Risk off. No rhyme nor reason that I could really see to justify the magnitude of some of the moves, but for whatever the reason, sentiment has been belted. Most of the news flow suggests it was poor earnings reports from companies like Dupont, Texas Instruments and Xerox. But then others like 3M reported strong results, although fair to say they lowered full-year earnings forecasts.
In any case the carnage actually started in Europe and rather than one large catalyst, there seems to have been a series of negative influences on the market, which combined to put the smack down on European stocks. There were some big moves, with the Dax off 2.1 per cent, the CaC off 2.2 per cent and the FTSE100 down 1.4 per cent. So, we had Moody’s downgrading five Spanish regions, following similar moves by S&P last week. Now S&P’s decision didn’t have a dramatic impact and I’m not sure Moody’s decision did either. In isolation. The fact is Spain and by extension her regions, have recourse to the unlimited buying power of the ECB and the significant firepower of the ESM. As a result, Spain’s debt is safer now than what is was, further downgrades have no justification. But then these are the companies that rated CDOs with the solid AAA stamp. They don’t know what they’re doing. Or as some have suggested to me, they know exactly what they are doing and get paid very well for it – guns for hire.
In any case, the decision was accompanied by news (from the Bank of Spain) that the Spanish economy probably contracted 0.4 per cent in the third quarter (same as Q2), and that the government would likely miss its budget deficit targets. Needless to say when the Spanish treasury is trying to sell debt, none of this helps, and so yields rose on the three and six month paper they auctioned off last night. Still very low yields mind you – 1.4 per cent (1.2 per cent last month) and 2.02 per cent (2.21 per cent) respectively. In the secondary market the 2 and 10-year yield shot up about 15-16bp to 2.94 per cent and 5.62 per cent respectively. Finally we have some data showing French and Belgian businesses were the most gloomy they’ve been in three years.
So you’ve got that, some negative news flow on US earnings, the presidential election, fiscal cliff and the fact that stocks have had a strong run since June. The S&P basically sold off from the open, most of the damage done within the first couple of hours. Losses have been trimmed into the close, but were still talking solid moves to the downside. As I write the index is down 1.3 per cent (1414), with the Dow off 248pts (13097) and the Nasdaq off 0.7 per cent (2996).
More pain was to be seen in the commodity space though. Crude is off some 2.3 per cent to $US86.6, gold is down $US18 to $1708, silver was also sharply weaker although copper was flat. The only beneficiary to all of this was the US treasury, and as the largest holder of US debt, the Fed. So all the major t.notes rallied with the yield on the 10-year down about 5bp or so to 1.755 per cent. The 5-year was off about 3bp to 0.75 per cent, while the 2-year is at 0.29 per cent. Aussie futures, then rallied, 3s up 7 ticks (97.55) and 10s up 6 (96.96).
In other news, the Australian dollar had a decent move to the downside, losing 80 pips to 1.0263. It’s all US dollar however as we saw euro lose about the same to 1.2983, while the British pound lost over 60 pips to 1.5953 and the Japanese yen is at 79.84. The we had Fed Chair Ben Bernanke indicate that even if Obama wins the presidential election, he won’t be seeking a third term. Recall that Mitt Romney has already indicated he would ask Bernanke to step down if he wins and as regular readers would be aware, I can only view this as a very positive development for the US and global economies. The fact is, the Fed hasn’t done anyone any favours, not the US economy, not the global economy and certainly not the world of central banking. The Fed is, undeniably, a major source of economic and financial instability. Not stability, which was the intention. Unfortunately a number of other central banks, including the RBA, are running down the same path.
Looking at the day ahead we get consumer price data for Australia at 1130 AEDT Now regular readers will know my view. The economic signals from this data set have been severely impacted by volatility, changes to methodology etc – inflation was surging last year and then just as quickly dropped off a cliff. Trying to determine true underlying inflationary pressure in that environment is very difficult, but suffice to say it is probably being understated at the moment due to the temporary influence of weather and the strong Australian dollar. We’ll see what the data today yields – the consensus is that CPI will rise by 1 per cent with some of that due to the carbon price. Core inflation (average of trim and weighted median) is forecast to rise 0.6 per cent.
Other than the inflation numbers, the ‘flash’ estimate of China’s manufacturing PMI is due out at 1245 AEDT and then tonight we get the European PMIs. Neither of these are particularly useful for economic analysis and so the markets attention will probably be more focussed on the German IFO survey. For the US, we get the FOMC decision tomorrow morning (at 0515 AEDT) and while no changes are expected at this meeting, the Fed will certainly crank up QE infinity at some point. Most likely when operation twist (the extended version) ends later this year. Prior to that we see new home sales (Sep), and house prices.
That’s about the lot, have a great day…
