SCOREBOARD: Austerity applause

Equities pushed back again and Spanish and Italian yields fell as investors applauded the Greek people's move towards austerity.

That brief respite we saw in the previous session didn’t last long and global equities rallied hard again overnight. There are a couple of reasons for this. Greece, obviously – and the latest is we could have a coalition government agreed this evening. It’s clear that the election result has changed things a lot. The risks of them reneging on reform and leaving the eurozone, as low as they were, are much reduced and so the irrational hysteria we’ve seen should die down. They stick to the reforms they agreed to, they get the cash. It’s as simple as that.

I think what the election showed more than anything is that the Greek people understand austerity is unavoidable. Recall all the drivel about how much better they would be if only they left the eurozone and adopted the drachma? Turns out the citizens aren’t as dumb as economists. Things would be worse, much worse, and it is a huge positive to know that the Greek government (once formed) has a popular mandate to remain on the reform path. To fix things. The people have spoken. There is even talk that the EU will allow Greece more time to hit their reform targets. Good news all round.

More importantly, it’s also clear that Spain hasn’t been closed out of financial markets the way some economists/commentators have suggested. They had another successful auction of debt last night – 12 to 18 month bills – and overall the auction was regarded as a success. They got their target €2-3 billion out, receiving about €8 billion in bids. Again, they are paying for it. But not at unaffordable rates – we’re talking a bit over 5 per cent for both, which admittedly is up sharply from about 3 and 3.3 per cent (12 and 18 month respectively) a month ago, but not unaffordable.

At this point, note that Spanish and Italian bond yields fell – the Spanish 10-year just under 7 per cent (6.99 per cent) which is down about 10 basis points or so – while the Italian yield is off about 13 basis points to 5.77 per cent, down 20 basis points from the session peak. A decent performance but not good enough to stop LCH Clearnet raising margin requirements for those who wish to trade Spanish bonds (up to 14.7 per cent from 13.6 per cent). In any case it’s probably worth noting reports doing the rounds that the G20 communique will contain a statement about getting Italian and Spanish yields down even further. Some papers report that the Italian prime minister is pushing the use of the bailout funds to buy debt, a plan Germany is warming up to. Nevertheless, other reports suggest all these rumours are just that, and Germany isn’t keen on the idea. Whatever. When do the Olympics start? I mean, it’s a ludicrous discussion when you gain an appreciation of just how immensely wealthy these countries are. That we are obsessed with their debt is incomprehensible when you see both sides of the balance sheet. Have you noticed that this is never done?

In the equity space, Italian, Spanish and Greek stocks had a strong session, Italian and Greek stocks up over 3 per cent. As for the major European indices, the Dax was up 1.8 per cent, then the CaC and FTSE were 1.7 per cent higher. Over on Wall Street, we also saw solid gains, but with less gusto than Europe. The FOMC are meeting and the prospect of even more stimulus is very real, as ridiculous as that is. It’s what Ben was born to do. He’s a student of the Great Depression, you know. That’s got to be helping the bid though – forth session in a row. Last night the S&P was up almost 1 per cent (1357), the Dow rose 0.8 per cent (12837) and the Nasdaq was 1.2 per cent higher. So it should be a decent session for Aussie stocks – the SPI suggests 0.6 per cent (4155).

On the rates side there is nothing really exciting of note, yields pushed higher on US treasuries but not much. We’re talking 6 basis points on the 10-year (1.62), 3 basis points or so on the 5-year to 0.7 per cent, while the 2-year is at 0.29 per cent. Not too much to say on the commodity and forex front either. Australian dollar is at 1.019 (50 pips higher), euro is at 1.2688 (80 pips higher) while sterling and yen sit at 1.5726 and 78.9. That leaves gold at $1618, crude at $83.9 (plus 0.9 per cent) and copper also 0.9 per cent higher – NY trading.

There were a few bits of data out overnight. The German Zew survey suggests economic sentiment fell sharply in June, the index falling to -16.9 from 2.3 (average 24). Nevertheless the current situation index slipped only to 33.2 from 44 which is well above the average of about -20. Then in the UK, CPI remains above target at 2.8 per cent year-on-year to May down from 3 per cent in the month prior. Finally, US housing starts fell 4.8 per cent in May following a 5.4 per cent spike the month prior.

The calendar today shows there are only a few Aussie data points out and most of them don’t matter. Dwelling starts at 1130 AEST is about the most important. Aside from that, German producer prices are this afternoon, and then for the UK, we see the BoE’s minutes and employment data. The big event of course is the FOMC meeting. The broader economic data flow would argue very strongly against any further easing. It is clear that the US is in no way approaching a double dip recession what have you. That said, a pattern has developed whereby any softening in the data, no matter how temporary or slight, is used as an excuse to provide more QE or derivations of. An extension of Operation Twist, for example, could reasonably be expected at this meeting, not that it’s a reasonable policy mind you.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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