Daily Market Reports | Dec 01 2011
By Greg Peel
The Dow closed up 490 points or 4.2% (regaining 12,000) while the S&P added 4.3% to 1246 (regaining 1200) and the Nasdaq jumped 4.2%
I noted yesterday that the ECB had not been able to “sterilise” all of the purchases it had made on its balance sheet of Spanish and Italian bonds. To sterilise those purchases, the ECB must in turn issue loans, and in order for loans to be issued there must be willing borrowers amongst Europe's banks. It is beneficial for Europe's troubled banks to go to the ECB for emergency funds because they are cheaper than funds available in the regular market.
But therein lies a problem, and the same problem was apparent in 2008. If a commercial bank goes to the central bank for money, it is assumed that bank must be in trouble. The market responds by pulling credit lines, withdrawing counterparty deals and selling down that bank's shares. A downward spiral begins. That's why European banks have been shying away from accessing the ECB's emergency facilities, just as US banks shied away from the Fed in 2008.
In the meantime, European banks have seen the cost of raising reserve currency loans in the interbank market rise to a three year high given banks around the world have become cash hoarders and not lenders and certainly not lenders to Europe. Over here's a rock and over here's a hard place. But in between is a dam.
The floodgates were opened last night, taking markets by surprise, as the US Federal Reserve, the European Central Bank, the Bank of England, the Swiss National Bank, the Bank of Japan and the the Bank of Canada issued a joint announcement that the rate currency swap lines would by slashed by 50 basis points for one week and one month money and that margins will also be substantially reduced. In other words, the Fed will give the ECB cheap dollars in return for euros and European banks can have access to that cheap money, with other central banks ensuring coordination.
It is not a case of the Fed “handing out” money, and there will need be no extra US dollars printed, albeit the cheaper loans do serve to devalue the dollar incrementally. This is merely a currency swap, such that the Fed takes euros in exchange for dollars. The intention, or hope, is yet another one of “buying time”. Germany is currently trying to organise a rapid revamping of the eurozone treaty to provide a closer fiscal union and central controls on eurozone member finances and policies. Then, and only then, can the ECB become the “saviour” of Europe by implementing QE just as the US, UK and others have done. The assumption remains that the ECB will print euros to give to the IMF and then the IMF will do the rest.
But even a “rapid” move will still take time, and realistically too much time. A rumour ran around Wall Street last night after the announcement that a major European bank had been about to go to the wall. This is probably just speculation but that doesn't really matter. Had things gone on much longer the way they have been then more than one European bank would have undoubtedly gone to the wall.
The announcement sent European stock markets flying, with financial stocks leading the charge. London was up 3%, France 4% and Germany 5%. When the opening bell rang in New York, the Dow basically shot up 400 points and stayed there all day, with a late kick at the close. Once again it could not be called a “rally”, just a price adjustment. And by the end of the session volumes remained disappointing.
The US dollar index lost 0.9% to 78.38 as the euro gained 1%, and gold jumped US$31.00 to US$1747.10/oz on the implicit dollar devaluation. The star on the day nevertheless was once again the Aussie risk indicator. Having risen three cents in two days, last night the Aussie added more than two and a half cents to US$1.0288. So much for currency relief on the other side of the world from Europe.
Base metals were set on fire in London, with copper, aluminium, lead and zinc all surging 5%. Oil has already run hard on Iran concerns and last night the weekly US inventory report showed a much bigger gain than expected, so oil missed out on the excitement. Brent fell US14c to US$110.68/bbl and West Texas rose US46c to US$100.25/bbl.
Europe, however, was not the only source of positive news last night.
Beijing has announced a 50 basis point cut to its reserve ratio requirement for Chinese banks – the first cut since 2008. Ever since Beijing introduced its big fiscal stimulus package in late 2008 the resultant surge in Chinese GDP has forced the authorities to put the brakes on quietly through tighter monetary policy. While this has entailed the odd rate rise, the most persistent policy tool has been incremental increases to the RRR in order to stem the flow of bank loans into the Chinese economy, particularly for unbridled property development. Now that the Chinese property market is looking vulnerable, and China is faced with a big cut in export demand were the European situation to send the world into recession, Beijing has decided it's time to ease off quietly on those brakes. Economists have been expecting as much.
Next came the US economic data for the night, led out by the ADP private sector jobs report for November. Wall Street was floored when it showed a seasonally adjusted increase of 206,000 jobs – twice the average of recent months and the biggest gain since last December. Economists are looking for a solid 125,000 jobs to be added in Friday's non-farm payroll report but concede that a better number could now be possible.
US pending homes sales rose 10.4% in October – the biggest gain in a year. While not all pending sales convert into actual sales, given deals fall apart, Wall Street was happy to take this result and a goodun'.
And finally, this month's Fed Beige Book showed anecdotal evidence that eleven of the twelve Fed districts continue to see modest economic growth.
As exciting and relieving as all of the above sounds, the reality is that a 500 point step-jump up in the Dow is only more reason for real investors to stay out of this market. For they know, having experienced it often enough now, that next week or some time in the near future could just as easily bring a 500 point down day were things to go awry in Europe once more. And we are only at the beginning of this latest “plan”. Indeed markets could go for one helluva sustained rally from here, only to turn around and go back down again just as quickly.
The situation remains somewhat binary. We can only hope the positive side of the equation will prevail. As it happens, there are a lot of national elections scheduled in Europe next year. Oh dear.
The SPI Overnight was up 141 points or 3.2%.
Today at 4.30pm Rudi and I will present the last Market Insight for the year on the BRR Network. Today's topic is “2011: a recap; 2012: an outlook”.
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