austria – were considering a plan to issue their own form of elite combination bond. This rumour too has been denied.
Warnings have continued to flow for Europe from various international bodies and governments that it's time to act and act decisively. The common thread of these warnings – the most recent being from the OECD – is that the ECB needs to be more involved. Currently the ECB cannot leverage up the EFSF with QE-style activity given there is no common bond and the ECB's rules do not allow it.
More importantly, Germany will not come to the party. At least, Germany will not expand the role of the ECB until there is a closer fiscal union in the eurozone – one which includes stringent budget control of members by a central body in order to prevent nations again letting their debt blow out to unsustainable levels. Only with such a union in place will Germany accede to any idea of an expanded role for the ECB. Otherwise such an expansion would simply mean Germany indirectly handing out more bail-out funds.
And so it was that Germany and France announced the intention on the weekend to take steps towards such a fiscal union. There are two points or interest here: (1) it was France and Germany who baulked at a tight fiscal union as the eurozone charter was being created, and (2) there is nothing here we actually haven't heard before, at least in principle. Germany was talking fiscal union even before the Grand Plan with regard to the EFSF was unveiled last month. France is still tossing around the possibility of a “two-speed” eurozone, which presumably means first and second divisions of currency, but that's not new either.
The other thing that hasn't changed is that this is still just talk. Even France and Germany concede that not every eurozone member is keen on the idea. We know that any such constitutional change will require a very lengthy process of parliamentary votes and wranglings, and potential political fall-out, riots, and more governments being usurped. There is no “quick fix” here, and what Europe needs right now is a quick fix. Italy's bond rate is still around 7%, and all of Italy, Spain and France will be holding bond auctions this week.
After last week's stock market slide, including seven straight down-days for Wall Street, traders were looking for a bounce. Talk in Europe over the weekend provided enough incentive it would seem, so we shot up yesterday in Australia and last night Wall Street followed suit. Wall Street's efforts could nevertheless not be construed as a “rally” per se given indices step-jumped at the open and closed at roughly the same levels. Volume was light. It was not what we could really call “buying”. Shorts were covered and bargains were hunted, but if you blinked you missed it.
Wall Street's rally was as much to do about retail sales as it was any supposed relief out of Europe. With the numbers in from Black Friday trading it seems Americans have been happy to spend more this year than they did last year, and everyone's excited. The healthy crowds were obvious, but so were the healthy discounts, so it was a good effort to outstrip 2010 in dollar terms. The only worry now is that Americans took advantage of the low, low prices and bought all their gifts on Friday, leaving little more to purchase before Christmas.
The other economic news last night was that new homes sales in the US rose to 307,000 seasonally adjusted in October from 303,000 in September. Not really stirring stuff, and economists had hoped for 320,000. It is noted that in a “healthy” US housing market, these numbers would be two to three times higher.
Talk out of Europe had the euro pushing higher last night, sending the US dollar index down 0.5% to 79.27. This provided incentive for gold bugs to reenter the game and gold jumped US$28.10 to US$1708.40/oz. The real “winner”, perhaps, was the Aussie dollar risk proxy. The Aussie is up around 1.8 cents from Friday to US$0.9878 and yesterday's combination of a strong local stock market and rising currency implied foreigners were in buying ahead of last night's western hemisphere sessions.
Base metals were similarly woken into action with copper up 2% and the others marking 1-3% rises.
For oil markets the focus has swung away from Europe now and more towards Iran. The US, UK and Canada are moving towards stricter sanctions against Iran on the nuclear issue and specifically in the energy market. Talk now is that the US may stop oil imports from Iran, and clearly that must have an impact on crude prices. Brent rose US$2.60 to US$109.00/bbl last night and West Texas rose US$1.18 to US$97.95/bbl.
The SPI Overnight was up 26 points or 0.6% after yesterday's solid move.
Last night in the US was “Cyber Monday”, which is basically the Black Friday equivalent for US online retailers. Why the online stores wait until Friday is out of the way before they start with their own Christmas deals and discounts is anyone's guess, but Wall Street will be looking for a follow-through on sales figures when the numbers are in.
In Australia we see our own October new homes sales numbers today but sellers are already disappointed about November. The last weekend in November is traditionally one of the biggest home sale weekends in the calendar but auction clearance rates were decidedly weak. Spare a thought for Toni Collette who bought a house in Bronte in Sydney for $4.5m in 2009 and couldn't sell it on Saturday for $3.5m.
The world is now looking towards the scheduled meeting of eurozone finance ministers beginning on Wednesday night to see whether anything more concrete might be delivered with regard to the fiscal union plan. And in late breaking news, ratings agency Fitch has confirmed its AAA rating for the US but put the country on negative watch.
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