Daily Market Reports | Jun 18 2012
By Greg Peel
Wall Street opened higher on Friday night and drifted upward to the close, with the Greek election the dominant focal point. The Dow closed up 115 points or 0.9%, the S&P gained 1.0% to 1342 and the Nasdaq added 1.3%. Wall Street had begun rallying on the Tuesday, spurred on firstly by an apparent voter swing toward the pro bail-out New Democracy party, and then more emphatically by what is effectively a free “put option” provided by global central banks.
A put option provides the holder with an automatic and pre-determined exit from, for example, a stock position. Declarations late last week from the likes of the Bank of England and the Bank of Japan that they would move to intervene as required were the Greek election result to spark a sell-off, and the general expectation the Fed has QE3 locked and loaded for use if necessary, implied a coordinated effort by global central banks to provide a financial market safety net were conditions to turn bleak. Friday's declaration from the ECB that “the eurosystem will continue to supply liquidity to solvent banks where needed” added further weight. While no trader would like to have been “caught long” ahead of the weekend, neither did it seem a very good idea to be “caught short”. Short positions have no doubt been reduced.
As I write, projections have the pro bail-out New Democracy party leading the counting with around 30% of the primary vote, with the anti bail-out Syriza party not far behind on 27%. A primary victory for New Democracy would be a positive for markets fearing the ramifications of a Greek exit from the euro. Neither New Democracy or Syriza wish to exit the euro, but Syriza for some reason believes Greece can remain in the eurozone while abandoning forced austerity. European officials have indicated otherwise. Yet whether or not New Democracy wins on the first count, there remains the issue of actually forming a government. The party will need to assemble a coalition to get it over the majority requirement, and this is exactly where Greece failed in the first election attempt.
So nothing is particularly clear at this point.
What appears to be clear, nevertheless, is that Francois Hollande's Socialist Party is all but assured of achieving a controlling majority in the French parliament, given the results of the “other” election over the weekend. Such a result will underpin Hollande's position of power not just in France, but in the eurozone in general, such that he can lean on Germany's Angela Merkel to take heed of his pro-growth policies. Merkel may yet yield to a some form of renegotiation of the Greek bail-out conditions.
Industrial production numbers for May were released in the US on Friday, and they showed a 0.1% fall compared to April's 1.0% gain. Economists had expected a flat result. The New York Fed's Empire State manufacturing index has fallen to 2.3 this month from a soaring 17.1 in May on this zero-neutral gauge. The Michigan Uni fortnightly measure of consumer sentiment fell to 74.1 to mark the lowest reading so far in 2012. A month ago the reading of 79.3 was the strongest since October 2007.
All this is grist for the QE3 mill of course, with Wall Street currently welcoming weaker data as an incentive for the Fed to act. The feeling, however, is that the Fed would have no isolated need to act given the US economy might be slowing but is not in dire straits, although Europe could well provide the incentive. At this stage the expectation is that Wednesday night's Fed meeting will at least bring an extension of Operation Twist, or something similar, as to not do anything would likely frighten Wall Street into a sell-off regardless of the Greek result.
In between we have the G20 leaders' meeting beginning tonight in Mexico, but nothing of importance is ever decided at G20 meetings. We'll probably just be granted a few more rah-rahs, we're all together, and Europe should do something type useless tripe. More important was a report on Friday night suggesting global banking regulators will consider easing the new liquidity requirements forced by the Basel III agreement if it is decided that they will prove part of the problem with respect to the latest European crisis, rather than part of the solution. Basel III was a response to the GFC and is due to come into force next year, but strict requirements for greater capital are placing even more pressure on Europe's crumbling banking system.
Suffice to say US banks led the upward charge on Friday night, while outside of stocks the other markets were relatively quiet.
Strength in the euro led the US dollar index to fall 0.3% to 81.59. Were there to be any coordinated central bank effort to provide liquidity one way or the other, the exchange rate situation will become quite messy. We would see another “race to the bottom” of currency devaluation, but if globally coordinated, in theory all stimulus would cancel itself out and major exchange rates would remain unchanged. Except, perhaps, the Aussie, which will have to rally further unless the RBA decides more big rate cuts are in order. The Aussie finished up 0.6% on Friday night to US$1.0083.
Copper rallied 2% and all other base metals bar aluminium were also slightly stronger. The oils were not much changed at US$97.61/bbl for Brent and US$84.18/bbl for West Texas. Gold ticked up US$3.80 to US$1626.70/oz.
The US ten-year bond rate ticked down 2 basis points to 1.59% and the VIX eased slightly to just over 21 as central bank promises eased fear.
The SPI Overnight rose 25 points or 0.6%.
This week's global economic data will be mostly overlooked as the world awaits what may yet be long drawn out party negotiations in Greece with the aim of forming a government, if the previous election is anything to go by. And if the previous election is anything to go by, we may not even see a result. Lord only knows what happens then. One can only assume the Greek parties will be ready to make sufficient concessions this time around to ensure at least some form of wobbly government can be established, lest eurozone officials lose patience and kick Greece out for political indecision.
All eyes will be on the Fed on Wednesday night, assuming no developments in the interim, as the FOMC holds its scheduled meeting and Bernanke provides one of his few press conferences. It is otherwise a housing week in the US, with housing sentiment out tonight, housing starts on Tuesday, and existing home sales and the FHFA house price index on Thursday. Thursday also sees a US leading economic index and the Philadelphia Fed manufacturing index.
Today in Australia sees vehicle sales, and tomorrow brings the minutes of the June RBA meeting, which gave us the follow-up 25 point cut. With Greece hanging in the balance, the minutes may largely be old news. Wednesday sees two leading index releases and Thursday brings the RBA's June quarter bulletin.
There are some important data out in the UK and eurozone this week, including the influential ZEW and IFO surveys and the estimate of the eurozone's June composite PMI. New Zealand will announce its March quarter GDP result on Thursday and on Friday HSBC will offer its flash estimate of China's June manufacturing PMI.
Greece, however, will dominate all else.
Rudi will not appear on Sky Business on Thursday this week.
For further global economic release dates and local company events please refer to the FNArena Calendar.
