Daily Market Reports | May 21 2012
By Greg Peel
German chancellor Angela Merkel has all but conceded to the new push in Europe to promote jobs and growth while keeping a tight rein on budgets. Merkel found herself isolated at the G8 meeting in her lone stance to maintain strict fiscal discipline, while pointing out the obvious that growth and tight budgets are not particularly compatible. But with President Obama pledging his support for new French president Francois Hollande's growth agenda, Merkel made qualified suggestions of areas where growth might be achieved, such as in infrastructure and communications development.
That was about all that came out of the weekend's Camp David meeting, other than another pledge from the Europeans that they would do “whatever it takes” to save the eurozone. They've being saying that for three years now without, one would have to say, much success. The G8 also urged Greece to remain in the eurozone but to heed to the necessary requirements. With Syriza set to win the next election, this is a hollow statement. Merkel has now suggested a Greek referendum on “in or out” would be sensible to answer the question once and for all.
Wall Street started Friday's session cautiously and largely drifted sideways during the morning ahead of the weekend meeting. There was, of course, somewhat of a sideshow to consider nevertheless – the listing of Facebook.
When the Facebook listing was touted earlier in the year, back when Wall Street was feeling confident before the European elections, numbers up to triple digits were being thrown around for the limited free-float. Having listed at US$38ps for the IPO, Facebook shares quickly shot up to US$45ps, but then someone rang a bell. The share price spent the rest of the session drifting lower before closing a mere tick over the offer price. The champagne failed to fizz, and many a potential “stag” trader was crestfallen. The sceptics, on the other hand, were vindicated.
One can speculate as to whether PE common sense won out over misguided exuberance, or whether the timing of the listing was simply unfortunate given the current uncertainty. One feels, however, that as Facebook drifted away in the afternoon, so did all of Wall Street. A gloom had descended. The Dow closed down 73 points or 0.6% while the S&P lost 0.7% to 1295, thus breaching another psychological level. The Nasdaq – home of Facebook and other social media hopefuls – dropped 1.2%.
The Dow has now fallen 12 of 13 sessions, and the last time that happened it was 1974. The Dow is down 6.4% for the month including 3.5% for last week, while the more bank-weighted S&P was down 4.3% last week. With the distraction of Facebook now out of the way, we are entering a potential void ahead of the next Greek election on (to be confirmed) June 17.
The ECB and European Commission are working furiously behind the scenes on contingency plans for a Greek exit, as well they might given we have a good idea what the election result will be. It doesn't really matter who wins, as the Greeks have generally elected to thumb their noses at austerity, assuming for some reason they have the right to.
So what happens this week? We'll be yet again keeping an eye out for headlines from Europe. Has the market corrected far enough to account for potential Greek exit mayhem? The answer my friend is blowing in thew wind. I'm sticking to my guns though, for what my opinion is worth. I believe a Greek exit will be so popular across Europe that it will actually lessen the risk of contagion. Keeping Greece in with more funds will be worse, because then everyone will put their hand up. And with Greece gone, all those earmarked bail-out funds can be redirected into ring-fencing the remaining zone. Add a new zone-wide fiscal policy of pro-growth into the mix, and even the average Spaniard might start to feel a little more hopeful.
The other option is more years of uncertainty and torture.
A funny thing happened to the US dollar on Friday – it went down. Call it squaring ahead of the G8 summit or simply an inevitable profit-taking drop after 14 days of up-moves – not seen since 1985 – but the dollar index fell 0.5% to 81.08. QE3 anticipation is another reason why the US dollar's upside must at some point seem limited.
The turnaround didn't help the Aussie however, which is down another 0.7% to US$0.9822 after another big Australian stock market rout on Friday. It did help gold, which gained another US$17.20 to US$1591.40/oz. Base metals were mixed on unsubstantial moves, and while West Texas crude lost a further US$1.08 to US$91.48/bbl, Brent rose US13c to US$107.14/bbl.
The US ten-year bond yield remained steady at 1.70%, but the VIX is now over 25.
The SPI Overnight was down 8 points or 0.2%.
Wall Street will at least have some economic data to contemplate this week as it drifts through limbo, beginning tonight with the Chicago Fed national activity index. Tuesday brings existing home sales and the Richmond Fed manufacturing index, Wednesday new home sales and the FHFA house price index, and Thursday durable goods. The news on the US housing front is looking a little more positive now, which may provide Wall Street with a modicum of hope.
Thursday sees HSBC release its flash estimate of China's May manufacturing PMI and also the eurozone's estimate of the May composite (manufacturing and services) PMI, along with the influential German IFO business climate survey and a revision of the UK's March quarter GDP result.
It's quiet on the Australian economic front, with Wednesday bringing two separate leading economic index releases.
On the local stock front, James Hardie ((JHX)) reports its full-year result today and tomorrow Graincorp ((GNC)) delivers its interim before holding an investor day on Thursday.
Rudi remains on overseas assignment this week and as such will not be making any media appearances.
For further global economic release dates and local company events please refer to the FNArena Calendar.
