Daily Market Reports | Mar 12 2012
By Greg Peel
Wall Street began trading on Friday content in the knowledge that the Greek bond restructure had been completed and believing that with a bit of luck we might now be able to push on without having to worry about Greece again in the short term. Early in the session, the February jobs data were released.
The data showed that for the third consecutive month, in excess of 200,000 new jobs were created. At 227,000, the figure exceeded consensus expectations of 213,000. The unemployment rate nevertheless remained unchanged at 8.3%, but this meant more job seekers entered the market looking for work in February and that reflects growing confidence in job opportunities.
So it was all good news, and the Dow rallied to be up over 60 points before the Friday drift set in. Then very late in the session a bulletin hit the wires that declared Greece had defaulted on its sovereign debt.
To recap, the Greek government needed 75% acceptance to avoid disorderly default and 90% acceptance to enable the restructure to proceed. Initial acceptance reached only 85% but Greece was able to get over the line due to a “collective action clause” (CAC) the Greek government had pushed through parliament recently to force any 25% of reluctant bondholders to involuntarily accept the deal. Because this clause was added to the bond's contractual details retrospectively, the International Swaps & Derivatives Association (ISDA) deemed the forced restructure to be a “credit event”. In simple terms, it represented a “default”.
What this means is that the holders of US$3.2bn worth of credit default swaps on Greek debt will be paid out. The payout level will be determined by an auction which will settle at some cents in the dollar value. Were, for example, the auction to generate interest at 25 cents in the dollar then the CDS holders would collect US$2.4bn.
If this were 1998, back in days when the LTCM hedge fund went down owing over US$6bn and with that magnitude nearly brought down the entire global financial system, then US$2.4bn would seem like a catastrophic amount. But this is the post-GFC twenty-first century, in which the central bank printing presses ensure that no one blinks at a dollar amount until there is a “trillion” behind it. Not only is an amount of US$2.4bn about what Apple probably spends on boardroom lunches each year, the bulk of the exposure has long ago have been hedged out. This doesn't mean the risk is gone, but it does mean the risk has been scattered to the four winds in ever smaller parcels.
And that explains why what amounts to the biggest sovereign debt default in post-war history managed only to trim the Dow's gain on the day down from about 45 points ahead of the news to 17 points at the close. The news was not, in isolation, significant. The Dow closed up 17 points or 0.1% to 12,922, while the S&P gained 0.4% to 1370 and the Nasdaq added a full 0.6%.
What the news did do was provide faith in the global CDS market, which to date has been scarcely regulated. Had Greek CDS holders not been paid, then the instruments would have been rendered forever impotent. However, more circumspect commentators have alluded to the wider implications of the ISDA decision. A sovereign European nation and member of the common currency has defaulted. It's all gone rather smoothly, which is not what defaults are meant to provide for the economic concepts of “creative destruction” and money passing “from weak hands to strong”. But then again nor was the 2008 TARP and the US government's rescue of the major US banks, AIG, Freddie and Fannie and GM. The real question is who's next? This default lark all seems rather easy.
Before Wall Street opened on Friday there had been more news which once upon a time would have sent stock prices into a tailspin. China's monthly data dump showed that in the month of March, Chinese industrial production, new loan and retail sales growth all slowed more than expected. The industrial production growth rate has fallen to its lowest level since June 2009. Property prices have steeply declined since one year ago. Last week the Chinese premier declared a new target GDP growth rate of 7.5% and on these numbers alone he might be looking safe.
Except that it's all a crock of course. The Chinese are magically fast at collating and crunching numbers compared to anyone else in the rest of the world despite having the world's largest (or is it second now?) population. But while the numbers were weaker than economists had expected, they were no great shock. The good news is that China's CPI inflation has fallen to 3.2% from 4.5% in January and over 6% last year. This provides scope for Beijing to further ease monetary policy to again ensure China comes in only for the soft landing everyone now feels happy to assume.
So when Wall Street opened on Friday, China was not a problem. And when Wall Street closed, the Greek default was not much of a problem either. The euro did rather tumble in Greece's wake sending the US dollar index up a steep 1% to 79.98, but such a move is a bit more realistically grounded than those in the upside-down world we've had to endure post-GFC. The US economy appears to be strengthening. The European economy is sliding into an austerity-based inevitable recession. Of course the dollar should be strong and the euro should be weak.
And that should be good news for Australia too. We may have seen a surprisingly weak January trade balance result last week but aside from monthly trade balances being subject to volatility, and Chinese New Year festivities falling wholly in January this year, a ceteris paribus improvement in the US economy and subsequent strength in the greenback means pressure on the Aussie dollar exchange rate. Woohoo! The Aussie is down 0.7% since Friday morning to US$1.0577.
While a stronger US dollar also puts mathematical pressure on dollar-denominated commodity prices, a strong US economy implies greater demand for commodities. Hence base metals were all up 1-2% on Friday night, and even gold managed a US$7.50 gain to US$1711.70/oz. Unfortunately, it also meant strength for the party-pooping oil price, which gained US72c to US$126.25/bbl (Brent) and US82c to US$107.40/bbl (West Texas).
You'd think that on the biggest ever sovereign default investors would rush into the safety of US bonds and into insurance through stock put options, but no. The US ten-year yield finished up a couple of basis points to 2.04% and the VIX fell 3.5% to 17.
The Greek saga has ended not with a bang, but with a whimper. At least for now.
The SPI Overnight was up 3 points.
Back to China. Over the weekend Beijing announced the Chinese monthly Chinese trade balance had fallen into deficit for the first time in year, and indeed the biggest deficit seen in a decade. Exports were up 18.4% in February but imports were up 39.6%. While again this news is something the world may have responded very poorly to once upon a time, there are at least three reasons why we should not be overly concerned: (1) Chinese New year usually falls in February but because it was in January this year, year-on-year comparisons were distorted; (2) Europe is China's biggest export customer and of course demand is slowing; (3) if the US and Europe can pick up a bit of the flipside, then the result is a small contribution towards addressing the global trade imbalance.
Does it mean China's demand for iron ore and coal has plunged? No. It may have slowed a little but then restocking is also expected from here.
Turning to this week's economic calendar, apparent improvement in the US economy will be tested this week with releases of business inventory and retail sales data on Tuesday, the Empire State and Philly Fed manufacturing indices on Thursday, and industrial production and consumer sentiment on Friday. The US PPI is out on Thursday and the CPI on Friday.
On Tuesday the Fed will meet and provide a fresh statement on monetary policy. For once it's a bit of an “anything could happen” event given the disappearance last week of Fed QE3 talk, subsequent media speculation of upcoming sterilised quantitative easing, and any sort of expansion of “Operation Twist” being a suggestion in between. Rest assured Wall Street will be hanging on every word.
Australia's week begins with those lazy Mexicans and Taswegians putting their feet up today, but this is not enough to close the ASX. Tomorrow will see housing finance and investment lending data along with the monthly NAB business confidence survey, followed on Wednesday by the Westpac consumer confidence survey and fourth quarter housing starts. Thursday sees inflation expectations and vehicle sales along with the RBA's quarterly bulletin.
On the local stock front there are still quite a few ex-divs to work through this week and Thursday sees a late rush of tardy earnings results from resource juniors Ampella ((AMX)), Altona ((AOH)), Bandanna ((BND)), Endeavour ((EVR)), Karoon ((KAR)) and Molopo ((MPO)) along with Myer ((MYR)).
Rudi will not be appearing on Sky Business this week as he will be presenting at the Perth Trading and Investing Expo on Saturday and Sunday.
For further global economic release dates and local company events please refer to the FNArena Calendar.
