Daily Market Reports | Jun 12 2012
By Greg Peel
Wall Street posted a strong performance on Friday night to end the best week of the year for US stocks. The Dow gained 93 points, the S&P added 0.8% to 1328 and the Nasdaq jumped 1.0%. Just before I departed for a two-week break Wall Street had posted its worst week for 2012.
The rock and roll ride in between has been all about Spain, with the focus shifting in the vacuum preceding the next Greek election. Friday night's trade, and the gains accrued earlier in the week, were all about anticipation that Spain would join Greece, Ireland and Portugal on the list of eurozone bail-outs. The eurozone finance ministers were holding a phone hook-up on Saturday to discuss what needed to be done. Urgency was required given next weekend's Greek election remains an unknown quantity.
The good news is that the eurozone has offered Spain a line of credit of up to E100bn, which is a greater amount than expected. Rarely in these past few years has European action actually exceeded expectations. Details were a tad scant on the weekend, but there was a general feeling global markets would breathe a sigh of relief last night.
And indeed relief was evident when the Dow opened 96 points higher from last night's opening bell. But that's where it ended. Wall Street did nothing but trade lower thereafter, resulting in the Dow closing down 142 points (a 238 point fall from the opening high) or 1.1% while the S&P lost 1.3% to 1308 and the Nasdaq finished 1.7% lower. Additional weakness in the tech sector was provided by an underwhelming product update from Apple.
The fall was a result of the bad news evident within the Spanish bail-out. The money is specifically earmarked to shore up Spain's crumbling banks and while the Spanish government may not need the full E100bn – it will conduct a bank audit with results due later this month – the bottom line is the money is nothing more than another loan to Spain at a time when Spain is struggling to pay its existing debts. The funds will come from either the EFSF or ESM and those bodies lend only on the basis of being first in line for repayment.
In other words, Spanish bank bondholders and everybody in between down to equity holders have shuffled one rung down the subordination ladder with this new source of rescue funds. The idea is that with the Spanish banks now backstopped, there will be no “run” and the banks can look to raise capital. The problem is, who will buy the capital of a bank that has just had more debt piled upon debt in a country bulging with unserviceable debt?
Think what you like about Ben Bernanke and former US Treasury secretary Hank Paulson (and maybe you even have to throw George W. in there) but when the crisis hit in late 2008 the US government pumped hundreds of billions directly in US bank equity. It did not hand out more senior debt. By early 2009 the US banks were back on their feet and in the interim most of that equity has been returned. By contrast, Europe's politicians have again indicated that the eurozone crisis is beyond their intellectual capacity. Money printing may be controversial, but for God sake use it effectively. Throwing more debt at an institution heading for bankruptcy is a practice that would not occur in the private sector.
No doubt European officials will be scratching their heads right now. Why did the market not react positively? Perhaps most telling is the Spanish ten-year bond rate. It opened 17 points lower last night but closed 23 points higher by session end, at 6.47%.
The euro underwent a similar about-face, leaving the US dollar index up 0.2% to 82.62. Gold is relatively steady at US$1596.10/oz, but the Aussie has dropped half a cent to US$0.9863. The US ten-year bond yield has fallen 4bps to 1.60% and the VIX is up 11% to over 23.
The weekend's spotlight was clearly on Spain and hence somewhat lost in the wash of market response was Saturday's monthly data dump from Beijing. The Chinese data were perhaps largely ignored last night on the basis the results were to a great extent neither here nor there.
Chinese inflation fell to 3.0% in May, down from 3.4% in April and below a 3.2% expectation. This is mostly good news as it allows further room for Beijing to ease despite last week's long anticipated cut in interest rates. The rest of the data were not as bad as feared, yet sufficient to confirm the current sluggishness of the Chinese economy. Expectations now are for further reductions in the bank reserve requirement ratio (RRR) ahead of one or maybe two more interest rate cuts over the rest of the year.
Industrial production rose by 9.6%, which also fell below expectation. The result marks two consecutive months of sub 10% production growth, which has not happened for three years. Meanwhile, the 13.8% rise in retail sales was the lowest in six years (if you exclude the New Year months). There was a bounce-back in vehicle sales, but home appliance sales actually fell 0.5% having shown 15.4% growth in May last year.
Perhaps most telling was the 1.4% drop in the producer price index, which indicates an easing of final demand. Trade balance numbers indicate imports grew by only 5.5% and exports by 7.1%. Both numbers are below Beijing's target levels of 10% for each.
At the end of the day the Chinese numbers are not particularly helpful. They are not indicating any great return to strength following successive cuts to Beijing's RRR, but they are not so bad as to spark panic, although worse numbers would have provided a hurry-up for the government and that in itself could have been construed as positive.
For that is the world in which we currently live.
Throwing Spain and China at commodity markets last night left us with an initial rally in base metals that waned towards the close, providing for mixed results. Oil was more definitive, given Brent fell US$2.16 to US$97.73/bbl and West Texas fell US$2.60 to US$81.50/bbl, albeit there was some confusion over remarks made by OPEC after its meeting on the weekend. The Saudi minister was quoted as suggesting OPEC would increase, not decrease, production in the face of falling prices but he then claimed to have been taken out of context.
The SPI Overnight fell 45 points or 1.1%.
So we will begin this shortened week in Australia on a weak note, and then no doubt spend the rest of the week worrying about the Greek election due on Sunday. I'm so glad to be back.
Today in Australia brings the the monthly NAB business confidence survey along with lending finance, while tomorrow sees Westpac's consumer confidence survey and the ABARES crop report for the June quarter. That's about it locally, although the RBNZ will make a rate decision across the ditch on Thursday.
Aside from whatever else may transpire in Europe this week, the UK will release its industrial production numbers tonight and the eurozone on Wednesday, while both will release trade balances on Friday. Japan will release its IP result on Thursday and the US will follow on Friday.
Prior to that the US will see retail sales and PPI on Wednesday, CPI on Thursday, and the Empire State manufacturing index and fortnightly consumer sentiment index on Friday.
More important than any of this week's US economic releases will be the following week's Fed meeting and press conference on the Wednesday. One presumes the Fed will by then have some indication of either a result or a stalemate in Greece and depending on what transpires the market will be breathlessly anticipating some word on our old favourite, QE3.
For further global economic release dates and local company events please refer to the FNArena Calendar.
