SCOREBOARD: Artificial intelligence

The markets dropped on little to no new data which begs the question – why?

Risk off in a big way it seems, but not a lot in the way of a catalyst that I can see. There was literally no new data and not much news out. Indeed, the news that was out was positive. So Iran and the EU have restarted negotiations over Iran’s nuclear program and nine more Greek bondholders came out and said they would be voluntarily participating in the writedown. I can see why crude was off then – WTI was down 1.5 per cent to $105.08 and Brent fell 1.2 per cent. But the rest? The VIX index surged 15 per cent!

In Europe the Dax was down 3.4 per cent, the CaC fell 3.6 per cent and the FTSE was off 1.9 per cent. Get this but – Greek stocks rose 2.8 per cent. One punter I spoke too reckons it’s just the way computer algorithms work. No good news is bad news, even if there is actually no news – and off they go. Wall Street then was basically offered from the outset – dropped like a rock and tracked lower for the rest of the session. At close, the S&P was down 20.97 points, or 1.54 per cent (1343) with every sector in the red, although financials, basic materials and industrials are hardest hit and all off more than 2 per cent. The Dow lost a whopping 204 points, or 1.57 per cent, to 12,795, the Nasdaq dropped 1.36 per cent (2910), while earlier the Aussie SPI was 1.6 per cent (4142) lower. The thing is, this is shaping up to be the worst session for the year – and on nothing. Markets go up and down, sure, but there is usually something driving it.

On the debt side, Spanish and Italian bond yields shot up – the Spanish 10-year yield 17 basis points higher to 5.14 per cent, while the Italian 10-year was 9 basis points higher at 5.07 per cent. Elsewhere, bonds rallied – bunds, gilts and treasuries with the US 10-year yield down about 6 basis points to 1.94 per cent, the 5-year off 4 basis points to 0.82 per cent, while the 2-year was down 1 basis point to 0.28 per cent. Aussie futures followed suit and the 3s were up 5 ticks to 96.41 and the 10s rose 4 ticks to 95.985.

In the forex and commodity space we saw the Australian dollar drop another 90 pips from 1630 to be at 1.0534 now. Euro is similarly off 90 pips to 1.3110, sterling is down 140 pips to 1.5711 while yen is at 80.81 from 81.41 at 1630. Copper was belted, falling 2.8 per cent, silver fell 2.7 per cent and gold was down $30 to $1672.

Don’t know what else to tell you – in Europe, the second estimate of GDP was confirmed as having fallen 0.3 per cent in the fourth quarter. The international Institute of Finance reckon that the cost of a disorderly Greek default would be in the order of £1 trillion, although I think they’ve pretty much lost that already. They said Spain and Italy would require €350 billion to contain the fallout, while Ireland and Portugal would need an additional €380 billion over five years.

Looking at the day ahead, we get GDP for Australia at 1130 AEDT. Partials to date suggest something in the order of 1 per cent, and that is my forecast, while the market is expecting a 0.8 per cent print. We know business investment is set to be weak, but household consumption should be robust, as should public spending. Net exports and inventories are also expected to add to growth. Prior to that and at 0830 AEDT, Deputy RBA Governor Philip Lowe gives a speech on the 'Changing Structure of the Australian Economy'. Tonight we see German factory orders, the US ADP employment report alongside nonfarm productivity and unit labour costs. Tomorrow morning at 7am the RBNZ meet but no change is expected.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter


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