Daily Market Reports | Jul 24 2012
By Greg Peel
The Dow closed down 101 points or 0.9% while the S&P lost 0.9% to 1350 and the Nasdaq fell 1.2%.
A senior politician and member of the German government coalition partner suggested last night the Greek government should begin to pay half of its state salaries and pensions in drachma instead of euro as part of a gradual exit from the eurozone.
It's not his call, of course, and he wouldn't be the only European politician to be advocating a Greek exit. However, the next tranche of bail-out funds due for Greece needs to be ratified, as always, in the German parliament. Angela Merkel has warned that the parliament will vote against further hand-outs if Greece has not met its required targets. There will be no more compromise. Meanwhile, troika officials are preparing to visit Athens for their regular inspection of the books ahead of the release of the next tranche. Talk is that Greece will not measure up, and that the IMF will finally pull the plug.
Any private sector business knows it is usually best to give a bad debtor a bit of leeway initially to see if they can dig themselves out of a short-term hole, make good, and continue their custom. And every business knows there is a point at which, if there is no improvement, that further assistance means potentially throwing money away. The bad debtor is cut adrift and the debt written off. The IMF, which is funded by many nations but mostly by the US, appears to have reached that point. If the IMF withdraws it could be left to Europe to sort out its own affairs, but Merkel has indicated this would not be acceptable. It's time for Greece to go. Were it not for dithering politicians, Greece could have been shown the door in 2010 and we would have been saved two years of slow pain.
The new Greek government of uncomfortable coalition partners is nevertheless determined it can meet the requirements. Harsh cuts are planned.
Dead man walking.
On Wall Street, on Bridge Street and in The City, markets have largely stopped worrying about Greece. Aside from being a tedious broken record, Greece is no longer the main game and preparations were made long ago for what has for a long time been assumed – that eventually Greece will default. It is Spain that is the problem now – a far bigger economy. At least if the bail-out tap is turned off for Greece the money can be diverted, and it's looking increasingly like it will be needed.
Media reports suggests a second Spanish state – Murcia – is about to follow Valencia and request a bail-out from the Spanish government. The focus of Spanish assistance up to now has been on the banks, which are struggling with a property market crash that makes the US market look like a mild downturn. However, it appears the problem runs deeper than just bank loans – it runs to general fiscal issues for the sovereign. Last night the Spanish ten-year bond yield hit 7.5%. The slope is getting slipperier.
It has been suggested for some time now that there is plenty of money in the European rescue funds and the ECB has yet to really exert its power, and such suggestions have only led to frustration over the inaction of European politicians. It has also been suggested, nevertheless, that if Spain needed a bail-out there would not be enough left for even bigger Italy. The longer Europe dithers, the greater the chance of a complete fracture. The time has come to ditch Greece and stop the dominoes at Spain. The next EU summit is not until October, however, before then, it will probably be up to the ECB.
Suffice to say, last night's latest episode of European drama served only to intensify the risk-off trade across the globe. We saw Australia fall hard yesterday, the major European stock indices fell 2-3% and on the open the Dow was down nearly 250 points. More risk-off nevertheless heightens the chances of more QE (notwithstanding a little bit of occasional Fed intervention) and thus Wall Street spent the session grafting back to a less significant drop.
It was not a night for Wall Street to be focused on domestic data or earnings reports. As it was, the highlight result of the session – McDonalds – was mostly a disappointment given 40% of its revenues come from Europe and Europeans can no longer afford diabetes. The Chicago Fed national activity index nevertheless improved in June, rising to minus 0.15 from minus 0.48.
The focus was rather on the euro, and it fell again to push the US dollar index up another 0.3% to 83.75. Dollar strength became too much for USD gold, which fell US$7.30 to US$1576.70/oz. And neither could the world's preferred safe haven currency hang on, no doubt impacted by yesterday's front page economic forecasts. The Aussie is down 1.4% to US$1.0259.
Base metals all lost 1-2% but it was oil that really took a bath, fearing the global effects of a worsening European crisis. Brent fell US$3.57 to US$103.26/bbl and West Texas fell US$3.56 to US$88.27/bbl.
And it's official. The US ten-year bond yield traded at a new all-time low under 1.4% last night, before rebounding to close down 3bps to 1.43%. The VIX jumped 14%, but only to 18.6. If no one is holding stocks then there's no need to buy protection, and hence the VIX will not spike as it used to.
Given the local market had its big risk-off session yesterday, the SPI Overnight is down only 14 points or 0.3%.
It's “flash” day today, with HSBC's estimate of the Chinese manufacturing PMI due out in the local session and the eurozone and US equivalents out later tonight. On the US earnings front, Wall Street will be hoping to keep the doctor away.
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