Daily Market Reports | Sep 05 2011
By Greg Peel
It was revealed on Friday that Greece has failed to meet even the trivial conditions of its 2011 E110bn loan from the EU-IMF let alone the fundamental conditions, the Wall Street Journal notes. Greece's budget deficit has blown out beyond targets, disposal of state assets has failed to meet revenue targets and even simple bureaucratic requirements have been neglected.
One might be tempted to suggest a level of intent here.
The breakdown in debt negotiations on Friday, in which Greece halted talks and postponed until later in the month, suggests the planned second bail-out package for Greece for 2012 will not eventuate. Many euro members are reluctant to contribute further anyway, and restructuring of Greek debt held by the private sector is unlikely to solve any problems, so realistically Greece is now headed to full default – just as many have assumed for the past two years.
Experts suggest the EU-IMF will at least hand over the next tranche of the 2011 bail-out fund this month, allowing time for European parliaments to approve the E500bn European Financial Stability Fund in time for the expected fall-out.
For almost two years the eurozone has attempted to keep a bankrupt Greece afloat in so doing avoid a fracturing of, and a serious loss of global confidence in, the common currency and the eurozone as a workable construct. No doubt it is clear to Greece that the choice between years of austerity and a stunted economy as a eurozone basket case or the sharp impact of a default and eurozone extrication is akin to the choice between the proverbial slow or fast methods of band-aid removing. Commentators often point to Russia, which defaulted in 1998 but recovered quickly from the impact to be one of the world's leading emerging markets. The reestablishment of a sharply devalued drachma would make many necessities very expensive for Greeks but would also quickly reinvigorate Greece's leading exports such as tourism, thus bringing in much needed foreign currency.
The problem in the meantime lies with the extent of Greek debt held by European banks and the reverberations a Greek default would cause around the European financial sector. On Friday the Greek stock index fell 4.5%, Italy 3.9%, France 3.6%, Germany 3.4% and the UK 2.4%.
One presumes the action on European markets would have been enough to send Wall Street rapidly south from its open as it was, but ahead of the bell on Friday it was revealed no jobs were added in the US in August when additions of 93,000 were expected. Wall Street had braced itself for a potentially bad result – Goldman Sachs forecasters only had a 25,000 expectation – but this was a shocker.
Wall Street fell sharply from the bell and then largely maintained that level for the rest of the session as offices began to clear for the Labor Day long weekend. The Dow finished down 253 points or 2.2% while the S&P lost 2.5% to 1173, smashing through support at 1200. Presumably Wall Street will now take QE3, in some way, shape or form, as a given, which may well have prevented a more protracted slide on Friday. The jobs number is a serious blow for President Obama who will front the American public on Thursday night (Friday morning AEST) to present his Administration's new fiscal policy strategy, which will centre around job creation.
The response in the US bond market on Friday reflected either a flight to safety or expectations of QE3 or both, as the ten-year yield plunged 15 basis points to 1.99%. Its GFC (and historical) low was 1.97%. Similarly gold jumped US$58.80 to US$1884.20/oz and silver jumped 4% despite a 0.2% gain in the US dollar index to 74.71, driven by the fall in the euro.
Base metals in London were all weaker on mixed movements while Brent crude lost US$1.96 to US$112.33/bbl and West Texas fell US$2.28 to US$86.65/bbl despite tropical storm Ted brewing in the Gulf.
The Aussie fell 0.8% to US$1.0645 and the SPI Overnight fell 63 points or 1.5%.
It's difficult to see Greece not now moving to default. There is no way Angela Merkel's government would survive on a platform of continuing to use German taxpayer funds to prop up the Greek economy for the sake of the eurozone. In a sense, Greece's apparent recalcitrance provides somewhat of an easy “out” of the building resentment across the zone to additional contributions for Greece and may make the EFSF ratification easier if it is seen to be for the protection of contributor states.
As to what happens now is the case in point. Has the world prepared itself sufficiently for the not-so-unsurprising outcome of a Greek default? Perhaps we will again see coordination between the major central banks of the world, providing wider implications for the Fed's QE3.
There are not many economic data releases in the US this week, with the Fed's Beige Book of economic activity on Wednesday following Tuesday's service sector PMI. The trade balance is due on Thursday and wholesale trade on Friday.
The European Central Bank will make its monthly policy announcement on Thursday which may take on a new tone, and the Bank of England is also due an update. The first revision of the eurozone June quarter GDP comes out on Tuesday following the global round of service sector PMIs on Monday (except the US).
Having closed the books on the August result season in Australia attention now turns to the June quarter GDP result due on Wednesday. After weather-led contraction in the March quarter, economists are expecting a return to growth with a 1.0% quarter on quarter gain, affecting 0.6% growth year on year. Ahead of the result there are still some Q2 numbers to be released, with company profits and inventories today and net exports and the current account tomorrow.
There is also a raft of monthly data due, beginning with the service sector PMI, ANZ job ads and the TD Securities inflation gauge today. Tuesday sees home loans and investment lending, Wednesday the construction sector PMI, and Thursday unemployment. On Tuesday the RBA makes a rate decision.
At this stage it is most likely the RBA will suggest it will be holding off on any thought of a rate rise for some time ahead. The central bank has suggested ongoing uncertainty in the US and Europe would prompt such a response. There is as yet no sign the RBA is considering a need to cut rates but then what transpires now in Europe may just alter that stance. The current cash rate of 4.25% is considered by the board to be “mildly restrictive”. Maybe one 25bps drop to a “neutral” position may yet be the tonic required before Christmas.
On that note, China will on Friday provide its monthly “data dump” of inflation, retail sales, industrial production and investment data and Japan will provide a revision to its June quarter GDP, which on first estimate was well received.
Australian investors should take note that there are a lot of stocks going ex-dividend this week, and particularly today, which can provide the illusion of a weak market. It's going to be weak today anyway, and then there's no Wall Street tonight.
This week FNArena's Market Insight program on the BRR network (brr.com.au) will break down the Australian result season and its implications. Tune in on Thursday at 4.30pm or check out the vodcast thereafter.
Your Editor Rudi will make his usual appearance on Lunch Money, Sky Business, on Thursday 12-1pm (prior to Market Insight). On Friday, Rudi will participate in BRR's Friday Afternoon Round Table (3pm).
For further global economic release dates and local company events please refer to the FNArena Calendar.
