Daily Market Reports | Nov 14 2011
By Greg Peel
Sunday brought us the news that Italian prime minister Silvio Berlusconi had resigned his bizarre reign as promised following the passage of Italy's strict new austerity bill through the lower house. Italians celebrated in the streets. This morning we have learnt European Commission representative and economist Mario Monti has been asked to form a technocrat government to oversee the implementation of the new measures until such time as an election is called.
These developments in Italy came on the heels of near identical developments in Greece, where prime minister George Papandreou's resignation has made way for another technocrat government led by former ECB vice president Lucas Papademos. The markets will rest easier now two of the eurozone's most troubled members are in the hands of leaders with proven economic credentials and not in the hands of self-serving politicians. In the meantime many in Europe are now bemoaning the fact that their nation is being ruled by the markets and not by elected representatives of the people.
The passage of the budget bill through the Italian lower house, by a margin of 380 to 26, followed successful passage through the Italian senate on Friday. Global markets were prepared on Friday to assume what ultimately came to be on the weekend. The UK stock market rose 2%, and France and Germany rose 3%, while in New York the Dow closed up 259 points or 2.2% and the S&P gained 2.0% to 1263. Once again we have endured several sessions of extreme headline-driven volatility but effectively only jogged on the spot – a theme for 2011. On Friday the S&P 500 scraped back into the black for the year. That's a lot of grey hairs for eleven months of going nowhere.
US bond markets were closed on Friday for the Veterans Day holiday but Italy's weren't, providing for the most important global price movement in the session. The yield on the Italian ten-year bond has now fallen to 6.76% having reached danger territory at 7.25% last week. Spain is back to a more comfortable 6.05%. Greece is sitting at 27% which factors in discounting for the expected 50% haircut and by comparison, Germany's equivalent rate is 1.8%.
The euro was the other influential winner on the day, rising 1.4% to send the US dollar index down 1.0% to 76.94. It was a “risk on” session, so the Aussie gained 1.3 cents to US$1.0277 and gold fell US$26.40 to US$1787.30/oz.
Adding to the “risk on” mood was the result of Michigan Uni's fortnightly US consumer confidence measure, which jumped to a better than expected 64.2 from the previous reading of 60.9. The result was cheered but there's a bit of straw-clutching going on here when you consider a “confident” consumer should poll 90. Another positive driver on Friday, nevertheless, came from the quarterly result of the happiest Dow component in the world – Walt Disney – which rose 6% in the session.
It was all enough to give commodities a kick, with copper rising 2.5% in London and the other metals chiming in with 1-3% gains. Brent crude rose US83c to US$114.73/bbl while West Texas gained US$1.44 to US$99.22/bbl.
The VIX volatility index managed to slip 8%, but at 30 points you get the impression whiplashed and wary investors are not going to shift to “complacent” mode just yet. Remember the EFSF? It is as yet still unclear as to how that will be leveraged from E440bn to E1trn and right at the moment no one outside of Europe is offering to provide funding.
The SPI Overnight rose 42 points or 1.0%.
It's inflation week in the North Atlantic this week, with each of the US, UK and eurozone reporting October consumer price indices. The numbers will be important in determining whether the UK might ease back on QE2, the US might be in a better position to unleash QE3 if needed, and the eurozone can cut again following president Mario Draghi's “I'm the new boss” stamp of authority last month when he cut by 25 basis points. It's a fine balance of course, given rate cuts (and QE is effectively a rate cut) devalue currencies which make commodities more expensive and thus promote inflation. These will be October CPIs but in the US for example, talk has now returned to the dampening effect of a rising oil price. Having traded at US$75/bbl in early October, West Texas crude is flirting with US$100/bbl once more. That implies a 33% oil price hike in the space of a little more than a month.
The US economic data week begins on Tuesday with the producer price index and the Empire State manufacturing index. Friday's consumer confidence result will also be tested with the release of October retail sales. Wednesday sees the CPI, industrial production and the housing market sentiment index. Thursday it's housing starts and the Philly Fed manufacturing index, and Friday wraps up with the Conference Board leading index.
Industrial production numbers will also be provided for Japan and the eurozone next week, along with September quarter GDP updates.
Australian tea and biscuit providers go into overdrive from today as the last weeks of November bring an avalanche of AGMs. On the economic front, today sees building approvals and housing finance and tomorrow sees vehicle sales and the minutes of the Cup Day RBA meeting which gave us the 25bp cut.
Wednesday it's the Westpac leading index and then the first of the September quarter numbers which lead us into the GDP result next month, being wage cost, followed by average weekly wages on Thursday. RBA governor Glenn Stevens will make a speech on Thursday at a financial market gathering in Sydney.
To wrap up the bank reporting season, Commonwealth ((CBA)) will provide a quarterly update on Tuesday.
In FNArena celebrity appearances this week, Rudi will be seen on Sky Business on Thursday at noon, Rudi and I will both provide another Market Insight program on Thursday at 4.30pm, and I will be on Sky Business on Friday at 2pm.
For further global economic release dates and local company events please refer to the FNArena Calendar.
