SCOREBOARD: Budget breakdown

There is no beating around the bush – risk was off last night and obviously the growing problem is that safe havens are increasingly in short supply. Stocks in Europe were absolutely smashed, with the Dax down 3.4 per cent, the CAC down 3.4 per cent and the FTSE off 2.6 per cent.

Incompetent politicians naturally enough sit at the root of all this evil – European and US politicians tag-teaming in what appears to be a coordinated wrestling match with market confidence. It's America's turn now and concerns are growing, apparently, about the US deficit impasse. The latest I've heard is that the congressional 'Super Committee' is about to announce the failure of these talks. What I'm more interested in is why the Congress would impose a 'deadline' that nobody thought would ever be met. Fodder for the press, surely? No one ever believed anything would be resolved until the election so, seriously, what are these latest theatrics about? Why impose a deadline you know will not be met, especially in this environment? Is it just to show the world that you too are inept? The worst case, apparently, is that if no 'last-minute deal' is made then $1.2 trillion in spending cuts kicks in anyway (in 2013).


It seems to me a bit of nothing then, but people are freaking out anyway over Europe so this episode obviously doesn't help. Talking of Europe, Spanish and Italian bond yields pushed higher last night, with the 2-year yield up 13bps to 5.6 per cent for Spain and 28bps to 6.4 per cent for Italy. The 10-year bonds also pushed higher, about 20bps for Spain (6.55 per cent) and smalls for Italy (6.65 per cent). Nothing new here – the ECB are still refusing to print money, although one governing council member said a debate was needed to determine the ECB's response (although he implied that did not include printing money). Silvio Berlusconi then renewed threats to the new Italian Prime Minister, Mario Monti, that if he tried to introduce any reforms he didn't like, then his government wouldn't last until the next election. Berlusconi, in particular, is reportedly against a wealth tax. Not to be forgotten, one of the ratings agencies, still in business it seems after having grave difficulties in rating CDOs etc, said that France could lose its AAA rating, especially if bond yields continue to rise – just to remind investors that it could.


As you can see, there wasn't much that was good about last night. Stocks on Wall Street felt the ensuing pain, although they climbed off their lows in afternoon trade. At the low, the S&P500 was down 2.7 per cent, but the index lifted late in the day to close down 1.9 per cent (1193) with industrials, financials and tech stocks the hardest hit (although everything was down). The Dow was off 249 points (11547), the Nasdaq lost 1.9 per cent (2523) and Australia's SPI is 1.6 per cent lower (4121).

Commodities too were absolutely belted – gold down about $40 to $1676, silver off 3 per cent, copper down 3 per cent. Crude so far is off about half a per cent on both WTI ($97.06) and Brent ($106.9). The US dollar is a part of the story here, but not entirely as the US dollar index rose smalls. Sure the Australian dollar was off over a big figure to 0.9846, but euro didn't do much – it was off 18 pips to 1.3506 while Japanese yen was little changed at 76.94. Sterling was otherwise off 94 pips to 1.5655.

As far as debt is concerned, moves were small and ranges narrow on the Treasury front – yields off modestly 0-2bps on the 2-year (0.27 per cent), the 5-year (at 0.9 per cent) and the 10-year (at 1.96 per cent). Aussie futures rallied harder however and the 3s are 9 ticks higher (96.88) while the 10s are about 7 ticks higher (96.02).

Bits and pieces otherwise. For the US, existing home sales rose 1.4 per cent in September, which was stronger than the expectation for -2.2 per cent but follows a fall of 3.2 per cent last month. (At 4.97 million, sales are about 11 per cent below average.)

In Europe, the head of the BDI Group (the leading industry group) said that while a slowdown was likely "there was no reason for a renewed recession scenario from an industrial... point of view.” I love that 'can do' attitude – it's no wonder Germany is an industrial powerhouse despite the problems faced (strong currency, high wages etc). They just get on with it. I mean, contrast it with the commentary we've had from our some of our own whimpering industry leaders and their lackeys over the last year. They're not all bad of course and some are outstanding, but let's be real about it – many were falling over themselves to tell everyone how bad things were – there was even a non-mining recession! We know this was false now, it always was, there was never any evidence, but even that didn't stop them. It's all about leadership and the quality of it. Germany and Europe in general may have that recession, but it doesn't appear industry will be leading the charge. There's not much else otherwise in terms of data or news, which is probably just as well.

Looking at the day ahead, there is nothing for Australia and for New Zealand, we get inflation expectations (1300 AEDT), migration and that's about it. Tonight, watch out for the second estimate of US GDP, the Richmond Fed manufacturing activity index and the FOMC minutes.

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.