The Overnight Report: Stalemate In Brussels

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By Greg Peel

The Dow closed up 28 points or 0.2% while the S&P gained 0.2% to 2100 and the Nasdaq added 0.1%.

Up to the Minute

“On the basis of their assessment of current conditions and taking into account the revised forecasts, the Board judged that a further reduction in the cash rate would be appropriate to provide additional support to demand, while inflation outcomes were expected to remain consistent with the 2 to 3 per cent target. In deciding the timing of such a change, members assessed arguments for acting at this meeting or at the following meeting. On balance, they judged that moving at this meeting, which offered the opportunity of early additional communication in the forthcoming Statement on Monetary Policy, was the preferred course.”

– My emphasis

This final statement within the minutes of the last RBA meeting would tend to suggest the board was seeking to apply only the one rate cut, either in February or March, and chose February. The board also made note of Australian house price increases, which would require “careful monitoring”. But it also reiterated that while the Aussie had fallen on its measure against the greenback, it remained elevated against the currencies of major trading partners.

The question thus is: has anything much changed in the two weeks since the meeting? The answer there is yes, we had the shock unemployment numbers which, if accurate, show a rate of 6.4% when the RBA has forecast 6.5% by mid-2016. Is this enough to force another rate cut next month?

The markets were not confident yesterday, sending the Aussie up 0.6% to US$0.7818 and the stock market lower. The stock market is due a pullback anyway, individual company earnings reports are affecting some big “alpha” swings, and yesterday’s index move must be adjusted for CBA going ex. But here at the giddy heights, the stock market is wondering what to do next. We have to get through reporting season first – the bulk of which is still pending – and then there’s the small matter of Greece.

Stand-off

The meeting of EU finance ministers in Brussels on Monday night ended in a stalemate. The EU will grant an extension to Greece’s bail-out package but Greece has to ask for it. Greece has indicated it would like an extension but of the loan, not the bail-out. The difference here is the “bailout” means the money with austerity caveats attached while the “loan” just means the money.

Meanwhile, the trickle of funds out of Greek banks is becoming more of a flood. The EU ministers have given Greece until Friday to ask for a bailout extension. The ECB has already stopped taking Greek bonds as collateral but has not yet cut off Greece’s access to the central bank’s emergency liquidity facility. This could happen as soon as tonight, when the relevant ECB committee holds its weekly meeting, but no one expects such an outcome ahead of Friday’s deadline. If there is no resolution on Friday, a run on Greece’s banks is all but inevitable.

One side has to back down to avoid a Grexit. Presumably the Greek government won’t back down, given it was elected with a mandate of anti-austerity. Will the EU back down? Global markets are keeping watch, but not panicking. They expect some form of resolution is most likely, but then they are not overly worried if a Grexit were to transpire.

Wall Street

Back from the long weekend, Wall Street initially fell from all-time highs as a response to the unfolding Greek story, but only to the level of down 70-odd points on the Dow. The fall was aided by some weaker than expected local data. The Empire State manufacturing index slowed to 7.78 from 9.95 last month when economists had forecast 10.0. The housing market sentiment index slipped to 57 from 58.

But news that Greece was considering to ask for an extension sparked a bounce-back mid-morning, although this was later tempered to reveal Greece simply wanted the money and not the terms. Wall Street hung on for a mildly higher close, suggesting a wait-and-watch strategy with regard Europe. Notwithstanding, the S&P500 hit a new all-time high with its first close above 2100.

German investors seem none too worried either – a very different scenario to that of 2011 when last a Grexit was on the cards. The German ZEW investor sentiment index has risen to 53.0 from 48.4.

The US stock market may have been quiet but it was all happening over in the US bond market. The US ten-year yield suddenly leapt 12 basis points to 2.15%. If you were concerned about a possible fracturing in the eurozone you would most likely buy US Treasuries, not sell them. Traders cite next week’s bi-annual testimony to the House from the Fed chair as the impetus, given expectations she will suggest the Fed still intends to go ahead with a rate rise.

Why suddenly sell last night?

Metals Hit

Gold also moved suddenly last night, dropping US$22.60 to US$1208.20/oz. The Chinese are on a week’s holiday from today so the excuse was expectation of reduced demand for gold now the shops are shut in China. The fall came despite the US dollar index easing 0.3% to 94.07.

Base metals were also lower, with copper falling 1% and lead, nickel and zinc falling 2%. Chinese New Year is again a factor, but so are concerns over Greece.

And Monday was just a blip, it would seem. Iron ore has fallen back again, by US$1.50 to US$63.60/t.

Only the oils bucked the trend in commodity land, but then oil is marching to its own tune at present. West Texas rose US83c to US$53.53/bbl and Brent rose US88c to US$62.46/bbl. In oil’s case, the complete non-event known as the Ukraine ceasefire was cited as a driver.

Today

The ever optimistic SPI Overnight is up 23 points or 0.4%.

China is off from today, as noted, while the Bank of Japan will hold a policy meeting hot on the heels of Japan’s weak GDP result. The minutes of the Fed meeting are out tonight, which is another supposed cause of last night’s big US bond sell-off.

Locally it’s the biggest day yet in the results season, with many more biggies to come. Today’s bigger names include Carsales.com ((CRZ)), Insurance Australia Group ((IAG)), Primary Healthcare ((PRY)), Seven West Media ((SWM)) and Woodside Petroleum (((WPL)).

Be aware also that amongst the result releases, the number of ex-dividends is also increasing from those companies reporting earlier in the season. This will act as a natural drag on the index.

Rudi will not be making his usual appearance on Sky Business tonight. He will be presenting to a crowd of CPA SMSF specialists instead.

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