The Overnight Report: Portugal Becoming The Issue

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By Greg Peel

The Dow fell 6 points while the S&P lost 0.3% to 1313 and the Nasdaq dropped 0.2%.

Well blow me down. The summit of EU leaders in Brussels last night failed to resolve the Greek restructure stalemate. How unusual, given the EU's track record of sorting problems out very quickly.

They did manage to ratify the planned establishment of the permanent European Stability Mechanism (a load of money) which will first run concurrently with and then ultimately replace the EFSF down the track. The ESM is a “so it doesn't happen again” type fidelity fund. Problem is, it's still happening now. Germany and Greece remain at odds over who will have control of the Greek budget post restructure.

As we ran into the new year, markets seemed sanguine about Europe and were assuming the Greek restructure would be sorted and Europe in general would ease off as a major fear generator. But as we again watch in frustration at talks that roll on and on, markets are starting to question their complacency. Did someone bring up contagion? Suddenly the eurozone country on the fear radar is once again Portugal.

Portuguese bond yields began to blow out again last night. It has become widely accepted that Lisbon is watching Greek developments closely and that as soon as a deal is reached, the next hand will go up for restructure. Alternatively, if the Greek deal fails ahead of the big March debt rollover and Greece is forced into disorderly default, then it is assumed Portugal will be hot on the heels.

Forgive me if I'm wrong, but isn't this sort of where we were…um…two years ago?

The failure of the EU summit to make any positive announcement meant the Dow dropped 130 points from the open, but then two things happened. Firstly, the S&P 500 hit a technical support level at 1300 and duly bounced off as buyers looked to take advantage. In typically low volumes, Wall Street edged its way back through to 2pm when the Fed released its quarterly survey on bank borrowing from businesses.

The survey of 56 banks had 17 reporting higher loan demand from companies of US$50m or more turnover, with six reporting weaker demand. The better news was that small business loan demand increased by an amount not seen since 2005. It was this result which gave stocks a bit more of a kick such that the Dow almost but not quite regained its ground.

This positive data overcame the earlier release of December personal income and spending data. Incomes of workers rose 0.5% to mark the biggest gain in nine months, but spending fell 0.1% in the Christmas month. Americans, like Australians, are paying down debt. More such numbers are expected this and next month as Christmas credit card spending is sorted.

US data nevertheless continue to be more positive than negative, and it's quite a big data week this week. Take euro-fear out of the equation and no doubt the US economy would be looking rosy, and stock prices would reflect such. But how long can it really be before we take euro-fear out of the equation? Again the question is raised: Can we not just let Greece default, take the hit up front and then get on with life? It will probably default eventually anyway, even with a restructure. In the meantime, we'll all simply go insane.

“Risk on” has begun to lose its attraction. Last night the euro ticked down, the US dollar index rose 0.4% to 79.16, and the Aussie fell 0.6% to US$1.0595. Gold lost US$8.40 to US$1728.30/oz.

With the exception of a slight rise in aluminium, base metals all fell 1-2% in London. I'm sick of writing down oil prices, given every day both crudes either go up or down by less than a dollar. Suffice to say Brent remains between US$110-112/bbl and West Texas remains between US$98-100/bbl and if there's any change I'll let you know.

The SPI Overnight fell 7 points.

The monthly NAB business survey is out in Australia today, as is private sector credit and a house price index. There are nine resource companies reporting quarterly production today to sneak in before the end of the month. Navitas ((NVT)) will report its interim result and Woolies ((WOW)) will release its December quarter sales figures. 

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