The Overnight Report: Germany To The Rescue?

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By Greg Peel

The Dow rose 150 points or 1.5% to 10,058. The S&P added 1.3% to 1070 and the Nasdaq managed 1.2%.

European Central Bank president Jean-Claude Trichet is said to be rushing back from the "secret" meeting of central bankers in Sydney (it would appear the conspiracy theorists are making something rather sinister out of the RBA's birthday party) to meet with the European Union and Germany's finance ministry in order to organise a more specific Greek rescue package. Speculation hit the wires overnight that Germany was preparing to provide some sort of debt guarantee that would snuff out concerns of Greek default and hopefully end the potential for European contagion.

The ECB is merely the keeper of the euro – it is not within the central bank's mandate to singularly “rescue” one member and nor is it permitted to do so. It is up to the EU to sort out the problems that are threatening the ever tenuous harmony of the trading bloc. But the EU itself is merely a collection of member states, and thus any rescue package requires the action of one or more of those states. Enter Germany, the EU's largest economy and the only one with a serious budget surplus.

The frugal Germans are seriously reluctant to bail out the profligate Greeks. Greece has brought the problem upon itself, so why should Germany carry the can? That's the German point of view. Germany's still trying to deal with its own GFC hangover. However, the rumour mill was churning last night as Chancellor Merkel called a meeting of her coalition partners for tonight in order to address the situation.

Despite denials from the German finance ministry that any specific package had been or would be mandated, Wall Street happily jumped to a positive conclusion and began buying everything that has been heavily sold these past couple of weeks.

Helping the renewed positive mood was a Morgan Stanley upgrade for global economic bellwether Caterpillar and very positive same-store sales results for Coca Cola and McDonald's. While sales were limp locally, let's just say China and India have a whole new world of obesity to discover over the next few years. All three are Dow stocks, incidentally.

German denials nevertheless tempered the rally in the afternoon such that lunch time's height of up 230 in the Dow was pared back. Even if Germany does go ahead and make guarantees, how far can it go? Greece and Portugal only have small economies but Spain's economy is half as large again as that of Australia. Such thoughts were worrying traders. Once again, Wall Street was reminded that Paulson and Bernanke bailed out Bear Stearns but when it came to Lehman, it was one bail-out too far.

Clearly the pressure is being brought to bear on Germany, who realistically would rather just let Greece go but cannot afford to shatter the EU and the euro-zone at this stage of the game. Merkel will know full well that any rescue is potentially electorally suicidal, and will now have some very fast talking to do in parliament.

The effect of the German rumours was nevertheless to turn everything around.

The US dollar index fell more than half a percent to 79.82 as the euro surged. The Aussie also surged, up more than a cent to US$0.8782.

Oil shot up US$1.86 to US$73.75/bbl, pushed along by news another big cold front is set to roll over the US east coast. Gold jumped US$13.10 to US$1076.70/oz.

Base metals had a bumper day, with aluminium and nickel up 2%, copper and tin up 3%, lead up 4% and zinc up 5%.

Lost in the wash was a surprisingly weak US wholesale inventory number. Economists had expected wholesale inventories to rise by 0.5% in December and wholesale sales to surge 1.0%, but inventories dropped 0.8% and sales rose only 0.5%. The first estimation of US fourth quarter GDP came out at 5.7% and was reportedly driven by inventory restocking. We will now await the first revision of that number.

One might have thought that all the sovereign debt fears in Europe would send buyers rushing into the latest US Treasury auction, but while short term US debt remains the safe haven of choice, longer term debt – for which deficit-driven inflation fears are held – is not exactly flying off the shelves. Demand for the US$40bn of three-year Treasury notes on offer last night was muted, and only 51.2% were taken on by foreign central banks compared to an average of 54% over the last three sales.

The yield on the US ten-year subsequently rose 8 basis points 3.64%. Tonight sees US$25bn of ten-years on offer, and Thursday night US$16bn of thirty-years.

The SPI Overnight rose 40 points or 0.9%.

Stand by today for results from Billabong ((BBG)), BHP Billiton ((BHP)), Boral ((BLD)), Commonwealth Bank ((CBA)), Computershare ((CPU)) and Stockland ((SGP)). There will also be Australian home loan and investment lending numbers released, plus an update on consumer confidence.

Further a-field, China is due to release various economic data some time over the next three days, including its trade balance, money supply and new loans issued. Let us not forget that while Europe is in the spotlight, both China and India are staring into the face of inflation spikes, the containment of which would mean more monetary tightening.

Please note that while FNArena will continue to publish an Overnight Report on Friday night's markets, that report will no longer be available on Saturday morning. Such a service was a GFC special, and from now on the Friday Overnight Report will be incorporated as part of The Week Ahead, published as always on Monday morning before the open in Australia.

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