Daily Market Reports | Sep 20 2011
By Greg Peel
The Dow closed down 108 points or 0.9% while the S&P lost 1.0% to 1204 and the Nasdaq fell 0.4%.
A down-session on Wall Street was a given last night following the disappointing EU finance ministers' meeting over the weekend, on the assumption nothing new transpired in the meantime. Daily swings on global stock markets at present have nothing to do with valuations and everything to do with each new episode of In Europe Tonight. A 1.4% drop on the Australian market yesterday and coincident drops in other Asian centres set the scene.
At the epicentre, market falls from the open were swift and unforgiving and there was no new news prior to closing bells to prevent Germany and France finishing down 3% and London 2%. Wall Street opened with the Dow down 250 points as the buyers stood aside. Indices were able to stabilise at that level nevertheless as Wall Street awaited the next piece of news. There was yet another phone hook-up underway between the Greek government and the “troika” of the ECB-EU-IMF in regard to whether or not Greece would be given its next tranche of bail-out funds.
Late in the afternoon session, and very late into the night in Europe, the troika announced it had not yet reached an agreement. This may have been bad news except that the announcement suggested an agreement was very close and that final discussions would continue tonight. In short, Greece needs to implement even more stringent austerity measures in order to qualify for the next hand-out – more stringent than those which sparked rioting in the streets of Athens some months ago. Aside from raising revenues through tax increases and asset sales, Greece needs to cut government spending. This requires one very difficult policy to be implemented, and that is the sacking of some 100,000 Greek public sector workers.
Rioting in the streets? Methinks we ain't seen nothing yet.
The news of a resolution being close was enough to remove the sellers for the moment and the subsequent short-covering rally – as much a feature of current Wall Street trade as the opening plunge – took the Dow right back to be only 65 points down. A bout of late selling came in at the close.
To recap: The Greek government will run out of money at the end of October and not be able to pay its public sector unless it receives the next tranche of the 2011 bail-out fund. This will not constitute default per se – that will come in December when the next big sovereign debt rollover is due if there is no definitive resolution prior. EU members have yet to agree to and vote on the 2012 bail-out fund required to get Greece through another year as that is currently being held up by the Finnish insistence on cash collateral in exchange for its contribution.
In the meantime, only five eurozone parliaments have voted in the E440bn EFSF with another seven votes to come in the next month or so. Both Austria and Germany have delayed their votes to a later date than previously set. It is accepted, nonetheless, that while E440bn could cover defaults in Greece, Portugal, Ireland and Spain it is not enough to save Italy were it to go down. A default even by Greece alone would render many European banks insolvent were there no preemptive recapitalisation plan. A bigger EFSF has been proposed, as has public capital injections into banks, or alternatively there is a call for the creation of a blanket eurobond and greater fiscal coordination. Various proposal are at odds with each other, and no proposal meets with pan-European approval.
Europe, at present, could not agree on the colour of an orange. There would be various proposals put forward as to what colour an orange should be, there would visceral disagreement with such proposals, twenty-seven EU member parliaments would need to vote on the colour of an orange knowing opposition parties are against a pan-European colour for an orange, and decisions would be postponed. European officials would put out a statement one day suggesting resolution on the colour of an orange is close and the next day put out another statement saying agreement is far from being reached. One or more ministers or officials would make emphatic statements that it is “ridiculous” to suggest that the colour of an orange is “orange” and why is there all this fuss?
Markets are still hanging on to a general assumption that resolution will be achieved in Europe. Unfortunately the most likely resolution at this stage is yet another stop-gap one, such that we'll all be back here again same time next year. Just as Big Brother seemed to go on forever, so will In Europe Tonight. The best solution would be a definitive one, but a definitive solution could only come about, it would seem, if Europe were about to or had begun to completely collapse. In other words, we might be in a situation now in which the best result would be near-disaster and further significant plunges in global stock indices ahead of the ultimate bottom, just as was the case in 2008-09.
It was a “risk off” night last night, most clearly indicated by the US$34.00 drop in gold to US$1778.50/oz as investors again liquidated positions in order to cover, or be ready to cover, margin calls on other assets. It also appeared last night that metal traders and speculators have lost patience, evident in a 4% plunge in copper in London. Other metals fell 2%.
Commodity price falls were assisted by a 0.7% gain in the US dollar index to 77.08 as the Aussie fell 1.3% to US$1.0224. Traders rushed US Treasuries once more, with the yield on the benchmark ten-year falling 13 basis points to 1.94%. That's a serious move ahead of the Fed policy announcement due on Wednesday night.
Brent crude rolled over into the November delivery contract last night and in so doing lost around US$3 on the adjustment. It then fell US$3.08 to US$109.14/bbl, while the West Texas October delivery contract fell US$2.02 to US$85.94/bbl. For those who understand such things, the fundamentals behind the Brent-WTI pricing gap means Brent is in backwardation and WTI is in contango.
Given the local market is running ahead of Wall Street, futures traders looked at yesterday's 1.4% fall in the ASX 200 and last night's 1.0% fall in the S&P 500 and decided the SPI Overnight should be 11 points or 0.3% higher.
Today we see the minutes of the September RBA meeting in which everyone will be looking for any hint the RBA would consider cutting rates. Tomorrow night we will finally know what the Fed has planned for its new monetary policy initiative.
But overriding all will be subsequent episodes of In Europe Tonight.
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