Daily Market Reports | Dec 07 2011
By Greg Peel
The Dow closed up 53 points or 0.4% while the S&P gained 0.1% to 1258 and the Nasdaq lost 0.2%.
Aside from generating a lot of anger in Europe, Monday night's news that Standard & Poor's was putting all of the eurozone that isn't already on negative watch on negative watch has had little ongoing impact. A few months ago when markets were at the peak of nervousness such news might have caused a violently weak reaction, as was the case when the US was downgraded, but the US downgrade was quickly forgotten and last night's market activity suggests talk of downgrading Europe has been met with a shrug.
Let's face it – if every major economy in the world loses its AAA rating, what is an AAA rating? If AA+ is the new AAA, why not just rebase and call it AAA again. Credit is only relative after all, and there seems little point in suggesting the state of New South Wales, still trying to unravel years of endemic government corruption, could save the world because it happens to still have an AAA rating by virtue of not spending any money for the benefit of its citizens. Except on Tiffany of course (allegedly).
German and French stock markets were around a percent weaker last night having closed before the Financial Times bombshell hit in the New York session on Monday night. The Dow lost around 100 points on that news, and while last night's 50 point rally in the Dow didn't quite make up for it, there certainly is no panic about. Overriding any irrelevance emanating from now derided credit agencies is a growing hope Europe can and will sort itself out. No one expects the latest concepts being touted to be a quick fix, but sentiment will turn long before reality if markets believe reality will eventually catch up.
Most importantly, the yield on the Italian ten-year bond last night fell below 6%. A week ago the Italian government had to pay 7.5% to borrow from the market. Aside from bond markets liking what they hear about fiscal union in the eurozone and an ECB ready to embrace such a plan, the transition to Super Mario (Monti) as technocrat prime minister is also very much a part of apparent renewed faith.
Last night was another night of running things up the flagpole to see if anyone salutes, as far as Europe is concerned, ahead of the EU summit beginning Friday night. In particular, the German finance minister suggested that the establishment of the ESM can be brought forward to run concurrently with the EFSF.
The original plan was that the European Financial Stability Facility, which was established in a hurry when Greece was about to default, would be an interim, emergency fund of E440bn which would then be levered up to some greater amount. This would exist until 2013, when the European Stability Mechanism would be put in place to act as a permanent pool of funds there to keep the euro in check. Now the suggestion is that the ESM is brought forward to run side by side with the EFSF, and could be funded with, say E500bn. Then the ECB could lend to the ESM when necessary and all would be right with the world.
It all seems like semantics to me, or acronyms at least, and there was no mention of where this ESM money would come from. But Wall Street seemed to like it, as did euro traders, given both saw a bit of a kick when the news came through (via the Financial Times again) around 2pm New York (again). That put the Dow up over 100 points before it faded a bit to the close. But all we're really waiting for now is the ECB meeting on Thursday night, at which either a 25 or 50 basis point cut to the eurozone cash rate is expected, and the summit on Friday night.
As far as everything else was concerned, it was another quiet night. The euro rally left the US dollar index down a tad to 78.51, and the Aussie is down only 0.3% to US$1.0247 despite yesterday's RBA cut which was considered a 50/50 bet. Gold tracked the US dollar inversely and finished down US$6.30 to US$1729.70/oz.
Base metals were again happy to play the waiting game, and even nickel was little moved last night. West Texas crude was also unmoved at US$100.98/bbl, albeit Brent gained US$1.00 to US$110.81/bbl.
I haven't mentioned the US ten-year bond yield lately, which has slowly crept up to 2.09% as European yields have eased, and the VIX volatility index, which has quietly slipped under 30 and is hovering around 27 – not quite the comfort zone yet.
The SPI Overnight closed up 32 points or 0.8% last night, which seems to ask the question why was the ASX 200 so weak yesterday afternoon post the rate cut? Big sell order?
It's GDP day today in Australia, and yesterday's weaker than expected balance of payments data had economists madly revising down their estimates. Having previously expected growth of 1.0% after June's 1.2%, consensus is now down to around the 0.8% mark.
[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.]
