That’s more like it, that’s the disappointment we’ve become accustomed to. Not that flimsy effort we saw yesterday. Having talked big, Mario Draghi disappointed the market when the ECB failed to deliver.
The talk was still reasonably tough with Draghi commentating that the euro is ‘irreversible’ and to bet against it is ‘pointless’. Which ultimately I think is right, or so the lawyers tell me, but a lot of time that will pass before we get to ultimately. Draghi went on to say that the ECB "may” restart bond buying but this would only occur under strict conditions, a tip of the hat to the Bundesbank who Draghi acknowledged had reservations about restarting bond buying. So the negotiations begin. But, it seems that before the ECB will crank up the printing presses, Spain and Italy must put in a request for aid through the bailout funds first. The ECB then went on to rule out giving a banking license to the permanent bailout fund.
So, Spanish stocks slumped 5.2 per cent and bond yields soared – the euro was down 60 pips to 1.2181 although it was whippy. The 10-year popped up 40bps to 7.06 per cent and the Italian equivalent wasn’t far behind at 38 bps to 6.3 per cent. Even so, the Italian and Spanish leaders both rejected any idea they would need a bailout, but noted it was worth exploring ways to get borrowing costs down. For the rest of Europe, moves weren’t as dramatic but they were still fairly atrocious. The Dax was down 2.2 per cent, the CaC fell 2.7 per cent while the FTSE was off 0.9 per cent.
Over on Wall Street, equities were offered from the open and hit a low a few hours later, but not quite the magnitudes on European markets (-1.5 per cent on the S&P500). We did see some data and it was okay, but not of sufficient importance to offset Europe. So jobless claims were up a bit – 8000 to 365,000, which is consistent with ongoing robust employment and above trend growth. Then we had the New York ISM bounce over 4 points to 55.2 and on the down side, factory orders fell 0.5 per cent in June. After a decent retracement in subsequent trading, the S&P500 was off 0.7 per cent (1365) at the bell with the Dow down the same (12878) while the Nasdaq was 0.4 per cent lower (2909). The Aussie SPI was then down 0.6 per cent (4201).
Naturally enough commodities were all weaker with crude off 1.8 per cent to $US87.3, copper down 2.2 per cent, silver off 1.7 per cent and gold down $US15 to $US1588. Despite this, the Australian dollar held its value well, down only 15 pips or so to 1.0464.
Finally for the price action, US treasuries pushed a little higher and the 10-year yield fell 3bps to 1.477 per cent, the 5-year was down 2bps to 0.61 per cent and the 2-year sits at 0.23 per cent. Aussie futures had a big sessions up 11 ticks to 97.51 and the 10s up almost 10 ticks to 97.035.
That’s the broad picture. In other news, the BoE took a break from printing more money, opting to keep its asset purchases at £375 billion and the cash rate at 0.5 per cent. Then we saw European producer prices fall 0.5 per cent to yield a 1.8 per cent annual increase.
Before I get into the day ahead it’s worth a quick comment on those retail figures yesterday. The importance of the retail figures isn’t in what they say about the retail sector. As I have consistently highlighted its far more subtle than that, as these numbers haven’t been a reliable guide to the sector, or consumption more broadly, for over a year now. No, they are important because the soft monthly retail numbers had been used by pessimists to talk the economy down. "The weakest retail environment in 50 years” and such rubbish. And that’s just from ‘economists’. The fact we’re now getting stronger numbers in this survey removes that ammunition. And this can only be good for confidence - for the country. And I think confidence is turning, albeit slowly. Already we have seen the government and their propagandists belatedly acknowledge the economy’s strength and identify the true problem in Australia - unjustified pessimism. Better late than never, but naturally I’m flattered to see them follow in my footsteps.
Nevertheless, the government and other policy makers should have been providing leadership on this issue last year when it was needed. Not strutting out onto the stage after the fact: "yeah take that you pessimists” sings the treasurer - just after he’s instructed the RBA to cut rates. In any case the issue of leadership is a much bigger problem that Australia faces across the spectrum and one that is as yet unresolved. As to the monetary policy implications I’ll talk more about that next week. Suffice to say it’s complicated.
Looking at the day ahead, there is no useful data for Australia out today and not much more for the region. We see China’s non-manufacturing PMI at 11 and that’s about it. Tonight, the Europeans release their retail sales data and of course the big one is US payrolls. Analysts look for a 100,000 increase in July payrolls and the unemployment rate is forecast to remain at 8.2 per cent. Also out is the non-manufacturing ISM index.
Have good day and a great weekend.