SCOREBOARD: Broken euros

Things in Europe are getting worse it seems and as yet, politicians are doing very little about it. It's not unusual to see Italian, Spanish and French bond yields push higher – and they did again last night with the Italian 10-year back up to 6.97 per cent from 6.82 per cent, while the 2-year rose 14bps to 7.12 per cent. It's also not unusual to see nothing of substance from European politicians in response. In fact the one thing I think it is safe to say now is that absolutely nothing is going to be done to 'fix' things in the near-term. That's not necessarily a bad thing though as 'fixing' things has come to mean printing money, which is terrible policy at the end of the day. Italy has, as I've outlined before, the resources to fix things up overnight if they want. It really is up to them. But while they hang out for the ECB to print money, and while some politicians actively call for it, there is no incentive for the Italians to make real decisions. The best thing that French, Spanish and other politicians could do is to actively rule out ECB printing and stop feeding this speculation. Only then can attention be turned to the real solutions and confidence be restored.

The other proposal that gets thrown around is for Europe to issue a common bond. The EC president, Jose Manuel Barroso, outlined his plan for this last night (it's not really new though). The idea is to enforce stricter budget discipline and issue joint bonds. His hope is that stricter budget discipline will overcome concerns that less fiscally prudent nations will free ride – Merkel didn't exactly seem enthralled by the idea, describing the proposal as 'extraordinarily inappropriate'.


In the meantime though, economic data continues to deteriorate. European industrial orders collapsed last night, falling by 6.4 per cent in September after a 2 per cent rise. Annually, orders are 1.7 per cent higher. We also saw the EC manufacturing PMI slip to 46.4 from 47.01 while the services PMI rose to 47.8 from 46.4. The PMIs I'm not so concerned about, as I've discussed before, given they bounce around with market sentiment and realistically can and do turn sharply if conditions change. They're not really reliable indicators in this new world. Certainly the fall in a Chinese PMI yesterday is meaningless, but obviously these headlines spook the market.


In terms of pricing, the combination of weaker data, rising bond yields in Italy and reports of a disastrous bond auction in Germany led to a sharp drop in euro – down 131 pips to 1.3332 – and a slump in equities. At the close of European markets, the Dax was off 1.4 per cent, the CaC fell 1.7 per cent and the FTSE was down 1.3 per cent. The German auction only saw cover of 1.1 and that's with a sharp reduction in the amount of issue. Headlines suggest the auction was a 'disaster' or 'horrible' although the German debt agency suggests they are not seeing any evidence that investors have shunned bunds and suggest that people "shouldn't over-interpret today's result".

In the US things are looking worse and that's despite OK-ish data. It wasn't great data but not too bad in the scheme of things. On the positive side was a 0.4 per cent gain in personal income, acceleration from a 0.1 per cent rise in September. Similarly, personal spending rose 0.1 per cent, which by itself isn't great but coming after a 0.7 per cent surge in the month prior is awesome. Given such a strong September outturn, a negative spending number wouldn't have been a shock. The fact that it was positive and actually built upon the strong gain is very positive.

Not as positive were durable goods orders, which fell 0.7 per cent in October after a 1.5 per cent fall in the month prior – but this was largely transport (especially aircraft) and defence items. Ex transport and defence, orders rose 1.1 per cent after a 1.5 per cent gain and are 13 per cent higher annually. Core capital good orders fell however and were off 1.8 per cent after a 0.9 per cent gain. A mixed result all up.

Nevertheless, on Wall Street, the S&P ended down 2.18 per cent (1162.15) with basic materials, energy and financials leading the charge (all down over 2 per cent so far). Commodities were generally belted – WTI is down 1.7 per cent ($96.4), copper fell 1.6 per cent, silver fell 3.2 per cent and gold was off $12 to $1694. Elsewhere, the Dow was off 232.08 points to 11261.64, the Nasdaq fell 2.41 per cent (2460.42) and the SPI is off 0.4 per cent so far (4048).

On the debt side of things, there wasn't a lot of action outside of a well-bid US treasury auction of 7-years. Cover was high at 3.2 for the $29 billion offer. The 2-year yield was then unchanged at 0.26 per cent, the 5-year, similarly, was little changed at 0.88 per cent on a 6bps rage, while the 10-year yield was off 4bps to 1.87 per cent (9bps range). Aussie 3s were then 6 ticks higher at 96.99 and the 10s rose 7 ticks to 96.14.

Other than that, the Australian dollar sits 76 pips lower at 96.94, pound sterling is off a big figure to 1.5512 and Japanese yen sits at 77.41 from 77.03.

In other data, US jobless claims were up 2000 to 391,000 in the week to November 19 – and it's a major positive that they are holding down below 400,000. On the inflation front, the headline PCE deflator fell 0.1 per cent with the annual rate falling to 2.7 per cent from 2.9 per cent. Core PCE rose 0.1 per cent with the annual rate rising to 1.7 per cent from 1.6 per cent.

To the day ahead – we get the New Zealand trade balance at 0845 AEDT and then tonight, watch out for a speech from the RBA governor (2020 AEDT). The German IFO survey and UK GDP are also out. Don't forget it's Thanksgiving Day in the US tonight so things will really quieten down over the next two sessions.

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

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