The Monday Report

Array
(
    [0] => Array
        (
            [0] => ((QAN))
            [1] => ((WBC))
            [2] => ((NAB))
        )

    [1] => Array
        (
            [0] => QAN
            [1] => WBC
            [2] => NAB
        )

)

This story features QANTAS AIRWAYS LIMITED, and other companies.
For more info SHARE ANALYSIS: QAN
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

As by now has been well reported, a vote was held in Brussels on Friday night for changes to be made to the EU treaty. The UK was the only dissenter of 27 members.

All of the seventeen eurozone members are nevertheless happy to sign up to new rules which include structural budget deficits of no more than 0.5% of GDP, automatic sanctions for members whose budgets exceed 3% of GDP, and required submission of budgets to the European Council for a possible revision request.

There are two main points to consider here. Firstly, there will be no powers granted to a central authority to manage member budgets – the treaty will still allow individual fiscal rule within the above restrictions, which of course will be subject to the policies of each ruling government. The second is that there always was a 3% limit right from the beginning of the eurozone's existence – a limit which every member exceeded, some blithely ignored, and which was never policed by the EU, ECB or anyone else in the good times. Only in the bad times have those breaches become a potentially destructive issue. There goes the horse.

So what's different? Not much. Realistically the EU is saying that this time they'll all be good little members. And while the above limits might be sensible in retrospect, they do nothing to resolve the issue at hand. Then there's the matter of a dissenting UK, which ushers in the prospect – oft speculated – that the EU will break into two distinct units. One is forced to ponder whether, if one level of fracturing may ultimately be endorsed, where might that end down the track? Why not just go the whole hog now and call the original idea a failure?

One can hardly blame David Cameron. The UK had been as guilty as any other member of budget blow-outs and excessive debt, but since the Greek problem first came to light has moved swiftly to enforce austerity measures under the new coalition government, as well as to pump money into the system via Bank of England QE. Despite this ongoing monetary debasement, UK bonds (gilts) are presently a safe haven. All of this has been achieved with a single currency, unlike Germany which benefits from the inflation-capping effect of a euro weakened by peripheral debt problems.

On Friday Cameron was asked to submit his nation to the same limitations and independent scrutiny as Greece and Italy, and to submit to whatever new EU-wide taxes and charges as might be required to fix the problems across the Channel. One tax still being pushed by Merkozy – to the sheer incredulity of bankers and brokers across the globe – is a financial transactions tax. We tend to think of New York as the financial capital of the world, but realistically that tag still goes to London, where to this day the global benchmark interbank borrowing rate is determined. The City is the lifeblood of the UK economy, with banking services a substantial contributor to GDP. There will never be a financial transactions tax in the US, but that's where the rest of the world's money and business will drain to were there to be a tax imposed in Europe.

Cameron is facing dissent within his own government over his refusal to sign – particularly from within the Lib Dem minority, but also from euro-centrists across the country. Snap polls over the weekend have nevertheless found strong support for Cameron's stance from the UK electorate. Is this a surprise?

Imagine how one might frame the question: “Would you agree to greater outside control of this sovereign Britain – this royal throne of kings, this sceptred isle; this earth, this realm, this England – from the people across the channel that have brought the world to the brink of global Depression through their rampant profligacy?” No? Really?

The nation that voted early in the century not to join the common currency, and must now be breathing a huge sigh of relief, is hardly going to change its attitude in the wake of all that has transpired post-GFC.

Wall Street, however, liked the result in Brussels. On Friday night the Dow rallied 186 points or 1.6% and the S&P gained 1.7% to 1255, all of which simply countered Thursday's drop following disappointment over ECB comments. At the end of the day, as has always been the case, a European rescue all comes down to the ECB.

On Friday night the ECB entered the market to buy more Italian bonds. The incursion came a day after ECB president Mario Draghi warned the central bank would not just start printing money as soon as fiscal agreement was reached in Brussels. Contradiction? Draghi has been careful to not have his words misinterpreted. As a member of the Ruling World Elite (ie ex-Goldman Sachs), he is not going to be a pushover. Draghi has pointed out that as soon as the ECB started buying Italian bonds earlier in the year, then prime minister Silvio Berlusconi arrogantly flaunted the budget restraints he had earlier agreed to. Despite interim changes of government across the eurozone, Draghi wants to see mote than just a handshake agreement to move towards an idea of a plan for fiscal union before he brings out the heavy artillery. 

The latest ECB announcement is that it will peg eurozone bond buying at E20m per week. In so doing, Draghi is ensuring pressure is maintained on eurozone and EU governments to keep moving forward in the right direction while still indicating “I have your back”. Italian bond yields fell on Friday night, and that market is now the determinant for all other markets.

This is what Wall Street liked. Or maybe Wall Street, like everyone else, is just sick of being scared. The most notable move on Friday was probably that of the VIX volatility index, which fell 13% to 26 as investors jettisoned the put option protection they felt they now didn't need. Wall Street is willing on a Santa Rally.

Elsewhere, market movements were predictable for a “risk on” session. The US dollar index fell 0.2% to 78.63 and the Aussie is up the same amount to US$1.0213. Gold was steady at US$1711.10/oz on more clarification of ECB policy intentions.

Base metals all rallied 1-2% while Brent crude gained US51c to US$108.52/bbl and West Texas added US$1.49 to US$99.83. The US ten-year bond yield jumped 8 basis points as European yields fell.

The SPI Overnight was up 73 points or 1.7%.

Aside from willing on a Santa Rally, Wall Street would dearly love to be able to return to trading US markets based on domestic fundamentals – corporate earnings, government policies, economic data – and not to be held ransom to headlines out of Europe. This week Wall Street has a good opportunity to again assess just how the US economy is performing.

Tomorrow night brings the November retail sales numbers which include the all important Thanksgiving weekend figures. Thursday sees industrial production, the Empire State and Philly Fed manufacturing indices, and the producer price index. Friday brings the consumer price index.

Tomorrow night also sees a Fed monetary policy meeting. One presumes the outcome of this meeting would have depended on what happened in Brussels, such that disaster might have brought us QE3. If the Fed is as comfortable with the outcome as Wall Street, then once suspects it will be a little changed policy statement from the last two or three – modest growth, zero rates until at least 2013, QE3 in the chamber but the safety catch still on. The Fed is hamstrung at the moment anyway by developments (or lack thereof) in Congressional fiscal policy, and could be all of next, an election, year.

The US Treasury will also auction three and ten-year notes and thirty year bonds from tonight through Wednesday. Demand for these issues will be another guide as to whether the world is feeling better about Europe since the weekend.

There will be industrial production numbers released across the globe this week, including the US, Japan and Europe. On Thursday HSBC will report its “flash” December manufacturing PMI estimate for China. Chinese monetary policy is as important as that of Europe or the US at this point.

It's a busy economic week in Australia. Today we have housing finance, investment lending and the trade balance, and tomorrow we have third quarter dwelling starts and housing affordability along with the NAB business confidence survey. Wednesday its the Westpac consumer confidence survey and on Thursday consumer inflation expectations, along with vehicle sales.

Qantas ((QAN)) will hold a Strategy Day today and Westpac ((WBC)) will hold its AGM on Wednesday. National Bank ((NAB)) will follow suit on Thursday.

FNArena has now completed its media commitments for the year. There will be a hiatus over the holiday period before we'll be back bigger and bolder on your screens in 2012.

Overnight Report readers know that I'm off on my break now, returning in January. To all subscribers I again wish you a very Merry Christmas and a Happy New Year, and let's raise a glass to a hopeful 2012.

There will be no more TV appearances from Your Editor Rudi this year.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

Click to view our Glossary of Financial Terms