The Overnight Report: Lots Of Chatter, Nothing New Yet

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By Greg Peel

The Dow closed down 3 points to 13,271 while the S&P was flat at 1418 and the Nasdaq was flat.

As noted yesterday, the post-GFC closing highs for Wall Street posted on May 1 were 13,279 in the Dow and 1419 in the S&P500. A previous high always offers up a level of chart resistance, and often a market pushing through that level will require two or three initial failed attempts before a break-out. Alternatively, the level may provide only a double-top ahead of failure and a pullback.

We are unlikely to see either this week, barring anything out of left field. Last night the Dow fluctuated in a 46 point range, virtually all to the downside ahead of a flat close. For most in the northern hemisphere these past couple of weeks of anticipated headline silence has provided a perfect opportunity to take a summer break and quite justifiably so, given nothing has happened. Those traders still left trying to do something – anything – resemble a bunch of fidgety school children unable to sit still at assembly.

Having come to react to, and then rely on headlines these past three years, mostly out of Europe, markets are feeling deprived at present and need a fix. Journalists are no doubt feeling the same way. Last night a report in German magazine Der Spiegel suggested the ECB is planning to “cap” the bond yields of troubled eurozone members by committing to unlimited bond purchases at a level. This would have been wonderful news for global markets, were it accurate. The ECB quickly issued a statement suggesting it was “absolutely misleading to report on decisions that have not been taken and also on individual views that have not yet been discussed by the ECB's Governing Council, which will act strictly within its "mandate”.

As to exactly what that “mandate” is not entirely clear. One gets the impression the ECB mandate was hastily written a decade ago on the back of an envelope. The central bank had no qualms in buying distressed eurozone sovereign bonds last year when a crisis seemed imminent. Some argued that such purchases were “illegal” and not in the ECB mandate, others simply called such purchases a “moral hazard”, and the majority were much relieved by the central bank intervention. As we approach the September ECB meeting, the whole world is pricing in, at least to the extent it has so far, an announcement that the ECB will again buy bonds.

German chancellor Angela Merkel vaguely pledged her support for the ECB last week, which has been taken as tacit support for such action. However the Bundesbank remains opposed. Germany's central bank has been opposed right from the start on the basis that propping up the bonds of a few distressed eurozone members is unfair to those members not requiring support – hence the “moral hazard”. Yet by the same token, the Bundesbank is bitterly opposed to any talk of an aggregate “euro-bond” that the ECB could use to support the zone in all fairness, because it would mean Germany could effectively be stuck with debt it doesn't want.

The Bundesbank, one might argue, appears anti-euro altogether, given no rescue solution is satisfactory. Funny that, given the German economy depends entirely on a serially devalued German currency. It is the politicians who wish to hold the eurozone together, as does the ECB. Without the euro there would be no ECB.

So where does that leave us with regard to next month's ECB meeting? Well as the above issued statement implies, decisions have not yet been taken and views not yet discussed. We know that Spain must first approach the ECB for help before the ECB will do anything, and we know that whatever the ECB might wish to do will be dependent upon the later ruling in the German constitutional court. There is a possibility September may provide just as much “hang time” as August has.

And let's not forget the sideshow tents. The Greek leader will meet with the German leader on Friday, and the French leader on Saturday, then the Eurogroup president will travel to Athens and the German and French leaders will also meet. Greece wants a two-year extension and will probably get it. With much bigger issues to contend with, the euro heavyweights will probably be happy to give Greece a bag of lollies if it will just please [expletive deleted] off.

Currencies were all little moved last night as were gold and oil. Copper was down a percent for no apparent reason in an otherwise mixed metals market. The US ten-year bond yield has now stalled around the 1.8% mark. All overnight prices are listed in the FNArena Cockpit.

The SPI Overnight was up 3 points.

The minutes of the last RBA meeting are released today but there should be no surprises. Otherwise today will see another busy round of earnings reports with Amcor ((AMC)), Oil Search ((OSH)) and a handful of REITs among the many. The full list can be found on the FNArena Calendar.

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