Daily Market Reports | Sep 06 2011
By Greg Peel
The German coalition government lost another regional election over the weekend in Angela Merkel's home province of Mecklenburg-Vorpommern. The Social Democrats took power and the Greens were elected to parliament for the first time in the state. The next federal election is not due until 2013 but regionally it is clear just what the German voters feel about Greek bail-outs and the EFSF. The federal parliament is yet to vote on the EFSF – a bill which must be passed by the parliaments of all EU members.
News that Greece had miserably failed to meet its 2011 bail-out targets on Friday, thus threatening the likelihood of a second, 2011 bail-out being organised, had European markets tumbling 3-4%. Little help was provided by the US jobs report. Then last night, bad turned to worse.
Aside from the German election, European banks have now been named in a US lawsuit being brought by the Federal Housing Finance Agency alleging misrepresentation of mortgage quality. This is the ongoing, and very slow, fallout from the toxic CDO debacle which launched the GFC. The lawsuit has already dogged US banks from Bank of America to Goldman Sachs, but last night HSBC fell 4%, SocGen 6%, Deutsche Bank and Barclays 8% and RBS 12%.
It was all too much for European stock indices, which underwent financial sector-led collapses. London was down 3.6%, France 4.7%, and Germany 5.3%.
There was little joy particularly in London, where the services PMI fell to 51.1 in August from 55.4. The eurozone equivalent slipped to 51.5 from 51.6. China also saw a pullback but at 57.6, down from 59.6, is still very much in expansion territory while the real standout was Australia, where our services PMI rose into expansion at 52.1 from 48.8. The result belied troubles in the large financial services sector, in which weak and lacklustre markets are leading to extensive planned staff cuts.
Indeed it was a good day for Australia all around yesterday, if it wasn't for the Yanks trashing our market. The 6.7% rise in June quarter corporate profits was about double expectation and has led, along with a better than expected 2.5% jump in inventory growth and a surprising 1.2% increase in sales volumes, to economists upgrading their GDP forecasts ahead of tomorrow's release to “at least 1.0%”. These results, along with the solid capex result from last week, rather put paid to any concept of a rate cut in the near future, with “on hold” sufficient right now to counter problems in the US and Europe, at least for now.
And speaking of those problems, the popular media seemed rather fixated with the poor US jobs report in explaining the big drop on the local bourse yesterday, with very little acknowledgment being granted the fact the eurozone may be on the cusp of dismantlement. The jobs report was a shocker, no doubt, but it does rather underscore the likelihood of a robust response from the Fed. The European bank fallout otherwise threatens global bank funding rates which would have been front of mind of those foreigners selling down our banks substantially yesterday, with foreign selling evidenced by the one cent fall in the Aussie to US$1.0545 despite the otherwise “hawkish” economic data releases.
The US dollar index has responded as expected, up 0.6% to 75.18 in Wall Street's absence last night, while other currencies were swapped for gold which was up US$16.10 to US$1900.30/oz to mark its first fix above 1900.
Base metals reacted unsurprisingly in London, falling 1-2%, while Brent crude dropped US$2.41 to US$109.92/bbl.
The SPI Overnight fell 52 points or 1.3%.
Were the ASX 200 to fall by that amount today, we would only be around 100 points above the August 8 low of 3986. As I have been saying for a month, markets rarely rally immediately from sharp falls. There's a lot to work through before they can, and right now there's an awful lot to work through with Europe providing a much bigger threat than the US. The US has the Fed while the ECB can do little more than buy individual eurozone member bonds and offer banks emergency loans, all of which is about to be challenged as unconstitutional under EU and sovereign laws.
All the while there is a rising groundswell of popular opposition to bail-outs in the strong economies such as Germany, and of being bailed out in the weak economies such as Greece. Politicians have their work cut out for them convincing all of Europe a eurozone, and the euro, should be protected in principle at all costs. The Greek government has obviously already decided its not worth it. Who's next?
[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]
