The Overnight Report: Europe Shrugs

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By Greg Peel

I would have loved to have been writing something new and interesting in my first Overnight Report for 2012, but I'm not. Hello everyone – hope you had a good break.

It was after the close of European stock markets on Friday night that S&P announced its downgrade of nine European sovereigns suggesting that any market fallout would be saved for last night while the US markets were on a holiday. New York had not yet closed on Friday and was thus able to respond to the news – a moderate decline – while Australia's response yesterday seemed more troubled. However, the ASX 200 pretty much opened down and stayed there all day on minimal volume, which is not the stuff of panics.

By contrast, last night London stocks gained 0.4% (the UK is still AAA), France gained 0.9% and Germany gained 1.3%. Standard and who? The euro was steady, albeit quiet without the influence of New York trade.

Nicholas Sarkozy conducted a press conference last night with steam coming out of his ears as he batted away what to him were pointless questions about France's loss of its AAA. In one breath he joined other European officials in damning ratings agencies as being a problem rather than a solution and in another he pointed out that last night S&P rival Moody's had confirmed its AAA rating for France, albeit with a negative watch. But S&P had another arrow in its quiver.

After the European close last night S&P downgraded its rating of the European Financial Stability Facility to AA+ from AAA.

It had been the greatest concern in Europe that the S&P downgrades would increase the borrowing cost for the already struggling EFSF. Realistically, however, this is a perfunctory downgrade. It would make little sense if the EFSF were AAA when only one of its seventeen contributors (Germany) was itself AAA. Otherwise it would look like a CDO. It's a pity it's not a CDO because then the eurozone could have paid S&P to give it an AAA rating.

A lack of negative response to the initial downgrades in Europe last night, and a relatively muted response across the globe previously, reinforces the notion that not only were such downgrades expected but that the world has become rather ambivalent towards rating agencies and their role in life. Perhaps most telling on the latter issue was last night's auction of E8.6bn of French one-year bills which, at a settlement yield of 0.406%, cost the French government less than only a week ago when a similar auction cost 0.454% on a AAA rating. The auction affected a sigh of relief across Europe.

Last night Greece again confirmed it is committed to remaining in the eurozone. Germany is intent on Greece remaining as well, but the rest of the world is becoming impatient for Greece's ejection. The rest of the world is seeing such a move, followed by a big fence being erected around the remaining members, as a positive if for no other reason beyond the perception of ultimate inevitability. Greece's problems first came to light in early 2010. No one wants another year of painful, soul-destroying procrastination and painted on smiles from Europe. Do it and do it now, and let the rest of us get on with it.

With the US closed other markets were quiet. The US dollar index was unchanged at 81.45 and the Aussie little moved at US$1.0309. Gold was up a bit at US$1648.80/0z and the oils were off less than a dollar. Base metals were mixed in London.

The SPI Overnight is up 9 points.

Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) will both report quarterly production and sales today while all eyes will be on Beijing for the release of China's December quarter GDP result. Consensus has growth at 8.7% (yoy) down from September's 9.1%.
 

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