The Monday Report

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By Greg Peel

As I write this morning the finance ministers of the EU are still in heated debate over the issue of a proposed 500bn euro package to defend the embattled euro following a week of carnage on currency markets. A decision is due at any time. Whatever the outcome, one presumes at least some sort of package will be agreed upon.

What the EU finance ministers have nevertheless already agreed upon is an extension of the 50bn euro European Commission fund for balance of payments support for EU members to 110bn euro. The fund was originally created to support single-currency EU members outside the eurozone which total 11 to the eurozone's 16 members. However, that fund will now be extended to all EU members, allowing the likes of Greece, Portugal and Spain access alongside Latvia, Romania and Hungary for example, who have all tapped the fund to date.

This is a separate fund to the 110bn euro package already agreed upon by the EU and IMF to specifically rescue Greece. On Friday night the German parliament voted to support the rescue package, and Germany's 22bn euro contribution, thus removing a major potential stumbling block. Last night the IMF also approved its contribution.

But the cost of rescuing Greece told on Angela Merkel's government last night as voters in North Rhine-Westphalia, Germany's most populous state, delivered the Christian Democrats a defeat and loss of majority rule in the federal upper house. It is not a helpful result amidst trouble in Europe if the eurozone's most powerful member becomes bogged down with internal government wranglings at a time when leadership and expedience are needed.

One of the problems with the larger euro currency support fund proposal is that the UK is not interested, but the “no” vote from British Chancellor of the Exchequer Alistair Darling must be taken in the context of the Brown Labour government being the least likely to be in power once negotiations are completed in the three-way battle between Labour, the Tories and the Liberal Democrats. The UK election resulted in a hung parliament, and party leaders will now spend some time attempting to create alliances for a minority government framework.

The EU ministers have also put a lot more pressure on the ECB to do what it should have done on Thursday and extend its emergency bond buying beyond Greece. The ECB had earlier ended its quantitative easing program of providing loans to eurozone members and accepting member bonds as collateral, and President Trichet had later refused to re-open that program for one only member state as part of the Greek rescue. He has since back-flipped, just as he back-flipped under pressure in approving IMF involvement in the rescue package. One presumes he will now back-flip on this issue and extend the program to all eurozone members including Portugal and Spain for example. Then, hopefully, he will be quietly led out the back. Trichet is an anachronism who is just too far behind the curve to be anything more than dangerous at this point.

As for the UK, if it continues (governed by whoever) to reject a euro currency support fund it may come to rue the day. The pound is also under pressure, and for Darling to denounce the extensive budget deficits of the southern eurozone members would be a pot calling a kettle black.

News of the German passage of the proposed EU-IMF rescue package for Greece hit Wall Street on Friday night and helped to halt what looked like being another ugly session. The Dow was down 279 points from the opening bell but managed to bounce, although the final close of down 139 (1.3%) came after an afternoon drift-off. The S&P 500 closed down 1.5% to 1110.

Amidst the turmoil on Wall Street on Friday was the release of the April unemployment data which was both good and bad at the same time. The good news was that 290,000 new jobs were created in the US in April, a much higher figure than the 200,000 expected by economists. This figure supports recent evidence that the US economy is indeed beginning to recover steadily. But commentators have long warned of a “jobless recovery” because with new jobs comes new job seekers – those who had previously pulled out of unemployment benefits given total lack of work but are now returning into a supposedly brighter arena. Those returning in April forced the actual unemployment rate back up from 9.7% to 9.9% from whence it came.

The figure supports the view of many that unemployment will be a long-lagging problem even as the US economy gets back on its feet, and that means ongoing pressure on consumer spending and continuing mortgage delinquencies. 

The euro had began to bounce from its depths on Friday following news that something was finally being done, and as I now write it is showing a 2% jump to US$1.29. The US dollar index dropped back on Friday in response, allowing some stability in metals prices including a 2% jump for nickel and 4% for silver. Gold held steady at US$1208.00/oz.

Oil continues to cop the brunt of European fallout however, dropping another 2.6% or US$2.00 on Friday night to US$75.11/bbl.

The Aussie also managed to hold steady on Friday night at US$0.8876 but the SPI Overnight fell 49 points or 1.1%. However, markets this morning should be able to take heart in the European emergency efforts currently being rushed into being, and specifically in the euro bounce, such that Friday night's trade is old news. The Australian market should not, in theory, open too weak this morning.

And we may see a bounce on Wall Street tonight, although Wall Street is suffering from added uncertainty since Thursday's “fat finger” incident which regulators are still trying to get to the bottom of. It is not that anyone actually believes the Dow fell 1000 points, it's the lack of faith in the system that has investors running scared. On Friday the VIX volatility index jumped another 25% to 41.

Oh and our old Icelandic friend Volcano Unpronounceable kicked back into life over the weekend, once again forcing the closure of airports in Northern Europe.

In the context on the European situation it is hard to see how any regular economic data releases will have much impact this week. It's pretty quiet before Friday in the US with only wholesale inventories and the monthly trade balance and Treasury budgets being released. But Friday will bring business inventories, industrial production, retail sales and the Michigan Uni consumer confidence measure.

Of more importance in the US will be another round of Treasury bond auctions, this week seeing a total US$78bn of threes, tens and thirties being issued. Investors rushed into to Treasury bonds last week amidst the turmoil, sending the benchmark ten-year yield down to 3.43%. Only a month ago it was threatening to break up through 4%.

As if we needed any more sources of volatility China will also be in the spotlight this week, and realistically this is not the week we want to hear about tightening measures actually working. By the same token, if the numbers are strong, then further tightening measures will be anticipated. Across the week, with a concentration on Tuesday, we receive the monthly round of Chinese data including industrial production, retail sales, investment, PPI and CPI.

Tomorrow night is Budget night in Australia so there's another source of potential volatility, if the Henry debacle to date is any guide. We will also have ANZ job ads and the NAB business sentiment survey on Monday, home loan data on Wednesday and the unemployment figures on Thursday.

In focus on the local stock front will be the interim result from Incitec Pivot ((IPL)) today, a quarterly update from CommBank ((CBA)) on Wednesday along with a full-year result from CSR ((CSR)) with supposedly an update on the demerger, and the AMP ((AMP)) AGM on Thursday which may or may not mention the current AXA-AP ((AXA)) position. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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