Daily Market Reports | Nov 24 2011
By Greg Peel
The Dow fell 236 points or 2.1% while the S&P lost 2.2% to 1161 and the Nasdaq dropped 2.4%.
It was a tale of two bond auctions. And it had nothing to do with Greece, Spain or Italy.
Throughout the European crisis the two major sovereign bond safe havens have been Germany and the US. Germany because it is the export powerhouse of Europe and the flipside of peripheral eurozone sovereign risk. The US because it's the world's largest economy and deemed the only true interest-paying safe haven on a lesser of the evils basis, despite historically low rates and despite a debt-related credit downgrade. For many months the yields on the respective German and US ten-year bond have stayed closely aligned. Until last night.
If you're in the eurozone looking out, it is clear Germany is the only option for sovereign investment when even the credit rating of number two France is under threat, let alone number three Italy and any other eurozone members. If you're outside the eurozone looking in, it's clear that Germany is the only answer, directly or indirectly, to the eurozone crisis. As the crisis goes on and on and on, Germany is refusing to stump up the required funds but rather is pushing for threatened members to get their houses in order. Yet Germany does not want the eurozone to fracture given the implications for runaway domestic inflation. Germany is trying to guts it out, but the world is losing patience and sees writing on the wall. No one wants to fund the EFSF. The ECB could fund the EFSF but only with the financial support of Germany. If the world then supports Germany, by implication it may yet be funding a full eurozone bail-out.
Last night the German government auctioned E6bn of ten-year bonds on a 2% coupon – the lowest since the launch of the euro. Is 2% a big enough fee for lenders given what may yet transpire? Clearly not. So poor was the demand that the Bundesbank was forced to step in and pick up 39% of the issue. Commentators called the auction “a disaster”. The market trading yield on German ten-years shot up 25 basis points at one stage, settling at 17bps higher on the session to 2.10%.
A few hours later, the US Treasury auctioned US$29bn of seven-year bonds and was swamped with demand. The settlement yield of 1.415% is the lowest on record. The yield on the US ten-year fell 5bps to 1.89% – a level last seen in the depths of October. The spread between the German and US ten-years is now the widest it has been since April 2009, at the nadir of the GFC.
All throughout the eurozone crisis the rule of thumb has been that politicians will do nothing until their backs are truly against the wall. We have seen this in Greece and we have seen this in Italy. We have seen Spain change governments. We have seen Sarkozy pushing in one direction to save the French banks and avoid a credit rating downgrade in an election year. We have seem Merkel push the other way in the knowledge that German taxpayers and voters will not countenance any more support for other eurozone members. All along, the markets have been telling Europe what has to happen. The markets are saying fix it or let it go because otherwise we'll destroy it for you anyway.
The world has had enough. The US goes on holiday tonight and fund managers maybe just won't come back. In Australia, fund managers have decided it's close enough to Christmas to go on holiday now. I asked one broker friend how he was going and his response was “Yeah awesome. Being a broker is awesome. Just awesome. Did I mention how awesome it is?” Another didn't even have the energy for humour. “It's not fun anymore,” he said.
The world is giving up.
Not helping the situation was yesterday's flash manufacturing PMI reading for China from HSBC. October had seen the Chinese PMI turn and head back into expansion. Economists were hoping for further expansionary data in November. Only China can save the world. But at 48, the PMI was not only contractionary again, but the lowest reading since the GFC. The final straw. (More on the PMI).
Did I mention that US durable goods orders fell 0.7% in October (mostly aircraft related, at least)? Personal spending rose a lower than expected 0.1%. The Michigan Uni consumer sentiment index ticked down again.
The weak German auction saw the euro tumble, sending the US dollar index up 1% to 79.02. The Aussie was already reeling yesterday from the Chinese PMI result, and it's down one and a half cents to US$0.9693. Some investors are liquidating their gold positions, others are looking to the safe haven. Gold fell US$6.70 to US$1692.70/oz. Base metals all fell 1-3%. Brent is down US$1.66 to US$107.25 and West Texas down US$1.71 to US$96.30/bbl.
The SPI Overnight is down 25 points or 0.6%. Doesn't seem much but we did China yesterday.
There will be no US markets tonight and minimal activity in the half-session on Friday night. That just leaves Europe.
Some say it's darkest just before the dawn.
Rudi will appear on Sky Business today at noon.
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