The Overnight Report: Greece Weighs On Australia

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By Greg Peel

The Dow closed up 7 points or 0.1% while the S&P lost 0.1% to 1205 and the Nasdaq gained 0.2%.

It was a choppy session on Wall Street highlighted by mixed earnings results, but as Wall Street reflected on the previous quarter the world was watching Greece.

Officials from the EU and IMF finally reached Athens last night as the skies over Europe began to clear and flights tentatively resumed. The officials will now begin a session of talks with the Greek government which are expected to last two weeks. On the agenda will be (a) is the Greek government doing enough on its side to rein in its budget deficit and (b) is the 45bn euros currently earmarked for the (inevitable) Greek rescue enough? Many think it is not.

It is clear that when the framework of the EU and the eurozone was drawn up, no one ever contemplated putting in a rescue package clause. For starters, the ECB is dead against but resigned to IMF involvement as it undermines the perception of the EU as a solid bloc and the euro as an alternative reserve currency. Secondly, those EU nations prepared to offer Greece emergency loans (Germany and France mostly) must introduce new legislation in their own respective parliaments to do so. In Germany's case in particular, reluctance by Chancellor Merkel to commit to any rescue earlier in the proceedings, and her insistence on IMF support, could well be explained by parliamentary resistance to rescuing Greece and an upcoming provincial election that may see her party lose the balance of power.

Thus the EU has suggested it remains “committed” to rescuing its member colleague, but what if locally the rescue gets voted down?

Such considerations were no doubt behind yet another sell-off of Greek bonds last night, with the ten-year yield crossing 8% for the first time (post-euro). That's now 500 basis points over the German bond despite a common currency. As the EU, IMF and Greek government sit down for two weeks to discuss what must happen, looming is the maturity of 8.5bn of Greek bonds on May 19. This week Greece struggled to sell 2bn euro of three month bills.

And attention has once again swung to Portugal, which many in the market consider a Greece-in-waiting. Portugal's bond market has also resumed selling mode and the pattern appears ominously similar to Greece's a couple of months ago. One is reminded of the power of the market. Lehman Bros did not go down because it was insolvent. It went down because its counterparties, fearing potential insolvency, pulled their credit lines all at once thus ensuring insolvency. Bear Stearns was the smallest of the Big Five US investment banks, and Lehman the second smallest. The Treasury and Fed saved Bear Stearns but Lehman was deemed one costly rescue too many.

The end result is that while Wall Street dithered over earnings season, investors once again decided to rein some of their risk. Emerging markets are a popular risk capital destination, and by association so is Australia. The US dollar index is up only 0.2% to 81.22 but the Aussie is down 0.7% over 24 hours to US$0.9259.

The S&P 500 is down 0.2% but the SPI Overnight is down 0.7% or 35 points. BHP Billiton ((BHP)), also now facing its own corruption issues, was down 2.8% in London and Rio Tinto ((RIO)) followed suit.

Impeding the otherwise possible rise of the US dollar last night was both the re-opening of European airspace, which helped to hold the euro steady, and a positive surprise on British job numbers which sparked a rally in the pound. Not helping the Aussie either are the latest reports this morning that Qantas ((QAN)) planes remain firmly on the ground at Mascot. The “safest airline in the world” will not budge until it is absolutely sure the ash cloud poses no threat.

Sharp falls in the miners overnight had nothing to do with commodity prices. The relatively steady US dollar index allowed a gain of US$5.80 in gold to US$1146.20/oz. Base metals in London were mixed with aluminium down 1% but copper up 0.5% and nickel up 1.5%.

Oil should have been up last night given airlines will once again be sucking up avgas, but a jump in weekly crude and gasoline inventories led oil to a US17c fall to US$83.68/bbl for June delivery – the new front month as of today.

Further indication of risk retreat was provided by the US ten-year bond, which continues to pull back from its charge at 4% and is now down to 3.73% after losing another 6 basis points last night.

There was a lot of colour and movement in earnings results last night to keep Wall Street otherwise distracted. Apple had posted its strong result in the after-market on Tuesday and Morgan Stanley came in with a positive result before the opening bell. Boeing (Dow component) also surprised to the upside as did United Technologies (Dow).

But it was a weak night for the drug-makers. Abbott Laboratories posted a weak result and Gilead Sciences downgraded guidance. This led market leader Merck (Dow) lower in the session. Oil stocks fell along with the oil price and by later in the day financials, too, gave up gains despite the positive Morgan Stanley result.

This mixture assured a mixed close by 4pm, but then it was on for young and old with after-the-bell results.

Alleged coffee-maker Starbucks posted a very strong result and drug-maker AmGen's result was positive but guidance weak. Chip-maker Qualcomm and on-line auction house eBay also beat expectations, but both delivered surprisingly weak guidance and both are seeing their shares down 8% in the after-market.

Put it all together, and Wall Street is not looking for a strong opening tonight, further results and economic data notwithstanding. While the Street is getting the sort of upside to earnings expectations it was hoping for, it is not getting a follow-through of positive momentum from corporate guidance and general outlook. After an 80% rally there are plenty on the Street who believe now might be a nice time to take some profits. Next month is May.

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