Daily Market Reports | Sep 12 2011
By Greg Peel
Hopes of a resolution to Europe's debt crisis took a decisive blow on Friday night when senior economist Juergen Stark announced his resignation from the ECB executive board at year's end. Stark has found his position untenable given his disagreement with the current ECB policy of buying eurozone sovereign bonds to prop up struggling members – a disagreement he shares with senior German financial officials and many others around the zone.
The announcement comes ahead of ECB president Jean Claude-Trichet's approaching end of term on November 1, when he will be replaced by Mario Draghi. Draghi has previously warned Italy that it can't take ongoing ECB bond purchases for granted, and commentators suggest his succession may lead to the ECB reverting to a harder line on inflation, as is its sole mandate.
Friday also brought a Bloomberg report that German officials were preparing a plan to recapitalise German banks should their holdings of Greek sovereign debt become too overwhelming. Presently German banks are set to take a “haircut” on their holdings, meaning the actual positions will remain on their books for a longer period at lesser value. The news report implies Germany is readying for full Greek default – a conclusion long assumed inevitable by many in the market.
Global markets have come to expect disagreement and dithering from politicians in Europe over how to resolve the crisis, but this is the first time any public sign of insurmountable disagreement has emerged from the central bank. It does little to instill confidence, and thus on Friday night the response in world markets was decisive. The Dow fell 303 points or 2.7% and the S&P also fell 2.7%, to 1154.
Wall Street had previously been disappointed on the Thursday when another central banker – Ben Bernanke – supposedly failed to provide solace with a policy announcement as well, even though that announcement is not due until September 21. The European news also overshadowed President Obama's announced policy initiatives, whether or not they would have provided the US economy and thus stock market any hope.
Talk now is that despite another fear-driven sell-off there may just be a silver lining to Stark's resignation cloud. Since the Greek debt problem became an issue in early 2010 European officials have done little more than run around with silicone sealant, putty and gaffer tape, trying to hold things together while avoiding any tough or more effective decisions. The wake-up call from Stark, plus the ECB succession, may finally spur Europe into real action. In short, this may mean either letting the eurozone go or fixing it properly and swiftly. The EFSF still remains on the table, but it is common knowledge that fund would not be sufficient to save Italy.
Friday night was all about “risk off”, and you know it's a rush to liquidate into cash when the gold price falls under such circumstances. Gold dropped US$11.00 to US$1858.60/oz, aided by a 1.2% jump in the US dollar as the euro was carted. The US ten-year bond yield fell 7 basis points to an all-time low 1.91%. If it were a battle of the central banks, the world is putting a lot more faith in the Fed than it is in the ECB.
Base metals all fell 2-3%, Brent dropped US$1.78 to US$112.77/bbl and West Texas US$2.04 to US$87.01/bbl. The Aussie dropped a cent to US$1.0471 and the SPI Overnight lost 70 points or 1.7%.
Markets may well have been able to open across the globe today feeling at least a little less fearful were the meeting of the G7 finance ministers held over the weekend to have produced some soothing words and solidarity. But then G7 meetings have never resulted in anything concrete, and in typical fashion the best the ministers could come up with was that they were “committed to a strong and coordinated response to the challenges”.
And what might that be guys? Global markets could certainly do with some enlightenment at this point.
Europe will dominate trading in the week ahead, one presumes, with the potential for the August lows to be retested. Ahead of next week's all important Fed meeting, US data releases this week include the PPI and retail sales on Wednesday, the CPI and industrial production on Thursday, along with both the Empire State and Philadelphia Fed manufacturing indices, and the fortnightly consumer sentiment index on Friday. Friday also sees long term Treasury capital flows and it is the “quadruple witching” options expiry in stock, futures and options markets which can often spark volatility.
Australia's week begins today with the monthly trade balance, followed by the NAB business sentiment survey tomorrow along with the ABARE crop report for the winter harvest. Wednesday it's the Westpac consumer confidence survey along with June quarter dwelling commencements, and Thursday it's vehicle sales along with the RBA's September quarter bulletin.
There will be quite a few stocks going ex-dividend this week in Australia, with quite a lump today in particular. A reminder that the removal of dividends provides for a potentially misleading drop in stock prices, albeit we may not be able to tell today.
Rudi will appear on Sky Business on Thursday at noon and on BRR's Friday Afternoon Round Table on Friday (3pm). On Thursday evening he will present at UNSW in Sydney (6-8pm), titled "Nobody Knows, Everybody Speculates".
On yer Sammy.
For further global economic release dates and local company events please refer to the FNArena Calendar.
