The Overnight Report: Back From The Greek Brink

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 By Greg Peel

The Dow closed up 9 points or 0.1% while the S&P added 0.2% to 1208 and the Nasdaq jumped 0.6%.

It was very much a turnaround story on Wall Street last night. In Wednesday's session it seemed as if the US had missed the memo about Greece as it gaily went about assessing local earnings reports, but 1% falls in Australia, Asia and then in Europe again last night provided the wake-up call. The Dow was down 108 points from the opening bell.

It has clearly reached the stage when humanity suggests someone puts Greece out of its misery, in form of triggering the bail-out. Overnight ratings agency Moody's cut Greece's credit rating from A3 to A2 and warned of more downgrades to come. The European statistics agency Eurostat also questioned Greece's accounting – again – and revised up its estimate of government debt to GDP in 2009 from 12.7% to 13.6%. The Greek government blamed a recent negative revision of 2009 GDP, but Eurostat cited the dubious classification of some public entities and the recording of off-market swaps as the basis of the discrepancy.

Funny – isn't Melbourne the second or third biggest Greek city?

The result of the news was to send the Greek ten-year bond out to a yield of 8.7%, now 570 basis points above the equivalent German bond. In less than a month Greece has to roll over 8.5bn euros worth of bonds. The EU is offering 5% on its emergency loans.

The blow-out also impacted on Portugal, which saw its bonds trading at a 50 basis point higher yield. While Europe's major stock indices were down around 1% last night, the Spanish index fell 2%, the Portuguese index 3% and the Greek index 4%.

After the round of Eurostat revisions, 2009 debt-to-GDP ratios sit at Greece on 13.6%, Portugal 9.4%, Spain 11.2% and Italy 5.3%. The winner is still Ireland with 14.3%, but perhaps the one to watch out for is the UK on 11.5%.

Public sector workers walked of the job in Greece last night in another round of strikes protesting newly applied austerity measures, which include cuts to public sector wages. The Greek government has targeted a four percentage point reduction in that debt ratio by year-end but says its pay cuts and tax increases should amount to a six percentage point reduction. The government is making no excuses other than that old political chestnut “don't blame this government – we inherited the problem from the last government”.

The euro sank to an eleven month low against the US dollar last night at US$1.3288. The US dollar index jumped 0.5% to 81.66. The yen was also weaker against the dollar after ratings agency Fitch declared the Japanese government “one of the most indebted in the world” and threatened a downgrade.

Not that the ratings agency have one iota of credibility anymore, having preformed similar downgrades on global investment banks in 2008 for holding swathes of the very same credit derivatives the ratings agencies had originally conspired to rate AAA. But that private sector debt burden has not been reduced or the problem solved, it has simply been transformed into public sector debt. Early 2010 is beginning to look spookily like early 2008.

It has not been often recently that base metals in London have all moved in concert but last night saw uniform drops of 1-2% as investors shunned risk and the US dollar rose. Gold fell US$4.90 to US$1141.30/oz. Oil managed to hold its own, rising US2c to US$83.70/bbl.

But we last left the Dow sitting at down 108, so why did it recover all of that loss by the end of the session?

Firstly, officials from the EU came out and said there was no risk of contagion in Europe and everything is under control. You would have thought Wall Street had learnt by now that if statements such as these have to be made it means the opposite is true.

Secondly, President Obama made a speech in New York pre-empting the passage of the financial reform bill through Congress. Wall Street held its breath expecting the worse, but a typically measured speech from Obama suggesting the Administration did not want to stymie free markets but simply guard against excesses and abuse allayed fears. Obama suggested that a market with such simple safeguards is “more free”. Wall Street had been prepared for much worse.

Then came the economic data. New jobless claims fell last week for the first time in three weeks by 24,000. The resulting level of 456,000 claims seasonally adjusted is down 27% from this time last year but steady in 2010. As such it does not appear as if the US unemployment rate will fall significantly any time soon.

Existing home sales rose 6.8% in March, slightly ahead of expectation and the first increase since November. November's results reflected the expiry of the initial government subsidy but the subsidy has since been extended and impacted on the March figures.

The Federal Housing Finance Association said mean house prices fell 0.2% in February following a 0.6% fall in January. The FHFA index had tried to stabilise in 2009 but is now back in a downward trend.

The headline producer price index rose 0.7% in March against expectations of 0.5%. The core PPI (ex food & energy) nevertheless rose only 0.1% and the year-on-year core rate fell from 1.0% in February to 0.9% in March, again ratifying the Fed's suggestion that inflation is low and thus rates can remain low.

Outside of house prices, the economic data were mostly positive.

We then move to earnings results, which focused in the day-session on telco Verizon (Dow) and foreigners Nokia and Credit Suisse. Verizon's earnings beat the Street but a lower new customer count sent its shares down 1%. Both Nokia and Credit Suisse posted weak results.

The Aussie was slightly higher last night at US$0.9273 while the SPI Overnight rose 4 points.

We now turn to earnings results issued after the closing bell.

On-line retailer Amazon had a “beat” on a 68% profit increase but subdued guidance has its shares down 6% in the after-market. Software giant Microsoft (Dow) just managed to beat the Street but despite high hopes for the upcoming release of Office 2010, Wall Street wanted more. Its shares are down 3%.

Credit card pedlar American Express (Dow) by contrast had a good “beat” in doubling its profits and its shares are up 1.5% in the after-market. But the star was Capital One Financial which posted earnings per share of US$1.40 against the Street's US58c. Its shares are up 6.5%.

Mixed results there.

The US sees new home sales and durable goods orders tonight and the UK will make its first estimate of march quarter GDP. RBA chairman Glenn Stevens will speak today and Woodside ((WPL)) and Lihir ((LGL)) will post production reports.

Please note that Monday is a public holiday in Australia for Anzac Day so expect a bumper Monday Report (on Tuesday) next week featuring two Wall Street sessions and a preview of the week ahead.

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