Daily Market Reports | Nov 28 2011
By Greg Peel
Guess what? Europe's arguing again. Yes I know – you could knock me down with a feather too.
Friday's half-session on Wall Street started well enough, with bargain hunters moving in after another depressing week as European markets pushed higher. Rumours were flying around out of Europe once more but it all came to nought as traders turned a 130 point Dow rally into a 25 point loss by the early close. The Dow's 0.2% fall was accompanied by a 0.3% fall in the S&P to 1158 and a 0.8% fall in the Nasdaq.
Wall Street was hoping to be able to forget about Europe for five minutes and concentrate on Black Friday – the day in which US retailers hope to go “into the black” for the year on early Christmas sales. Australians would recognise Black Friday as akin to the boxing day sales downunder – queues, stampedes, bargains, biffo. Signs on the day were positive if judged by the number of shoppers who descended upon stores. However, a question remains as to whether the dollars will match the headcount given stores were slashing prices to the bone.
It's all a bit academic given the world is in the palm of European politicians.
As we recall, the October bounce was all about what was hoped to be the final plan to save Europe, involving an EFSF leveraged to E1trn, E106bn for European banks holding toxic sovereign debt and a 50% haircut for Greek bondholders. Since October we've learned that a leveraged EFSF is nice in principle but only a practical reality if the lenders can be found to provide said leverage. So far financing requests have been met with a resounding silence all around the globe. The French, and everyone else on the planet, wants the ECB to provide the leverage through quantitative easing. The Germans, on the other hand, won't have a bar of it.
Which means the plan to save Europe is to date a fleeting dream. And then there's the matter of that 50% haircut. Once again it looked nice in principle but there were still details that needed to be settled. It's all very complicated, and wearyingly tedious, but Greece now wants bondholders to take a 75% haircut on the net present value of the E206bn of bonds rather than 50% on the face value. Bond holders had assumed the 50% cut on face value would equate to an NPV cut of something below 60%. Greek officials have decided to go around the independent body in charge and talk to bondholders, such as US hedge funds, directly.
More tedious is a complication with the European Stability Mechanism. The ESM is something else eurozone members dreamed up a couple of months ago, not as an immediate bail-out fund but as a mechanism to deal with any future contagion. With typical Euro-expedience, the ESM is due to come into being in mid-2013. As to who's going to fund it, Lord only knows. What it will involve is the restructuring of eurozone debt and that is supposed to involve the private sector as well as the public sector, but now the suggestion is that the private sector should not be involved. France, Italy, Spain and all the peripheral members say yes, Germany, Finland, Holland and Austria say no. In the meantime Germany is pushing for ever stricter austerity measures to be implemented by the culprits, which is Germany's counter to expanded powers for the ECB.
Where does this all leave us? I honestly have no idea, and don't think anyone much else does either. All I know is that RBA governor Glenn Stevens is readying the troops for GFC round two, and the Fed has taken QE3 out of its box and given it a clean just in case it's needed as well. As for Europe, anyone got a bomb?
Markets are clearly now in the business of dropping their own bomb. On Friday, Italy auctioned E8bn of six-month bills and had to pay a yield of 6.5%. One month ago, a similar auction cost only 3.5%. At these levels, Italy won't last long. In the meantime, the new Spanish government has suggested the first thing it will probably do is ask for a bail-out, S&P downgraded Belgium to AA from AA+, and Moody's downgraded Hungary to junk. Hungary is an EU member but not a eurozone member and is expected to now go to the IMF for support.
With all that was going on the world decided on Friday to rush into the currency of the most nominally indebted nation on earth, such that the US dollar index rose 0.8% to 79.66. The Aussie fell 0.3% to US$0.9697. Gold dropped US$14.50 to US$1680.30/oz.
Base metals markets were mixed and little moved, while Brent crude dropped US$1.04 to US$106.40/bbl and West Texas fell US26c to US$96.77/bbl.
The SPI Overnight rose 5 points.
I have been asked, with regard to the dark storm clouds once again gathering over Europe, why the VIX volatility index in the US isn't a lot higher than its current 34. Back in August it reached as high as 48 and in October the index saw another spike to 45. The answer is that the VIX reflects demand for put option protection over stock positions. Right now fund mangers and investors are holding record high levels of cash, and record low levels of equities, and you can hardly blame them. The smaller the equity position, the less need for put option protection, the less upward pressure on the VIX.
Which doesn't mean we're not moving into this week with an air of trepidation. It will be a busy week of global economic data, but one wonders what difference it will make. It's also month-end on Wednesday.
That means Thursday brings the monthly round of global manufacturing PMI data, as Australia, China, the eurozone, UK and US all post releases. Ahead of Thursday, the US will see new home sales on Monday, the Case-Shiller and FHFA house price indices on Tuesday along with the Conference Board consumer confidence measure, and pending home sales, the Chicago PMI and the Fed Beige Book on Wednesday. Wednesday also brings the monthly ADP private sector unemployment number.
On Thursday it's chain store and vehicle sales and construction spending along with the manufacturing PMI, then on Friday it's non-farm payrolls.
Australia sees new home sales on Tuesday and the RP Data-Rismark house price index on Wednesday along with private sector credit. Wednesday also brings the all-important September quarter private capital expenditure and expenditure intentions data, which is one of the most influential numbers for both economist expectations of Australia's September quarter GDP result and for ongoing forecasts. The RBA will also be paying close attention.
On Thursday it's building approvals along with the manufacturing PMI.
There will be an estimate of the eurozone's November CPI released on Wednesday which will be closely watched by the ECB which makes a rate decision next week.
On the local stock front, the end of November brings the end of the AGM season with one final avalanche before Thursday, after which only a few stragglers still have meetings scheduled. Metcash ((MTS)) will release its interim result on Wednesday.
Rudi will appear on Sky Business on Thursday at noon and then at 4.30pm on Thursday Rudi and I will present the last FNArena Market Insight program for the year on the BRR Network.
For further global economic release dates and local company events please refer to the FNArena Calendar.
