Daily Market Reports | Apr 08 2010
By Greg Peel
The Dow closed down 72 points or 0.7% while the S&P lost 0.6% to 1182 and the Nasdaq fell 0.2%.
Last night the yield on the Greek ten-year bond hit 7.15% to mark its highest level in eleven years. The spread between equivalent Greek and German bonds now exceeds 400 basis points for two countries who share a common currency. It now costs more to insure Greek debt than Icelandic debt.
The latest blow-out follows news that Greece's GDP contracted in 2009 by a greater than expected 2%, forcing the government to revise up its budget deficit estimate from 12.7% to 12.9%. Greece is supposed to be applying austerity measures to reduce that deficit in a hurry.
With a big rollover of debt financing required in May it's hard to see how Greece is going to avoid the slippery slope to default. This would supposedly trigger the planned EU-IMF bail-out, but therein lie problems as well. The Greek government is baulking at IMF involvement, knowing full well that the first thing the IMF will do is to impose even harsher restrictions on spending. The Greek prime minister is very right to fear the civil unrest such an imposition will spark.
In the meantime, the EU is bickering over just what price should be imposed on Greece in a bail-out, meaning what interest rate to charge on emergency loans. If that rate is too high, the purpose is defeated. But cheap loans will effectively be financed by the taxpayers of Germany and France in particular, and once again electoral considerations must come to the fore. The German chancellor is already under heavy populist pressure not to provide Greece with any sort of assistance and her party's incumbency is on the line.
While the Parthenon crumbled, the world rushed back into US Treasuries. The demand for US$21bn of ten-years in last night's auction hit a record and the yield settled at 3.9%, well short of the supposedly crucial 4% mark. Foreign central banks bought 43% of the issue, up from a running average of 37%.
Why the sudden turnaround? Well the first simple answer is PPT, but we'll leave that one alone. Less sinister reasons include the fact that yields have recently jumped significantly, making bonds more attractive, particularly when the Fed has again hammered home the point that the cash rate will not be raised any time in the near future. Recent US economic data have been strong, which is the sort of reason one might buy a country's bonds in the first place as long as you were prepared to ignore a total debt to GDP ratio of 368%.
And an obvious reason is that the world is really now looking at a Europe potentially in tatters, and a euro which may not survive the experience.
Coming back to that US total debt figure (which includes all public and private borrowings), February consumer credit data released last night showed a fall of US$11.5bn or 5.6% to US$2.45trn when economists had expected a 0.5% increase. January had seen a rise of US$10.6bn (which was revised up last night from US$5bn to just hammer home the guess and giggle nature of a lot of these numbers).
Falling consumer credit is a two-edged sword. On the one hand, it is exactly the prescription for a nation up to its eyeballs in debt at both the public and private levels – a condition which brought about the GFC. It is what Obama wants America to do – spend less and export more. But on the other hand, US consumers represents 70% of the US economy and if they stop spending, there but for the grace of God goes the US economic recovery.
Adding to concern is the recent 30 basis point jump in US fixed mortgage rates which is once again reducing applications. In the meantime, another wave of Alt-A mortgage resets is about to hit (mortgage rate steps up from, say, 5% to 12%) as foreclosure numbers already begin to rise. US banks are now working hard to provide “work-outs” and for delinquent loans in order to avoid excess foreclosures, but all up the US housing market is coming under heavy pressure once more.
It is thus hardly a surprise that Ben Bernanke seems to have ignored recent positive data and warned Americans that the US economic recovery remains on track but still fragile. Hence a near zero cash rate for potentially a very long time. Adding to stock market weakness (and bond market strength) last night was dissent from the Kansas City Fed president who called for a jump to a 1% cash rate immediately to prevent another asset bubble.
The GFC was meant to be a debt wake-up call. US debt has done nothing but increase ever since.
Given many on Wall Street already think the stock market is overheated, it was little surprise the Dow fell 124 points by 3pm before late buying (PPT again? Oh leave it) came to the rescue.
It was a wild night for commodities. Another drop in the euro had the US dollar index pushing up 0.2% to 81.56 but if you're bailing out of your euro where do you go? The US dollar? The ten-year bond auction might suggest so but the other safe haven is back in form. Gold rallied US$15.50 to US$1149.50/oz last night, defying the dollar with buying out of Europe. Adding to the Eurozone's woes was a revised fourth quarter GDP – down to 0% growth from 0.1% growth.
Oil, on the other hand, wobbled with the stock market and another weekly increase in inventories and dropped US96c to US$85.88/bbl. Base metals nevertheless closed on small, mixed movements as the recent rallies took a breather.
The Aussie was little changed at US$0.9271.
The SPI Overnight fell 24 points or 0.5%.
I said yesterday I'd note if there was any change to the weak volumes of recent months. Having hovered around an average share turnover of 800m on the NYSE, last night volume jumped to 1.2bn.
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