SCOREBOARD: Euro elation

By now we know the broad spread of the European package and so I won't cover it here again. Suffice to say, it has been met with euphoria at this stage and there have been some absolutely huge moves. The euro, for instance, is up to 1.4207 or 280 pips from lunch yesterday, and two figures from 1630 AEDT. The Australian dollar managed to outperform that, spiking to 1.0725, up three big ones from lunch yesterday and up 223 pips from 1630 AEDT. Remarkable, and I sincerely hope that people hedged when they had the opportunity. Sterling and yen had a quieter session, with sterling up 'only' a big figure, while the yen did nothing really and sits at 75.859.

Equities and commodities also had a massive bid put on – the numbers are incredible. European stocks surged, with the Dax lifting 5.4 per cent, the Cac soaring 6.3 per cent and the FTSE rising 2.9 per cent. On Wall Street, the S&P500 finished 3.4 per cent higher (1,284), the Dow rose 339 points (12,208) and the Nasdaq was 3.3 per cent higher (2,738). All sectors had a strong bid obviously, but financials ( 6 per cent), basic materials ( 6 per cent) and industrials ( 4.6 per cent) led the pack. So far then the S&P500 has had the strongest run – the biggest monthly rally since 1974. For Australia, the SPI is 1.4 per cent higher.

Commodities then generally surged. Gold put on $20 to sit at $1,743, silver shot up 5 per cent and copper rose 5.8 per cent. WTI was 4 per cent higher at $93.8 and Brent was 2.8 per cent higher at $112.

Big numbers, lots of numbers. But will it last? Who knows. The usual suspects are out spruiking doom and gloom and doubt. In reality this is what Europe must deal with and this would be my main criticism of the package, to be honest. There is no full-stop; the conversation isn't over and that of course gives plenty of scope for the usual PR crews to whip up further hysteria. Indeed, in the not too distant future, I look for someone to purchase a report from one of the ratings agencies, downgrading someone or other – or everyone maybe. Timing is the issue.

The Europeans have a few weeks' grace to tidy things up but the pressure is on, and they must realise what is going on and end it. End the conversation, end the speculation. Only then will confidence be restored. Until that point, this is just volatility.

So doubts have already been expressed about whether the new and improved debt-to-GDP ratio for Greece of 120 per cent can be sustained. There are lots of 'whats, ifs and buts' about recession and the question of whether they will stick to their side of the bargain and so on. That is, despite €100 billion of debt being wiped off – and noting that it hasn't even been 24 hours – the conversation that we've been having for the last two years is exactly the same. It hasn't changed. People are still expressing doubt about whether Greek debt is sustainable. European politicians need to end this.

More doubts were expressed about whether the 'voluntary' haircut will even turn out that way. Will they be able to convince individual banks to go along? They had a 90 per cent target last time, which they didn't get. So a default is still on the cards. Then of course there is the issue of how the Europeans will fund the beefed-up EFSF. We've got weeks of this stuff to go and the odds of a ratings agency shooting off a downgrade or two in the interim is very high – the timing will be pure coincidence of course. If European politicians are sincere about ending this crisis they must put out the detail with a view to ending, once and for all, the press discussion and the PR effort. It needs to be watertight and remove any scope for doubt.

In part, this is why Italian bond yields had a modest reaction (all things considered). Sure, the 2-year yield was down some 14bps to 4.42 per cent (with the German 2-year at 0.6 per cent), but the 10-year was off only 5bps to 5.87 per cent. Spanish bond yields had a better time of it – with the 2-year down 25bps to 3.67 per cent and the 10-year down 14bps to 5.33 per cent. Across the Atlantic, US treasuries sold off aggressively and the yield on the 10-year t-note spiked 15bps to 2.38 per cent, while the 5-year was 10bps higher at 1.2 per cent and the 2-year was up almost 3bps to 0.31 per cent. Aussie futures were off 14-15 ticks, with the 3s at 96 and the 10s at 95.38.

Now it wasn't all just about Europe last night. For much of this year we have had people tell us that the US was at the precipice of recession – the economy had hit stall speed and analysts were dusting off their catchphrases and upgrading their recession calls of 40 per cent or 50 per cent. Indeed, the competition was on to see who could sit on the fence most visibly. Last night's GDP data shows that the US is nowhere near a recession. The problem of course, and as I've been highlighting for well over a year now, is that the sentiment indicators have been at odds with the real, hard data. False signals of weakness have therefore been given. Thankfully, this idea has gained considerable traction of late, and after last night's GDP the issue should be put to rest. So third quarter GDP rose 2.5 per cent, which was smack bang on expectations and followed on from a 1.3 per cent rise last quarter.

Note though that 2.5 per cent isn't really giving us the complete picture. The reality is that economic momentum is considerably stronger. Firstly, consider that inventories took off about one percentage point from growth. I've been highlighting the inventory rundown as a function of uncertainty, although business shipments themselves and orders have been solid. At some point business will have to restock, which will provide a boost to growth (after four quarters of detraction). Consider also that private demand is up some 4 per cent annualised for the quarter after 2 per cent in the second quarter. Consumption rose 2.4 per cent and business rose 13.2 per cent. These are good numbers and with pristine corporate balance sheets, high cash balances and solid earnings I wouldn't be looking for an end to it anytime soon.

In other news and data, German inflation was little changed in October and remains well above target at 2.8 per cent from 2.9 per cent last month. Back to the US, and jobless claims were pretty much unchanged in the week to October 22 at 402,000. A good number consistent with solid employment growth.

Looking at the day ahead there isn't too much for Australia and New Zealand or much anywhere else in our regions. Japanese industrial production and inflation figures are about it. Tonight, watch out for personal spending and income in the US.

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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