The Monday Report

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By Greg Peel

What I should have been able to write this morning is that following the weekend's meetings we now have a ratified resolution plan for Europe the details of which are close to being finalised, all the G20 is in agreement and supportive, Greece is now effectively out of trouble and Italian issues have been brought into line. But unfortunately I can't.

What I have to write begins with the fact that right now Greece doesn't really have a government and it remains uncertain whether or not Greece will remain in the eurozone. Papandreou survived the confidence vote but offered to form an interim unity government of all parties with the specific intention of passing the required bills to bring the European plan into action, and to ensure ongoing bail-out funds. However, the main opposition party has put a spanner in what otherwise might be encouraging works by insisting Papandreou must resign and a snap election be held. Papandreaou is prepared to hold an election but not immediately – perhaps in March – and is prepared to stand down at that point. But he won't stand down unless he knows his country is out of danger. As we speak the Greek president is trying to broker some sort of deal between the parties.

In the meantime the weekend's G20 meeting achieved, as usual, nothing. Everyone has told Europe it must fix its problems, everyone is keen on leveraging up the EFSF to achieve that goal, but no one is prepared to provide any financial support. So it remains unknown at this point just how the EFSF might be leveraged up. There is support for an increase of funds to the IMF, with one of the lesser leaders driving that suggestion, and already the UK has suggested it would be prepared to double its IMF contribution. But IMF leader Christine Lagarde is not so keen on handing over more money to save Europe until such time as various issues can be resolved, and the intention of Gillard and others is that further IMF funding be provided in case of future problems, not of existing ones.

Right now the biggest problem may not even be Greece. Italian bond yields blew out further on Friday (more on that below) and they are coming dangerously close to the level that saw Ireland and Portugal tipping into required bail-out territory. But Italy is too big to be bailed out. No one can be sure as to whether Berlusconi is even sane, let alone prepared to be complicit in implementing necessary budget cuts, and the groundswell of protest from the Italian people over their own prime minister is growing.

Will the eurozone survive? What happens if the answer to that question is no? This is the level of uncertainty at which we find ourselves once again as we begin a new week. The situation is becoming ever more perilous and something will simply have to give. We might speculate that if the Greek opposition can take off its political hat long enough for the Greek piece of the resolution plan puzzle to be put in place, and Berlusconi either confirms his compliance, or leaves, or is ousted, then we might be able to pull back from the edge of the cliff. But still we only have “ifs”. 

On Friday night Wall Street fell from the open, and by mid morning the Dow was down 194 points. Realistically the session was simply shaping up to be another dominated by fears over Europe given the early money was on Papandreou not surviving the confidence vote. As to what that implied beyond the weekend was anyone's guess, but uncertainty is the enemy of financial markets.

Wall Street was also domestically focussed on Friday morning, specifically on the US jobs report for October. The numbers once again underlined the perception that there are lies, damned lies and US economic data. For although the report showed a disappointing 80,000 jobs added in the month compared to expectations of 90,000, the figures for the previous two months were revised upward.

August's initial figure of 57,000 jobs added was near doubled to 104,000 jobs added, while September's 103,000 was upgraded to 158,000 to imply the best jobs performance since April. While we'll need to wait for subsequent reports to find out by how much October's result will be revised, the net result of Friday's report is that the US unemployment rate has fallen to 9.0% from 9.1% when economists expected no change.

So the overall result can best be described as “mixed”, and the US government statisticians can best be described as a complete and utter laughing stock. Who will ever forget the massive downgrade to the previous US March quarter GDP number announced four months after the event?

Whether or not traders took the jobs report on board as being okay in the end or whether bargain hunters again had their rose-tinted European designer glasses on the Dow managed to recover for the rest of the session to the close. The Dow closed down 61 points or 0.5% while the S&P lost 0.6% to 1253. When the bell rang, the Greek confidence vote was still some hours away.

Movements in other markets were not substantial on Friday with the possible exception of oil. Brent crude rose another US$1.24 to US$111.97/bbl while West Texas added only US19c to US$94.26/bbl. The Brent-WTI spread has come in to around US$18 from an earlier peak of around US$26 when Libyan oil exports ceased. There seems to be general market expectation that as Libyan oil exports are slowly restored, the spread must slowly evaporate. However, this view ignores the fact the spread began to confound traders long before the Arab Spring as it blew out on scarce storage space being left at Cushing at the same time North Sea oil production is on the wane. Those situations have not changed.

The London Metals Exchange is still reeling from the collapse of global broker and LME member MF Global, which has forced remaining members to eye each other off suspiciously in anticipation of who might be next. Back in the US another MFG-style outfit in the form of Jefferies Group has seen its stock come under severe pressure on simple guilt by association assumptions of European debt positions. No one was believing declarations to the contrary from management, so on Friday night the broker took the unprecedented step of opening its proprietary trading books for all the world to see, thus confirming just what positions it did and didn't have. It's an extraordinary move tantamount to, say, the All Blacks handing out its play-book to all other finalists ahead of the World Cup. As we know from Lehman's experience, peer suspicion can see you illiquid long before reality can be used as a counter-claim.

Nickel rose 2% on Friday on lower inventories (which are down 37% in 2011) while all other metal were mixed on minimal moves. The US dollar index ended the session up 0.3% to 76.98, gold fell US$8.10 to US$1755.40/oz and the Aussie has slipped slightly to US$1.0393.

US bonds have seen renewed buying as investors keep a wary eye on Italian bond yields. With the Greek debacle still unresolved, the yield on the Italian ten-year rose to 6.38% on Friday as the US ten-year yield fell 5bps to 2.03%. Warning bells went off when Italy's yield hit 6% and with E40bn of Italy's E1.9trn of sovereign debt coming up for rollover shortly a yield of 7% would be enough to suggest default is a realistic possibility. 

The SPI Overnight fell 27 points or 0.6% and closed before the Greek vote.

It will be a quieter week economic data-wise in the US this week and while the September quarter earnings reports will keep coming they are beginning to thin out. The economic highlights will be wholesale trade on Wednesday, the monthly trade balance and Treasury budget on Thursday, and the fortnightly consumer sentiment report on Friday. The Treasury will auction three and ten-year notes on Tuesday and Wednesday and thirty-year bonds on Thursday.

China will provide a data dump on Wednesday of its inflation, industrial production and retail sales numbers followed by a trade balance result on Thursday. The world will be much relieved if the Chinese CPI shows further slowing of inflation growth.

Australian bank economists have their monthly moments in the sun this week with the release of the ANZ job ads series today, the NAB business confidence report tomorrow and the Westpac consumer confidence report on Wednesday. Today also sees the construction PMI, tomorrow the trade balance, and Wednesday housing finance and investment lending. On Thursday economists expect to see the unemployment rate tick up to 5.3% from last month's 5.2%.

November is the peak month for Australian corporate AGMs and there's plenty of them this week. Orica ((ORI)) will post its full-year result today, Westfield ((WDC)) will provide a quarterly update tomorrow, and on Wednesday CSR ((CSR)) and SP Ausnet ((SPN)) both post interim results. Qantas ((QAN)) will hold a no doubt well patronised Strategy Day on Wednesday and Santos ((STO)) will hold an Investor Seminar on Thursday.

Rudi will appear on Sky Business on Thursday at noon.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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