SCOREBOARD: Bears naked

Positive US earnings and European economic data buoyed markets proving the bears wrong again.

Global equities got another solid boost overnight on the back of strong US earnings reports and positive European economic data. Just another day of humiliation for pessimists. For the US, it’s looking like stocks are getting their biggest boost in about a month after Johnson and Johnson, Mattel and Goldman Sachs posted better than expected results. Indeed so far it’s not looking like the earnings season is all that bad. In any case, US stocks are up into the close with the S&P almost 1 per cent higher (1454), while the Dow has put on 103pts (to 13527), and the Nasdaq is 1.1 per cent higher (3096).

In Europe too, gains were robust, the Dax up 1.6 per cent, the CaC 2.4 per cent higher while the FTSE100 was 1.1 per cent higher. There are two things here. Firstly, trade data is improving sharply and we learned last night that European exports rose 3.7 per cent in August (strong gains in the’ periphery’) following a 2.2 per cent fall. Imports were also modestly stronger. You can see a pattern developing here – Chinese trade data lifts, US and European industrial production accelerates and now the trade figures are showing the same thing. All the tier one indicators suggest the global economy is picking up, getting stronger – equities are rallying.

Then there is plenty of speculation about whether Spain is close to requesting a bailout or not. Reports have recently re-emerged that they are close to asking for a line of credit – boosting markets – but one of the key considerations, according to a senior finance official, is whether their decision will spark contagion into Italy.

I think that goes without saying, but then this whole process has been truly bizarre. It should have and could have ended with Greece two years ago - and would have only cost a few hundred billion. A couple of years and well over a trillion euros later we’re still taking about it. Astounding. Anyway, the line of credit idea would differ from the other bailouts, where the Troika effectively became the sole lender. Under this line of credit plan, the money would be there to tap only if needed. The plan, and it’s a good one, is that once the credit line is established, it is likely that Spain’s borrowing costs would drop, which in turn would mean they would never need to actually use the credit line. The same senior official says that while they may be close, he doesn’t expect resolution of the matter this week. After all that, Spanish and Italian bond yields were lower, Italy’s 10-year yields down about 4bp to 4.81 per cent, while Spain’s was down only a couple of bp to 5.6 per cent.

AS for bond moves elsewhere, US treasuries sold off and moves were comparatively large. So the 10-year yield was up 7 bp to 1.73 per cent, the 5-year was a few bp higher at 0.69 per cent, while the 2-year was at 0.27 per cent. Aussie futures sold off – 3s down 5 ticks to 97.59, while 10s were down over 7 ticks to 96.995.

Then for forex and commodities we generally saw a weaker US dollar and stronger commodity prices – gold up $US11 to $1749, crude rose 0.3 per cent ($US92.13), while copper was up 0.2 per cent. The Australian dollar is up smalls (15 pips or so to 1.0278), the euro is 50 pips higher to 1.3052 and the British pound was about the same to 1.61115. The yen sits around 78.91.

Bits and pieces otherwise – there was quite a bit of data, especially on prices. We saw US consumer prices surge 0.6 per cent in September to be 2 per cent higher annually. Core pries rose 0.1 per cent and are 2 per cent higher annually. The European inflation was 0.7 per cent higher in the month and 2.6 per cent year-on-year. Finally, UK inflation was 0.4 per cent higher in the month and 2.25 higher annually. The key take from this data is that inflation remains elevated despite recession in both the UK and Europe. There is no disinflationary pressure as economists warned there would be. The same economists who have been constantly wrong on the global recovery to date. Consequently, inflation is still the biggest threat to the global economy and we are seeing that already. No one is warning of hyperinflation so don’t let people who have been so wrong on the recovery thus far try to distort the debate. The issue is whether central banks will be able to contain inflation to their targets as the global recovery regains momentum after a temporary lull. The answer is no of course. And, as this data shows, we are starting from a high base already. It’s about thinking ahead. Too many people who can’t see that inflation is already a problem, just don’t seem to be able to do this – this is the same thinking that lead to the GFC. It’s a failure of comprehension.

Otherwise, the German ZEW survey shows a big improvement in sentiment – the index at -11 from -18 (current index at 10 from 12). Then for the US, the NAHB housing index rose to 41 in October from 40 the month prior – pointing to ongoing improvement in the housing market.

There isn’t much for Australia today and it’s pretty quiet around the region too. Tonight we see the BoE’s minutes, and UK employment data. For Europe, it’s all about construction data and then for the US, we see housing starts.

That's about it, so have a great day…

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