The Overnight Report: Draghi Pleads The Case

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By Greg Peel

The Dow closed up 4 points while the S&P gained 1 point to 1410 and the Nasdaq rose 0.1%.

The passing of Neil Armstrong brought back memories of a certain seven year old who was fascinated by the space program but bored into submission as he sat on a classroom floor and waited interminably for said astronaut to open the door of the Eagle. Need I explain the analogy?

ECB president Mario Draghi declared on Tuesday night he was too busy with saving the world to be able to make an appearance at Jackson Hole. Last night an op-ed piece, written by Draghi, suddenly appeared in German daily Die Zeit and one might presume it outlined what he would have said in Wyoming were he able to attend.

The good news, it seems, is that Draghi is hellbent on ECB purchases of distressed eurozone sovereign bonds. But then we knew that. The bad news is that in this newspaper piece Draghi seems to be pleading with Germany in public. We know that Germany, via the Bundesbank, is against a single monetary policy for the eurozone and would rather, via Merkel, first move towards a more uniform fiscal regime. The former means Germany is on the hook for everyone' problems and will lose control of its finances. The latter will take years to achieve, and requires a sacrifice of sovereignty across the zone. Europe does not have years.

In his piece, Draghi says the ECB will always “act within its mandate,” but notes that to fulfill the mandate of maintaining stability might “sometimes require us to go beyond standard monetary tools”. The issue here is that the Bundesbank (and others) argue the ECB does not have a mandate to buy individual members' bonds. Draghi is saying it does under the circumstances. When markets “are fragmented or influenced by irrational fears,” argues Draghi, “our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens”.

In other words, the ECB can manage the eurozone cash rate, and can even offer the odd LTRO to all Europeans banks, but these homogenous measures are of little use when the zone is polarised between the haves and the have nots of economic stability. Target the specific problem and act accordingly, and the whole zone will benefit. For example, buy Spanish bonds. Try to evenly help the zone, and one member might easily bring the whole lot down.

Bravo. Draghi even threw in that while he thought increased oversight of eurozone member budgets was a good idea, full fiscal union, or the “United States of Europe”, is unnecessary. Stop pushing the fiscal barrow, Draghi is telling Germany, and let's just fix the problem.

One must now ask: Why is Draghi venting his spleen publicly with only one week to go to the ECB meeting? Is this a last ditch appeal? Should we presume from this that if Germany refuses to budge, any hope we all had of a European resolution next month is quite simply pie in the sky?

In the nearer term, Wall Street remains fixated with monetary policy at home. Last night the Fed released its Beige Book, which found that while retail and housing might be improving across the regions, manufacturing is on the slide. The big manufacturing regions of Philadelphia and Richmond reported slow growth. Of the other ten regions, six showed “modest” growth and three showed “moderate” growth. In the previous survey, three showed “modest” growth and five showed “moderate” growth. So the US economy is going backwards.

Enough for Bernanke to act? I'm not going to argue that toss any further. We may know on Saturday morning or we may have to wait for two weeks to find out.

Last night also saw the release of July pending home sales, which rose by 2.4% to the highest level since April 2010. And the June quarter GDP was revised up to 1.7% growth from the earlier estimate of 1.5% as expected. It is this mix of contradictory data which has brains hurting on Wall Street.

The good news is that slow-moving Hurricane Isaac has now be relegated back to Tropical Storm status and has largely skirted the major oil refinery areas without causing any significant damage. There remains a flood risk in New Orleans, but any potential impact on gasoline prices now seems muted. Last night West Texas crude fell US$1.24 to US$95.09/bbl, but Brent was little changed at US$112.54/bbl.

Currency traders decided to buy the US dollar last night and sell the euro, which would tend to suggest Draghi's op-ed piece provided no joy, while Fed action is still up in the air. The US dollar index rose 0.3% to 81.57 and gold backed off by US$10.20 to US$1656.40/oz.

Base metals decided to drift a little lower last night with the exception of tin, which fell 5%. Earlier a large Indonesian tin producer had decided to halt spot sales of the metal, sending tin prices higher, but last night it changed its mind.

The SPI Overnight was down 10 points or 0.2%.

The local market has been particularly focused this week on the plight of the spot iron ore price. While the big iron ore producers of the world have shifted from one-year contract pricing to quarterly contract pricing, the spot iron ore market in China has become particularly influential as far as sentiment goes, having halved from last year. (See: The Iron Ore Price Crash) Analysts feared a breach of the US$100/t mark might open a vacuum with US$90/t possibly, but not necessarily, a support level. Yesterday spot iron ore hit US$90.30/t.

The prevailing view among analysts is that this crash through 100, which is a reflection of steel overproduction in China, will force a much needed shake-out. Most are still confident of a return to US$120/t by year-end. In the meantime, the brunt of the fear is being felt in the share prices of Australia's big miners and iron ore pure-play juniors.

The Fed symposium in Jackson Hole begins tonight, but Bernanke will make his much awaited speech tomorrow night. In Australia, monetary policy will be in focus with the release of the June quarter private sector capex and capex intentions report.

Only two more days of earnings reports to go. Woohoo!. Look out today for Boart Longyear ((BLY)), Lend Lease ((LLC)) and Perpetual ((PPT)) among others.

Rudi will appear on Sky Business today at noon.

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