Daily Market Reports | Mar 26 2010
By Greg Peel
The Dow finished up 5 points while the S&P fell 0.2% to 1165 and the Nasdaq slipped less than 0.1%. The Dow had been up 119 points at lunchtime to 10,955 at which point the S&P hit 1180.
The focus of attention last night was, understandably, on Europe as the European Union members gathered to discuss a bail-out plan for Greece. The late mail on that plan is that the EU will tip in two-thirds of a rescue plan (more detail will no doubt emerge after the second session tonight) and the IMF will contribute one third. US local market news aside, it was this long awaited semblance of an actual plan that spurred Wall Street into buying stocks with enthusiasm in the morning.
Then along came European Central Bank president Jean-Claude Trichet with a big bucket of cold water. Not a participant in the EU meeting, Trichet's response to the early rescue plan news was to state on French television that the plan was “very, very bad”.
Trichet's comments immediately sent a previously stronger euro tumbling, which sent a previously weaker US dollar index surging, which killed off commodities and sent stocks crashing back to their starting points. However, it is not difficult to see where Trichet is coming from.
The problem is we have a “eurozone” of sixteen nations which have a single currency, a controlling central bank, no central bond, sixteen sovereign bonds, sixteen treasury departments, sixteen fiscal agendas, sixteen separate electorates and a spread of ethnicity. This eurozone then sits within a 27-member EU, in which eleven nations have chosen not to join the single currency, and therefore have another eleven different agendas of their own.
Those agendas are all purely political and controlled by elected officials. The ECB on the other hand has no political agenda and is merely charged with the task of protecting the euro. A decade ago, the euro was created to gather together the EU trading bloc nations (the EU being the modern version of the old Common Market) under one currency, to provide not only a powerful unified economy to challenge the hegemony of the US economy but also to offer an alternative reserve currency.
The problems began when only 16 of 27 EU nations opted in to the euro, but I believe my summation above suggests that a unified and powerful “eurozone” was always going to be a big ask anyway. Trichet's problem is that we are only one decade into the existence of the euro and already its members are running off to the IMF for help. Aspirants to reserve currency status cannot go running off to the IMF – an organisation created and controlled by the US – at the first sign of trouble. Such a solution completely undermines any notion of that which Europe was trying to create and promote to the world, and that which Jean-Claude Trichet is employed to protect.
It's now the EU versus the ECB, and specifically Merkel versus Trichet. Germany's problem is that a Greek bail-out using taxpayer funds would be electoral suicide. That's why Merkel brought in the IMF. France was initially against IMF interference, but as it happens the greatest exposure to Greek debt lies with French banks. Thus Sarkozy has now fallen into line with Merkel.
These are the two dominant economies within the eurozone. There's not going to be a lot of bleating coming out of members such as Italy, Spain, Portugal and Ireland for example, who are sitting at the meeting thinking “there but for the grace of God – so far”.
If one wished to forecast a conclusion, it is that more than ever before the euro, as a currency, as a concept, is on the ropes.
One wonders whether Trichet's US counterpart, Ben Bernanke, is sitting across the Atlantic right now experiencing an element of schadenfreude. Because right now, it is argued, the only thing holding up a deficit-ravaged US dollar is euro weakness.
Stock market bulls on Wall Street are arguing defiantly that the US dollar is strong because the US economy is strong, and the US economy's strength can be measured by the rapid return to not only improving corporate earnings but, more importantly, improving revenues. Wall Street was boosted this morning, for example, by a very good sales result from Best Buy – sort of a US Harvey Norman – as consumers rushed in to buy the latest flat-screen TVs and notebook computers. In the meantime, Nasdaq-listed technology stocks such as your Apples, Oracles, Ciscos and Qualcoms are going from strength to strength as well.
But one is hard pressed to find a similar argument outside the US. US Treasury yields are on the rise and it's not because of US economic strength in anticipation of a CPI inflation-led Fed rate rise, foreigners argue. It is because the US deficit is taking its toll and demand for US sovereign debt is falling. The dollar is rising (euro weakness aside) on anticipation the Fed will need to raise rates not to calm an overheated economy but simply to attract desperately needed offshore funding.
Such dollar strength, under such a scenario, is at risk of proving fleeting.
Last night saw another auction of US Treasuries, this time US$32bn of seven-year notes. Demand was again lacklustre, and foreign central banks bought 42% of the issue compared to a running average of 50%. The trend of foreign participation continues to track lower. The benchmark ten-year yield had jumped another five basis points to 3.90% by the close of the stock market.
Many observers consider a breach of the 4% level in the tens a potential inflexion point. It is potentially the point at which the US dollar will no longer rise on expectation of a Fed rate rise, but collapse on fear of the reason behind a Fed rate rise, or a lack of rise.
To put things into perspective, the Australian ten-year bond is currently yielding 5.76% which is 176 basis points above the RBA cash rate of 4.00% and what one might consider suggests a healthily positive yield curve. The US equivalent bond is yielding 3.90% or up to 390 basis points above the Fed cash rate. The Fed is keeping the cash rate low in fear of killing off US economic growth which it sees presently as sluggish at best. The US ten-year yield is representing inflation fear – and that is not the sort of CPI inflation derived from a strong economy. It is monetary inflation derived from the printing press.
For the US, Greece is a wonderful global distraction.
Commodity prices traded in typical inverse fashion to the US dollar last night, and thus enjoyed rollercoasters of their own. The LME was closing just as Trichet was fuming and the Treasury bond auction was underway, so base metals prices are showing reasonable moves to the upside which, all things being equal, would reverse at the open tonight (but there will no doubt be more news from Europe).
Gold and oil were both higher at lunch time but gold finished up US$7.30 to US$1093.00/oz and oil lost US8c to US$80.53/bbl.
The Aussie was steady at US$0.9077 on a 0.3% rise in the US dollar index to 82.18, and the SPI Overnight lost 2 points.
The RBA's Glenn Stevens is making a speech today, so it will be interesting to hear his take on the rest of the world.
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