The Overnight Report: European Uncertainty Continues

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By Rudi Filapek-Vandyck

Never stop dreaming.

On this day when US financial markets remained closed in memory of Martin Luther King (January 15, 1929 – April 4, 1968) it seems but appropriate to pause for a few moments and to repeat the underlying message MLK had for each and everyone of us (see opening sentence).

As far as the lead-in for the Australian share market is concerned for Day Two of January's third week, European equities found it hard to move in either way while FX markets moved erratically with continued pressure for the euro as decisive action by Germany to combat the Union's intertwined debt problems remains elusive. Meanwhile, investors have taken note of the fact that Apple guru Steve Jobs is once again battling some health problems which is expected to weigh on the Apple share price at opening later today. Given the weight Apple shares represent on the Nasdaq these days, this might well prove a stumble block for technology indices overall.

As said above, US equity and bond markets were closed on Monday.

European equities closed mixed but with a bearish (cautious?) undertone. The German DAX closed the session broadly flat at 7078, the Euro Stoxx 50 fell 0.3% to 2911 while the FTSE 100 fell 0.3% to 5986.

Although the meeting of eurozone finance minsters garnered a lot of attention, history suggests the likelihood of these leaders reaching any new, strong agreement on dealing with the regions debt crisis probably isn't worth betting on. ECB’s President Trichet has suggested the European Financial Stability Fund (EFSF) -current assets E750bn- should be allowed to take over the purchase of the region’s government bonds from the ECB, but there seems to be little support for the idea. Commentators are pointing into the direction of Germany which seems rudderless and without any firm idea about what can and should be done.

Meanwhile, across the Big Pond, debate amongst Fed members continues. Last night, Philadelphia Fed Presdent Plosser – who becomes an FOMC voting member this year – argued US monetary policy may need to be tightened later in the year saying, “If economic growth in the US continues to gain traction…it might be time for us to begin thinking about how we do gradually take the foot off the accelerator.” Plosser also expressed further scepticism over the effectiveness of QE arguing that, “Monetary policy is not going to be able to speed up the adjustment in labour markets” and that such policies may create more rather than less instability.

Closer at home, floods continue to hurt Australia with the Wimmera River in the Victorian town of Horsham expected to peak today. According to media reports, around 40 towns have been hit by these Victorian floods. Meanwhile, estimates of the damages bill from the Queensland floods continue to climb. ANZ Bank economists believe the total rebuild effort could be in the order of $20bn. With the Commonwealth government likely to foot a big proportion of this rebuild, the 2012-13 budget surplus is, as expected, under significant threat, note the economists.

In absence of US investment funds, major currencies were mixed against the US dollar in "choppy" European and north American trade on Monday. The euro held between US$1.3245 and US$1.3340, ending trade around US$1.3295. The Aussie dollar rose from lows near US98.60c to US99.60c, before ending trade near US99.45c. And the Japanese yen held in a wide range from 82.35 yen per US dollar to JPY83.45, ending trade near JPY82.75.

US crude oil prices fell on Monday as OPEC oil ministers indicated that the market was well supplied with oil. In its monthly report, OPEC blamed recent price increases on investment demand for commodities and harsh winter weather across Europe and the US. The Nymex crude oil contract fell by US51c to US$91.03 a barrel while Brent crude fell by US87c to US$97.51 a barrel.

Base metal prices fell on the London Metal Exchange on Monday as investors digested the latest attempts by Chinese authorities to keep inflationary pressures in check. Lead lost 1.4% and aluminium lost 1.5% but other metals fell just 0.1-0.2%. But the gold price was largely stable with spot futures prices around US$1,361 an ounce.

The calendar today has both Rio Tinto ((RIO)) and Fortescue ((FMG)) scheduled for release of quarterly production figures.

SPI futures prior to opening suggest little movement should be expected at opening of the Australian share market at 10am today. SPI futures up 3 points at a few minutes before 8.30am.

Greg Peel is still on holidays and won't return until after Australia Day.

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