Daily Market Reports | Jun 25 2012
By Greg Peel
While downgrades to the credit ratings of US banks have been touted for some time by Moody's, the impending announcement helped Wall Street to a big plunge on Thursday night. There were predictions flying around of just how many notches of downgrade would be suffered in particular by the likes of Citi, BofA, JP Morgan, Morgan Stanley and Goldman Sachs. But when the announcement did eventually come out, long after the close, most banks were spared the depths of downgrade widely anticipated.
The news was not enough to reverse Thursday's fall, nor to ensure a gain for the week, but on Friday the Dow rose 67 points or 0.5% while the S&P gained 0.7% to 1335 and the Nasdaq added 1.2%.
There were no data of note out in the US on Friday, but in Germany it was revealed the IFO survey of business confidence fell to a two-year low this month. More evidence of a deteriorating European economy amidst a wider slowing of the global economy. What to do?
Hold a summit, of course. The EU will hold yet another grand summit beginning this Thursday, which no doubt will come up with a definitive and final solution for Europe, just like every summit has this past three years. Over the weekend nevertheless, the leaders of Germany, France, Italy and Spain agreed to measures to boost growth in the eurozone, for which they would mobilise 1% of zone GDP or E120-130bn. This agreement marks Merkel's first clear concession to the pro-growth faction led by Hollande and supported by just about everyone else. Germany remains pro-austerity given it is the inevitable paymaster, but weight of numbers have ensured Merkel can now only insist on fiscal discipline in a less harsh framework.
The arrangement will be discussed at the summit. Meanwhile the new Greek government will push for a two-year extension of its bail-out program in order to meet the strict deficit reduction targets, so it can freeze public sector layoffs and pension cuts, reduce taxes (what taxes?) and help Greece's growing poor. Greece can point to the eurozone leaders' fresh shift towards growth as grounds for such a concession, but as to what will be granted is yet unknown. EU leaders will further discuss greater fiscal union, a proposed banking union and other such alignments, all within the bounds of maintaining sovereignty.
What is they saying? The improbable takes time, the impossible a little longer?
The ECB is also ready to do its bit for kings and countries. The eurozone central bank has announced a widening of access to its funds through increasing the collateral it will accept from banks in the form of non-standard assets, such as mortgages, car loans and lower rated securities. The last time the ECB relaxed its requirements a cut to the cash rate followed, and it is expected the ECB will cut to 0.5% from 1.0% next week. There is also talk such moves would be laying some groundwork for a third Long Term Refinancing Operation (LTRO), which is the QE the ECB has when it can't have a QE given there is no eurozone bond.
The US dollar index fell back slightly to 82.21 on Friday as the euro managed to recover some ground. The Aussie crept up 0.3% to US$1.0064 and gold scraped back US$7.10 to US$1572.30/oz. The US ten-year bond did not rise much in price on the Thursday, but on Friday the news of further ECB easing saw the ten-year yield rise 5bps to 1.67%.
News of a tropical storm building in the Gulf had oil recovering, with West Texas up US$1.56 to US$79.76/bbl and Brent up US$1.75 to US$90.98/bbl, although the storm has since appeared to have subsided. Base metals were little moved.
The SPI Overnight rose 13 points or 0.3%.
Speculation and proposals as the stakeholders jostle for position will probably be the story of this week as we head into the two-day EU summit beginning Thursday. The week will also be dominated by US economic data, which will no doubt bring more QE3 speculation.
The US sees the Chicago Fed national activity index tonight along with new home sales, and the Case-Shiller house price index on Tuesday along with the Richmond Fed manufacturing index and the Conference Board leading economic index. Wednesday it's pending home sales and durable goods, and on Thursday the final revision of March quarter GDP will be made before we start looking at June quarter numbers. Expectations are for the March result to be unchanged at 1.9% growth. Friday's data include the Chicago PMI and the fortnightly consumer sentiment index along with personal income and spending.
The UK will also make a last revision to March quarter GDP on Thursday as a eurozone measure of business and consumer confidence is released, all in time for the summit.
It's a bit of an economic non-event in Australia this week, with Friday's building permits and private sector credit the only highlights.
Metcash ((MTS)) will release its full-year result on Thursday.
Rudi will be returning to the screens on Thursday at noon on Sky Business.
Note also that this is the last week of trade ahead of books close for the financial year, which can often inspire a bit of tax-selling on the one hand and fund manager window-dressing on the other.
For further global economic release dates and local company events please refer to the FNArena Calendar.
