Daily Market Reports | Oct 04 2011
By Greg Peel
The Dow fell 258 points or 2.4%. The S&P fell 2.9% to close at 1099, breaching the earlier August intraday low of 1101. The Nasdaq dropped 3.3%.
The question is: might this really be good news in disguise?
The Australian market was hit hard yesterday on news Greece had failed to pass the budget deficit reduction test required to be eligible for the next tranche of bail-out funds. The Greek government projected a deficit of 8.5% of GDP for 2011 and 6.8% for 2012, below the limits set of 7.6% and 6.5% respectively. Greece has vowed to implement even further austerity measures but has noted that austerity measures to date are sending Greece into recession.
What's wrong with this picture?
What's wrong is the Catch-22 of it all. The more Greece cuts its budget, the greater its economic recession will be. The greater the recession, the less likely the revenue side of the budget will provide enough to gain ground against the expense side. The troika's response? You must cut more. Where does the spiral end? It ends with Greece in default, that's where.
So realistically the troika should give up on its fruitless attempts to prop up Greece. Officials will meet again tonight, but they will not be reaching a decision on whether or not to give Greece its next tranche until October 13. While this seems like yet another delay, it also suggests the troika's intention is to work on shoring up the European banking system first. Greece will simply go down without the bail-out money, implying a “disorderly” default. Better to give Greece the money anyway, buying time to arrange an “orderly” default. That means passing the EFSF through its final parliamentary votes and agreeing on a leverage plan, or Eurotarp.
The first alarm bell, wake-up call, call it what you will has now occurred, with Franco-Belgian financial group Dexia Capital calling an emergency board meeting last night as bankruptcy looms due to Greek debt exposure. The finance ministers of France and Belgium have also called an emergency meeting as a result. Financial markets are in a tail spin. But then perhaps this is exactly what we need. Perhaps a final end to all the dithering and bickering will come through sheer necessity.
Perhaps we are reaching the critical point.
Yesterday was global manufacturing PMI day, and results were mixed. We already knew China's PMI had risen (officially) to 51.2 in September from 50.9 in August, and we were none too surprised when Australia's PMI fell to 42.3 from 43.3, marking its eleventh fall in thirteen months. Nor could we be knocked down with a feather by the news the eurozone's PMI fell to 48.5 from 49.0.
More promisingly, the UK ticked back up into expansion at 51.1 from 49.4, and the US surprised with an increase to 51.6 from 50.6. They may be barely expansionary numbers, but the US number in particular tells a tale. Take Europe out of the equation and we are not looking at a US double-dip – very slow growth perhaps, but not recession. Sort out the problem once and for all in Europe, and we may not have to be fretting over JP Morgan's collated global manufacturing PMI. It fell to 49.9 in September from 50.6. That's only just a contraction, but it is the first contraction in this global number since June 2009.
I have previously noted that if Europe doesn't sort itself out in a hurry, the markets will do the sorting out instead. What we see now is short-side slamming of weaker stocks around the globe, which in the US case includes the investment banks for example and last night AMR, owner of American Airlines. Bankruptcy rumours have flowed. European bank stocks are simply being carted, suggesting little to no chance of private sector equity injections. The short-side will hammer away until there is nothing left to hammer.
On the other side of the equation investors continue to take flight into safe havens, and right now the US dollar is the lesser-of-the-evils safe haven of preference. The dollar index rose another 1.0% last night to 79.58 while the benchmark US ten-year bond yield fell 16 basis points to 1.76% as it continues to slide below 2008 levels. Last night was the first session for Operation Twist, and the thirty-year yield fell 19 basis points to 2.73%.
Gold is back in favour, bucking the US dollar influence in rising US$32.50 to US$1657.30/oz as the euro fell 1.2%. Even silver managed to rally 1.5%.
As China enters a three-day holiday, volumes on the LME have dried up. It's also LME Week this week, meaning a lot of talk around the bar and little action in the pits. Metals were all over the shop last night and bounced off intraday lows. Copper still finished down 1.7% from Friday but nickel is up 6%.
West Texas crude continues to be slammed in meaningless fashion since it breached support at US$80 on Friday, falling another US$2.58 or 3% to US$76.62/bbl. The world's benchmark crude's slide is more orderly, and last night Brent recovered to be down US$1.05 to US$101.71/bbl having briefly traded below the US$100 mark.
The Aussie is down 1.3% to US$0.9533 with a lot of the damage being done yesterday as foreigners again exited Aussie stocks.
The SPI Overnight closed down 46 points or 1.2%.
As noted, the S&P 500 closed at 1099, which is below the previous intraday close in August (US credit downgrade day). Technicians will now be slavering over a a more distinct breach suggesting another leg down. The way things are looking, it is hard to see anything but continued selling from here – a la 2008 – until Europe gets its act together. Even then, short-covering would likely give way to another cohort of dispirited investors getting out all together.
And additional noise is not helping. The UK is now considering a referendum on leaving the EU, albeit Prime Minister Cameron has sensibly said it won't be put until after the immediate issues in Europe are sorted. The Republican-led US Senate is putting a bill to impose import tariffs on countries which manipulate their currency, ie China. Talk about pot calling kettle. This blindly and ignorantly parochial bill will nevertheless not be passed in the House.
Yesterday TD Securities informed us that Australia's CPI inflation grew by 2.8% in September. Inflation is still growing but the rate of growth has slowed slightly, given the August number was 2.9%. There is not enough reason here for the RBA to cut today, and no one expects such. There is, however, a growing number of economists joining to school believing a cut is not far off. This view contradicts RBA rhetoric to date, which suggests that “on hold” is in itself a response to Europe and the local two-speed issue because a hike would otherwise be forthcoming. One gets the feeling the RBA is not looking to cut unless it joins in with a G20 coordinated monetary/fiscal emergency response as it did in 2008, in which case global financial markets would have to be facing collapse. But we learn more from Glenn Stevens' statement today.
We'll also see the August trade balance today, which will provide a further clue as to whether demand from China is slowing or not.
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