Daily Market Reports | Jun 27 2011
By Greg Peel
On Friday night Moody's put sixteen Italian banks and two government institutions under review for a possible ratings downgrade. The news caused pandemonium on the Italian bourse as bank stocks tumbled, sparking trading halts in some listings. Italy's biggest bank, Unicredit, lost 5.5%.
If Moody's is suddenly on to it, then it's no doubt a situation which has been in place for a year or more. One is reminded that Moody's downgraded Australian banks in May based on their reliance on offshore funding – a situation which not only has been in place since 2008, but has already begun to ease. One might argue that the recent Greek scare has heightened the risk that offshore funding will become very costly once more, but then we went through this all a year ago as well. Since then Australian banks have felt comfortable returning provisions to their earnings results.
So there's very little point in paying the slightest bit of attention to what Moody's finally cottons on to, but unfortunately markets do. The agency also put Italy's sovereign debt on watch given public debt is 120% of GDP (Greece 150%).
The result was that any goodwill generated by the new EU-IMF five-year austerity package for Greece announced on Thursday night, which sparked a near 200 point turnaround in the Dow, was countered on Friday night. Moreover, Wall Street traders began to question whether the EU-IMF news was actually that monumental given Greece's immediate fate still lies with parliamentary approval being granted tomorrow night. Must have read my Overnight Report on Friday morning.
So down we went again, and once again the 200-day moving average on the S&P 500 came into focus. The average was at 1263.54 on Friday, so an ultimate close of 1268.45 provided an element of relief. But Wall Street is very nervous that the average could be breached at any moment. The S&P was down 1.2% on Friday, while the Dow was down 1.0% or 115 points. The Nasdaq, which had made a sterling comeback on Thursday night, fell 1.2%. A poorly received earnings report from Oracle sparked the selling.
There was some good news on the US economic data front nevertheless. The March quarter GDP result was revised up to 1.9% growth from 1.8% as expected, so finally we can put Q1 to bed. Growth of 1.9% is a big drop from the December quarter's 3.1% result however. May durable goods orders jumped a better than expected 1.9%, or 0.6% ex-transports, after falling 2.7% in April.
There was even some good news from across the pond, where Germany's closely watched IFO business sentiment index rose to 114.5 in June from 114.2 in May when economists had expected a fall to 113.5. If it weren't for Germany, imagine the mess Europe would really be in. But then euro weakness, based on Greece et al, is a fillip for Germany's export industry. It's just as well Europe has a dirty floating currency given China's currency is pegged and all of the dollar, pound and yen are dampened by QE. It's a manipulated race to the bottom, currency wise, for the world's biggest exporters. Hello Glenn? Bit of relief please Glenn?
On the contrasting news, the euro fell 0.7% on Friday. Euro down, Wall Street down – that's the way of things in 2011. The US dollar index rose 0.5% to 75.63 and, first the first time since 110, we can mark the end-New York Aussie below 105. It was trading at US$1.0495 on Saturday morning. Okay Glenn, maybe you can relax.
The S&P may not have breached the 200-day moving average but fear, as I noted, is heightened. The VIX volatility index jumped 9% on Friday to just over 21, while investors continued to sell gold for cash. It was down US$18.10 to US$1502.60/oz. Silver fell another 3%.
Base metals are once again in limbo in London as global markets ponder which way to turn, but on Friday night copper traded higher to close up 1%. A decent fall in Shanghai copper inventories had traders speculating as to whether China's seasonal destocking period is now over, meaning six months of restocking has begun. Or the metal might be headed to Japan for its reconstruction efforts.
Brent crude continued to fall on Friday in the wake of the IEA's Strategic Petroleum Reserve release – the 60m barrels of which will be eased out steadily – dropping US$1.74 to US$105.52/bbl. West Texas added US25c to US$91.26/bbl but “oil” (meaning Brent) is now down 16% from its May peak, and that can't be a bad thing for the global economy.
The SPI Overnight fell 41 points or 0.9%.
Lost in the wash on Wall Street on Friday night was that which had provided a timid boost to the ASX 200 in Friday's Asian session. In a piece for the London Financial Times, Chinese premier Wen Jiabao wrote, “There is concern as to whether China can rein in inflation and sustain its rapid development – my answer is an emphatic 'yes'. China has made capping prices the priority of macroeconomic regulation and introduced a host of targeted policies. These have worked. The overall price level is within a controllable range and is expected to drop steadily”.
These have worked? Not all economists share Wen's enthusiasm. There is nevertheless general agreement that China's headline inflation growth will begin to abate in the second half, but not before it marks over 6% (May 5.5%). Even China's own National Development and Reform Commission expects June's CPI to be higher than May's. Global concerns over a hard landing for a tightened Chinese economy have persisted since early 2010, as output data have eased while inflation has continued to rise. The Chinese property market bubble is causing ongoing discomfort, and recent talk of unregulated, off-balance sheet lending by Chinese banks has only added to the nervousness.
Were we to take Wen's statement to be a declaration of the end of Chinese tightening, then the world should be free to breathe a sigh of relief. However economists still expect one more interest rate rise from Beijing, the property bubble is hardly going to go away if tightening ceases, and given Chinese official data are always manipulated we never really know what to think anyway.
It is with this thought in mind we enter the last week of June, the last week of the quarter, and the last week of the Australian financial year. While there could be some argy-bargy among the tax sellers and window-dressers this week, macro concerns will continue to dominate. Primarily, it is still not certain that Greece can avoid default as it is yet to pass the new austerity package through parliament on Tuesday night and smooth passage is not a given. Nor is it is a given, nevertheless, that the IMF would stand idly by and simply let Greece default were the bill to fail. A rejection would certainly have stock markets tumbling across the globe to begin with however.
Then there's the small matter of the continually stalled Congressional debate over debt ceilings and budget cuts. Uncertainty on this front has been just as detrimental to US stock markets as eurozone uncertainty during June, but given an early August deadline the wrangling could yet go on for another month with no quarter given.
The next crunch period will begin on July 11 when Alcoa reports its June quarter result and kicks off the next US earnings season. Wall Street weakness is indicative of, among other things, expectations that current consensus earnings forecasts are too high and hence either results will disappoint or companies will be downgrading guidance between now and the season commencement. And there's also plenty of data to get through in the meantime.
Tonight in the US sees personal income and spending, and Tuesday brings the Case-Shiller house price index, the Richmond Fed manufacturing index, and the Conference Board consumer confidence measure. Wednesday it's pending home sales, Thursday it's the Chicago PMI and Friday brings construction spending, vehicle sales, and the Michigan Uni fortnightly consumer sentiment measure.
Beginning tonight, the US Treasury will auction US$99bn of two, five and seven-year notes at a time when the two-year yield is at an historic low. And Friday also sees the release of the US manufacturing PMI, following on from similar results from Australia, China, the eurozone and UK.
Australia's economic week doesn't begin until Thursday when we see private sector credit and the RP Data-Rismark house price index for May. On Friday it's the manufacturing PMI along with HIA new home sales.
Other releases to watch across the globe this week will be the final revision of the UK March quarter GDP, the eurozone CPI, and for a recovering Japan, May industrial production, vehicle production and the manufacturing PMI for June.
For further global economic release dates and local company events please refer to the FNArena Calendar.
