Daily Market Reports | May 08 2012
By Greg Peel
The Dow closed down 29 points or 0.2% while the S&P closed flat at 1369 and the Nasdaq gained less than 0.1%.
I posed the question yesterday as to whether markets had already priced in the weekend's European election results by Friday. I also posed the question last week as to whether markets might actually perceive a stimulus-based response to the euro-crisis as more promising than an austerity-based response. On the strength of Australia's capitulation yesterday, the answer would be no to both. However last night's trade offshore paints a different picture.
The Australian market perhaps has some excuse, given the final piece of the PMI jigsaw proved to be even worse than the other two. The manufacturing sector, service sector and construction sector PMIs (referred to in Oz as “performance of”) together represent the non-mining economy, and scores of 43, 39 and 34 paint a picture of serious recession. Construction is the real shocker but then it has been for some time.
Yesterday was not really about local economic data however. It was more about omigod here we go again. The expectation was that the European and US markets would completely tank last night, despite the fact the election results were pretty clear by Friday night's session. They did give it a shot first up, with the French market, for example, falling 2% on the open, the euro trading under US$1.30, and the Dow falling over 60 points. But that was all. France turned around to post a 1.7% gain for the session, the euro recovered, and Wall Street came back to square. All compared to a 2.2% drop in Australia.
Had the world been enormously worried about the European elections, global markets would have been a lot lower before the weekend just on poll results. They were clearly lower, but not by any means panicked. I suggest there are three points to consider:
Firstly, those outside Europe have never been particularly comfortable with the plan to reduce sovereign debt through austerity. Cutting budgets may reduce the need to borrow, but revenues are still needed to actually reduce existing debt levels. Cut revenues through forced recession and all one ends up doing is going nowhere fast. Spend your way out of recession with monetary stimulus and economic growth will provide for faster debt reduction. As for monetary inflation, that risk seems a long way off.
Secondly, and in combination with the first point, capitalists love “funny money”. Wall Street has returned to pre-Lehman levels because of QE1, QE2 and anticipation of QE3. Although QE3 is yet to be used, the ECB's LTRO has been the proxy in the interim. With Mario Draghi at the helm, or Euro-Ben as I call him, markets can be as happy as Linus with his blanket. There now appears to be a coordinated attitude of “whatever it takes” between the central banks across the Atlantic.
Thirdly, the markets would really just like Greece to [insert expletive] off. There is no sympathy for this individually insignificant and corrupt economy. Exit the euro? Oh God yes please. An exit might cause some short-term global pain, but at least we'd end this two-year lingering torture in one last bout of volatility. Everyone is really, really “over” Europe.
Of course those on the other side of the fence despair that in printing more money the world is just creating more debt it will never get rid of, and the problem will still be around for our children and grandchildren. It's a fair point, but markets don't tend to look that far into the future. Unless you're Warren Buffet of course, who last night indicated he had been buying on Friday and would buy again on any dip because equities are quite simply a valuable long term asset. Buffet has been given some credit for encouraging Wall Street to turn around.
Have Hollande and the Greek mismash of parties which look like not being able to form a coalition increased global volatility yet again, right on cue for the northern summer as usual? Well if they have, you wouldn't know it from the market responses last night. The US dollar index was up only 0.1% to 79.60. The US ten-year bond yield did not move from 1.88%. Gold fell US$3.60 to US$1638.70/oz. And that supposed global risk proxy – the Aussie dollar – is 0.2% higher from Friday night at US$1.0197.
The direct measure of Wall Street volatility – the VIX – fell last night by 1% to under 19.
And it goes on. West Texas crude traded as low as US$95 in electronic trading before the Nymex opened in New York but closed down only US55c at US$97.94/bbl. Brent was down all of US2c to US$113.16/oz. Base metals were spared given the public holiday in the UK.
The SPI Overnight is up 32 points or 0.8%.
So what happens now? That's a good one, but it seems there's little panic. Hollande will now meet Merkel who no doubt has seen the writing on the pan-European wall and has been considering just what compromise can be reached. At the end of the day, the people have spoken. The Greeks have only another couple of days to form a coalition or they go back and do it all again. For some bizarre reason just about all Greek parties, other than those simply touting an exit from the euro, intend to “renegotiate” the bail-out and bond deals. Will you tell them or will I?
Assuming Australia recovers at least some of the lost ground today, we can perhaps return focus to domestic matters in the interim. We have the budget tonight of course, and we have our trade balance and a whole lot of data from China this week to consider, including trade balance, inflation, industrial production and retail sales.
Thereafter we can only be spectators at another no doubt lengthy round of euro-dithering, dallying, debating and finally deciding.
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