SCOREBOARD: EU optimism

Well it doesn't look like we'll get the detail on everything today and there is certainly no comprehensive solution, but 'good progress' is being made apparently and it's not impossible we won't see further detail later this morning. No sign though, yet, that this is causing panic on the streets. Otherwise, European leaders next meet on November 7-8.

We did see a statement from the Europeans suggesting they had reached agreement on recapitalising banks, but in terms of Greece and write-downs etc, negotiations are ongoing. Much of the statement we actually know from official commentary prior to the meeting. So, for instance, the summit statement said that banks should work with a capital ratio of 9 per cent and suggested the actual target would have to be reached by mid-2012. Governments stood ready to back banks with guarantees if they were having trouble raising capital.

As mentioned, how much of a write-down private bondholders will take on Greek debt is the main sticking point. Eurozone leaders apparently want to reduce the Greek debt-to-GDP ratio to 120 per cent by the end of the decade, from an expected 186 per cent estimated next year. A 50 per cent write-down on private debt holding is being bandied and Angela Merkel and Nicholas Sarkozy are speaking with banks as I write, apparently.

Until that is sorted, there has been no agreement on how much the EFSF needs to be beefed-up or even on how it is to be beefed-up. There was good news on this front though. The Bundestag passed the bailout bill with 503 of 596 parliamentarians voting in favour. Then we had some press commentary suggesting that China intended to invest in the EFSF and lastly, the new head of the ECB said that the central bank would continue buying government bonds.

That's pretty much it I think at this stage, and despite the lack of anything really substantive, there was a modest risk bid put on – well on Wall Street at least, as European stocks ended mixed (Dax -0.5 per cent, Cac -0.2 per cent and FTSE 0.5 per cent). Markets didn't collapse though and that of course is a positive sign.

In the US, the S&P500 finished up 1.1 per cent (1,242), with basic materials, energy and financials the key outperformers (up 2 per cent or over). Now apart from Europe there were a few other factors that acted to lift sentiment. One of the major points was a continued strong bounce in core durable goods orders, which rose 2.4 per cent in September after a 0.5 per cent gain in August. Headline orders were weaker, down 0.8 per cent after a 0.1 per cent fall last month, but this largely reflects aircraft and auto orders. Core shipments fell 0.7 per cent, but this follows a strong gain of 3.1 per cent last month and is largely a base effect. The overall picture being painted by the durable goods numbers is one of cautious strength. Shipments and orders remain solid but firms are unwilling to really match this with a solid lift in inventories, which rose at the weakest pace in 2 years in September – nerves over Europe no doubt. The bottom line is that business investment will likely make a solid contribution to third quarter GDP.

Then we had some solid earnings reports (Boeing) and with all that to digest, I think people are wising up to the fact that repeated recession calls are again falling flat. Elsewhere then, the Dow rose 162 points (11,869), the Nasdaq rose 0.5 per cent (2,650), while Australia's SPI is up 0.6 per cent (4,246).

In the forex and commodity space, we saw the euro little changed at 1.3912 (almost a two figure range though) and there wasn't much action elsewhere either. So, the Australian dollar was 34 pips higher to 1.0407, the pound lost 58 pips to sit at 1.5978 while the yen is at 76.25 from 76.02. Gold was then up another few bucks to $1,720, silver rose 1.2 per cent and copper was 2 per cent higher. Crude was weaker, with WTI down 2.5 per cent ($90.8) and Brent off 1.4 per cent ($109.3).

Finally, in the debt space, US treasuries reversed some of the gains of the previous session. The 10-year yield rose 8bps to 2.21 per cent, the 5-year was 7bps higher at 1.07 per cent and the 2-year was 3bps higher (0.29 per cent). Australian futures were then off 2 to 4 ticks with the 3s at 96.22 and the 10s at 95.55.

In other news and data, new home sales in the US rose by 5.7 per cent in September, stronger than the 1.7 per cent forecast. Home sales remain weak however, and are only about one-third of what could be regarded as 'normal'. Still in the US, mortgage applications rose by 4.9 per cent (both refis and new approvals were up) in the week to October 21 after a 14.9 per cent fall last week. Turning to Europe, Italy wrote up a document showing how keen they were to reform – in it they announced they would raise retirement age to 67 from 65 and sell off some assets.

Finally, in our region, the RBNZ kept rates unchanged at 2.5 per cent, the accompanying statement showed there was a need to hike rates but with everything going on, Bollard doesn't seem to be in a rush. Europe depending, I look for the first hike in the first quarter of 2012. And that's about it.

For the day ahead, look out for South Korean GDP this morning, out after NZ trade data and then tonight, we get US GDP and the European business climate indicator.

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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