By Greg Peel
The Dow closed up 108 points or 0.9% while the S&P gained 0.9% to 1280 and the Nasdaq added 1.3%.
As the epic Greek Tragedy has played out over the past couple of years and evoked much wailing and gnashing of teeth, one group has been conspicuously silent – Greece's actual creditors. Overblown sovereign debt is at the heart of Greece's problem implying not only that Greece has borrowed too much, but also that someone has been silly enough to lend the profligate and ill-governed country the money.
The ECB, IMF and leaders of the EU nations have spent the last two years trying to come up with the right solution, ranging from concessional bail-outs on the one hand to debt restructuring on the other. The IMF would have restructured Greece's debt in a heartbeat were it not for the common currency. The ECB says a restructure would amount to default under eurozone rules. Germany wants bondholders to, quite reasonably, take a “haircut” on their bad trade rather than German taxpayers having to foot the bill while France, quite understandably, wants to avoid any contagious banking collapse such haircuts might spark.
Yet all along we haven't heard a peep, publicly, out of the bondholders – the bulk of which are European banks, and French banks in particular. Perhaps they were thinking if they just kept silent hopefully a solution would be agreed upon which did not involve them losing any more money. Or perhaps they've been working furiously behind the scenes but we just haven't heard about it.
In support of the latter scenario, last night President Sarkozy endorsed a plan drafted by a collective of French banks which effectively offers the haircut you have when you're not having a haircut. No doubt now concerned that Greece is sliding ever more inevitably towards default, the banks have offered to set up a special purpose vehicle which will reinvest half the proceeds of maturing Greek bonds into new 30-year Greek bonds and another 20% in “high quality” bonds as insurance of repayment in 30 years time. The EU needs European financial firms to roll over as much as E30bn in Greek maturities coming due over the next few years.
One presumes this deal will fit inside the ECB rules and will get the tick of approval from the IMF and Germany.
In the meantime, the Greek parliament is due to vote on the austerity bill needed to be passed to ensure the interim E12bn tranche required to get Greece through the next quarter. The vote will occur on Wednesday morning Sydney time, after the close of New York. The Papandreou government controls 155 seats of the 300 member parliament but it is understood four of Papandreou's party are unsure on parts of the bill. This implies, at this point of time, a passage of the bill by one vote. Is that enough to inspire confidence?
Well, Wall Street seemed to think so last night given it was happy to start buying again. The combination of the French solution and the Greek parliamentary numbers were at least sufficient cause for fund managers to look at the extreme amounts of cash in their portfolios and decide they better put some of it to work before the end of the quarter on Thursday. The Dow was up as much as 164 points (back above 12,000) before the traditional last hour fade.
Here's a question: Will the French bank solution provide an opening for Greece to reject the austerity bill, believing their creditors are now preparing to carry the can?
While European issues have been playing out, another factor has been weighing on global, and particularly US, banks. International regulators have been trying to settle on the amount of additional capital needed to be held by “significant” institutions, meaning those “too big to fail”, in order to avoid a repeat of the GFC some time in the future. All banks will now be required to hold 7% of tier one capital, but it was decided on the weekend that TBTF banks will be required to hold an additional 2.5%. The banks had been fearing an amount of 3% or more. The requirements need to be satisfied by 2019.
The news provided some much needed relief for US banks which have been wallowing not only in uncertainty over this requirement, and weak economic data at home, but also in the indirect impact feared were Greece to default and cause another Lehman domino effect. Bank of America shares led the charge, up 3%.
The economic data release of the session was May personal income and expenditure, which showed US incomes up 0.3% instead of 0.4% as expected and consumer spending flat as expected.
In recent times the US Treasury has had a canny knack of scheduling bond auctions on days when European fears send Wall Street tumbling and investors rushing for supposed safe havens, but not last night. With the two-year notes having traded at all time lows last week and Greek fears easing, last night appetite for US$35bn of twos on offer was weak and the yield jumped 5bps to 0.39%. Foreign central banks purchased only 22% compared to a running average of 33%. The benchmark ten-year yield rose 6bps to 2.92% and we are reminded that QE2 ends on Thursday.
The euro unsurprisingly rose 0.7% last night sending the US dollar index down 0.4% to 75.33. Australia's been out of favour over the past 24 hours however, with the Aussie down 0.5% since Friday to US$1.0444.
Gold is also currently out of favour and appears to be going through one of its regular correction phases, sparked last week by panicked selling for cash. It must be remembered that we're now in the middle of the dark zone for jewellery demand from Asia and gold typically pulls back at this time. Gold enthusiasts are known to sit back for a while and let it happen before piling back in later in the year.
Base metals movements were mixed and insignificant last night while Brent crude rose US$1.08 to US$106.20/bbl. West Texas was flat at US$90.86/bbl.
The SPI Overnight decided to flip yesterday's local trade on its head and rallied 49 points or 1.1%.
I have noted to date that the US June quarter reporting season will commence in a couple of weeks and that there are fears current earnings estimates are too high given recent weak economic data. However, those estimates have still not been revised and last night, after the bell, Nike reported its out-of-cycle result with a strong “beat”, sending its shares up 4.5% in the after-market.
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