Daily Market Reports | May 15 2012
By Greg Peel
The Dow closed down 125 points or 1.0% while the S&P lost 1.1% to 1338 and the Nasdaq dropped 1.1%.
All Greece's political parties will meet tonight in a last ditch effort to form a coalition government. Failure will mean Greece goes back to the polls next month. Little hope is being afforded a positive resolution given the clear austerity/no austerity rift between the leading contenders. The left-wing Syriza party is gaining in opinion poll popularity each day, with the party platform of remaining in the euro but abandoning austerity measures, a tempting scenario.
Would it were possible. The implication of such a policy is ultimately that EU members would have to hand over more bail-out funding to Greece, and that's just not going to happen. An exit from the eurozone thus seems the only likely outcome, except that no one quite knows how that would work. There exists neither precedent nor constitutional provision.
What is unlikely is Greece being ejected in a disorderly fashion. More probable is some kind of staged departure enacted in order to prevent severe volatility. However, while the EU and eurozone powers that be are working on a contingency plan as we speak, we have no idea at this stage what that might be. Meanwhile, as Greece dominates centre stage, President Hollande and Chancellor Merkel are yet to meet for the purpose of discussing a new direction for France, and by implication the rest of the more stable northern eurozone.
In the south, Spanish bond yields creep ever higher, now touching 6.25%.
In the face of uncertainty, the rest of the world has been quietly circling the wagons. Financial institutions across the globe have been easing out of their Greek and other eurozone exposures over the past couple of years, but in the immediate term we are once again looking at a flight to safety, in the form of German bonds, US bonds and cash. The latter implies the liquidation of gold positions – a trade enhanced by the gradually rising US dollar. As it has done many times in the past, gold will fall to a level before it is once again sought as a hedge against global monetary inflation.
Volumes on Wall Street have been very light these past weeks, including last night. The Dow opened down 159 points but quickly recovered to be only 50 points down at 2pm. Such movement has been the pattern of late, but most recently the midday recovery has been followed by renewed afternoon selling, as was the case last night. The selling is not panicked, but more of a quiet exit to the sidelines to watch the game from a safe vantage point.
The US ten-year bond yield fell 5bps last night to 1.78% – its lowest level since October. The US dollar index rose 0.5% to 80.69. The VIX volatility index, which has remained stubbornly within the complacency zone for some time, rose 10% to over 21.
Ring the bell, the Aussie has broken parity, falling 0.7% from Friday to US$0.9969. The extent of any ongoing retreat for the Aussie will be dependent on how long it takes before more stimulus is unleashed, particularly QE3. The rising greenback is nevertheless impacting directly on commodity prices, with the base metals falling mostly 1% last night except for copper, which was down 2%. Brent fell US$1.28 to US$110.98/bbl and West Texas fell US$1.92 to US$94.21/bbl.
There were other influences at play on Wall Street last night, although they took a back seat to Greece. It was the first session in which traders could respond to the JP Morgan US$2bn loss news and its shares were down 3%. There was also weak Chinese data to further mull over, with Beijing's 50bps RRR cut in the interim not providing any great comfort at this time.
The Australian market appeared to be in wait and see mode yesterday, as it went nowhere. Last night the SPI Overnight fell 31 points or 0.7%.
Catalysts for any global stock market rally are difficult to identify at present. The pertinent question is just how far markets might retreat on the latest European crisis. So far the damage has not been severe, with Wall Street in particular seeing any US assets, including stocks, as the “best of a bad bunch” bet at present. By tomorrow we should know whether Greece is going back to the polls, and tonight the first estimate of eurozone March quarter GDP is posted.
In Australia today we will learn more about the thinking behind the RBA's 50 point cut when the minutes of that meeting are released.
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