Daily Market Reports | Jan 25 2012
By Greg Peel
The Dow fell 33 points or 0.3% while the S&P lost 0.1% to 1314 and the Nasdaq gained 0.1%.
Private bondholders, represented by industry group the Institute for International Finance to which the European banks belong, say they will not accept a coupon below 4%. The EU finance ministers and the IMF say they won't accept a coupon above 3.5%. Right now, 50 basis points might as well be the Grand Canyon.
The coupon is the rate that will be charged on Greek bonds which will be restructured from short dates to long dates. On the borrowers' side, the low rate is required to put Greece on a fiscal path (into the distant and unknown future) that is “sustainable”. On the lenders' side, 3.5% represents a 70% haircut which is more than first assumed (it started at 25%, then went to 50%, before talk of 60%) and thus a bigger hit for European banks.
The word “sustainable” is a bit of a laugh considering the target of debt to GDP of 120% by 2020. We're reminded once more that Argentina defaulted on a ratio of 45%, and that Greeks have little idea of concepts such as “work” and “tax”. All the restructuring deal will do is keep a heroin addict alive with a bit more heroin.
Yet markets across the globe seem to be beyond caring at present. Six months ago, the rejection of a work-out deal for the eurozone would likely have had the Dow down 400 points, gold up US$50 and the VIX volatility index at 40. In 2012, the Dow is down 33, gold is down US$10 and the VIX is at 19. European bank shares were under pressure last night but the major indices fell only 0.5% or less.
Last week the World Bank came out with its gloom and doom predictions and we've had a litany of copy-cat threats ever since. Last cab off the rank traditionally is always the IMF, and true to form it came out last night with its own round of dooming and glooming. The IMF cut its 2012 world GDP growth forecast to 3.3%, down from its last estimate of 4.0%. The IMF is always so far behind the curve that the analysts have just discovered Nirvana (the band, not the Norse utopia). We note the World Bank's number was 2.5%, down from 3.6%, which is at least a bit more consistent with recent economist forecasts.
A common factor in all these warnings of hardship and pestilence is the word “if”, as in “if things turn bad in Europe again”. Gee – thanks for the heads up.
The Dow actually was down 95 points from the bell last night, which in today's terms is quite a big move. It immediately recovered half that ground nevertheless, and this despite some pretty uninspiring US earnings reports. Markets might currently be feeling complacent, but prior to US reporting season the general warning was that forecasts were too generous. We started fairly well with reasonable results from the banks, but as we move through the industrials that warning seems to be proving accurate. Last night Dow components Travelers, Verizon, Johnson & Johnson and even McDonalds all disappointed, with only DuPont seeing a slight share price rise on the day.
There was good news, however, in the form of the Richmond Fed manufacturing index. It leapt to 12 in January from 3 in December to mark the highest level since last April. There was similar good news out earlier from across the pond, in the form of the early estimate of the eurozone composite purchasing mangers' index (aggregates the manufacturing and service PMIs). It rose to 50.4 from the official 48.3 last month, implying a return to expansion.
The euro was off only slightly on the Greek news, sending the US dollar index up 0.1% to 79.85. The Aussie is off half a cent to US$1.0484 ahead of today's December quarter CPI release, although every economist and his dog believes the RBA will cut again and yet the Aussie can't get under parity. It's all about carry trades – borrow low in the US, Japan, the UK etc and lend high to the Australian government. You'll get a higher coupon here than in Greece!
The stronger greenback was enough to end gold's run for the time being, sparking a US$9.70 fall to US$1666.30/oz. Base metal moves were all minimal except for zinc this time, which decided to rally 3%. Oil was off about US50c in both counts.
The SPI Overnight was up 4 points.
Since the bell on Wall Street we've had earnings reports from Apple and Yahoo. Both were underwhelming, leading to very slight after-market gains. President Obama will deliver his State of the Union address at 1pm today Sydney time. Which is why Rudi's appearance on Sky Business's Lunch Money has been cancelled this morning (don't worry, he'll be back on next week on Thursday).
Ahead of that we have the aforementioned local CPI and tonight the Fed will make a “rate decision” and provide a press conference.
There will be no Overnight Report tomorrow but despite the fact most of you are planning a four-day weekend, there will be a two-day wrap Overnight Report on Friday.
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