Daily Market Reports | Dec 06 2011
By Greg Peel
The Dow closed up 78 points or 0.7% while the S&P gained 1% to 1257 and the Nasdaq rose 1.1%.
If an article from the London Financial Times is accurate, ratings agency Standard & Poor's made another desperate move last night to regain its long lost credibility but again only served to generate anything from anger to ironic amusement. In another totally unhelpful case of stating the bleeding obvious, S&P has put all of Germany, France, the Netherlands, Austria, Finland and Luxembourg on negative watch, suggesting they may lose their AAA ratings within 90 days. The ratings will all be cut to AA+ if the self-appointed deities at S&P decide not enough progress is being made by policymakers to resolve the eurozone debt issue.
What a joke.
I made the suggestion back in August that perhaps S&P and its cronies could do the world a favour – drop everybody's credit rating in unison and then just leave it all alone. My suggestion came after the pointless US rating downgrade which has made absolutely no difference to anything other than to scare the bejesus out of a lot of frightened investors at the time. Now here we are possibly getting close to some sort of European stability package and S&P has to justify its existence once more, seeing if it can't, by its own actions, scare bond markets into justifying those actions. Not that anyone with a brain is going to take S&P seriously. Sure – go ahead. Bond markets have already been telling us what the state of play is for months, right up to the weak German auction of a couple of weeks ago.
Wastes of oxygen aside, Wall Street seems intent on pushing this market higher into Christmas as the potential for yet another breakdown in European negotiations is overwhelmed by very low levels of risk assets in fund portfolios, very low US rates offering negative real returns, and another round of central bank liquidity injection. There remains a binary risk: on the one hand, the eurozone may break up in a disorderly fashion and the world could be plunged into a recession worse than 2009; but on the other hand, progress on resolution could provide the stability needed to turn market sentiment and allow the rest of the world to get on with unencumbered investing.
The Financial Times article hit the wires at 2pm New York. At that point the Dow was up around 170 points, having undertaken another one of its step-jump opens followed by a flat trading. The jump on the open probably mirrored the fade-away on Friday night's session as traders decided it unwise to take long positions home. These days anything can happen over the weekend. Nothing new did happen, and last night Merkel and Sarkozy met as planned and again put forward their suggestion of a rapid overhaul of all relevant EU treaties with the main goal being a “golden rule” of budget discipline in every constitution.
There was nothing much new here, other than a target date for the overhaul of March, and a concession from Merkel to Sarkozy that the European Court of Justice – the central body that will be charged with monitoring member budgets – will have the power to apply penalty sanctions but not the power of veto over national budgets. Now Merkozy must put it all down in writing ready for consideration at the EU summit on Friday.
Perhaps the most significant development of the past few sessions, which realistically is the mirror to the surge in equities, has been a sharp fall in Spanish and Italian bond yields. S&P did its best to stuff this up as well, given the FT article saw yields bouncing last night as the euro plunged on the news, but the net result is still in the right direction.
The rise on Wall Street last night nevertheless belied the global economic data of the past 24 hours. But then again, we're only trading on European headlines and nothing else at present.
Somewhat surprisingly, the service sector PMIs for both the eurozone and UK rose in November – the former to 47.5 from 46.4 in October and the latter to 52.1 from 51.3. Australia's PMI slipped slightly again, to 47.7 from 48.8, and the US also suffered a setback at 52.0, down from 52.9. But the big news was China. Beijing's official non-manufacturing PMI crashed to 49.7 from 57.7. Oh how the mighty have fallen.
The fall in HSBC's independently measured service sector PMI for China was nowhere near as dramatic, with a move to 52.5 from 54.1. But perhaps now financial markets will develop the same “bad news is good news” attitude about China and monetary policy as it often has lately about the US and the Fed. The official result gives Beijing every cause to step up the pace of monetary policy easing begun last week.
The euro had been up on the session before its big drop at 2pm New York, meaning the US dollar index was down but finished square at 78.62. The Aussie is up half a cent to US$1.0273 while gold took a US$22.30 hit to US$1723.40/oz.
Commodities were little moved last night for the most part with the exception of nickel. The sudden swing into falling nickel inventories at the LME has sparked a short covering scramble that had the metal up another 4% last night after a 5% rise on Friday.
The SPI Overnight was up 14 points or 0.3%.
The biggest problem that S&P would generate by dropping the credit ratings of northern Europe would be to make funding the EFSF more expensive at this crucial time. Cheers. I don't know why Germany, France, the Netherlands, Austria, Finland and Luxembourg don't just pay S&P for an AAA rating. That's how it works, isn't it?
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