In the wake of no new data, investors in Europe flicked the switch to risk while Wall Street also enjoyed a bounce.

It seems that punters had enough with the ‘risk off’ trade last night and we saw a bounce back on global equities. There wasn’t much in the way of major news or data flow or anything, so realistically last night’s moves could have gone either way. Especially with Fitch coming out and downgrading a bunch of Spanish banks again. That saw the Spanish 10-year shoot up to a euro era high of 6.82 per cent (from 6.48 per cent) and the Italian equivalent up to 6.15 per cent from about 5.85 per cent. That action alone could have sparked another rout, and it almost did with most of the major indices taking a tumble soon after (the Dax fell almost 1 per cent), some even slipping into the red. But as it was we saw some tentative gains on the Dax (up 0.3 per cent), and the CaC (up 0.1 per cent) – both only just managing to claw back gains lost after Spanish yields spiked. Only the FTSE managed a decent gain of 0.8 per cent.

I still haven’t really read any decent explanation as to why Spain did it, accepted the aid, when it wasn’t actually needed. It seems crazy to me. Talk about throwing petrol on a fire. I read one report that reckons the Germans were desperate to get them to sign on before the Greek election, to calm markets and demonstrate that the Spanish banking system was well capitalised. Just in case. Whatever the reason, market nerves are worse, so if calming the market was indeed the intent, it’s a strategy that has failed dismally. Everyone’s talking about Italy now – oh, and Cyprus. Apparently Cyprus needs a bailout now, which according to EU officials would amount to something like €3-4 billion.

Over on Wall Street the major indices saw a solid bid through most the session, with the major indices closing 1.2 to 1.3 per cent higher (S&P500 at 1324, Dow at 12573 and Nasdaq at 2843). Commodities too pushed higher although gains were a little more subdued. WTI, for instance, was up about $1 to $83.4, gold is up about $14 to $1611, while copper was flat.

Over on the rates side, US treasuries sold off and the 10-year yield spike about 8 basis points to 1.66 per cent. The 5-year rose about 6 basis points to 0.73 per cent, while the 2-year was up a couple of basis points to 0.28 per cent. Finally for the price action, the Australian dollar had a decent bid and is up some 80 pips from 1630 to 0.9960. Euro is little changed at 1.250 on an 80 pips range, while sterling is about a big figure higher to 1.557 and yen sits at 79.42.

There wasn’t much major economic data overnight. Stuff like US import prices, which fell 1 per cent and small business optimism which was steady. Contrast that to Australian business confidence – remarkable. Otherwise, UK industrial production was flat in April.

Today at 1030 AEST we get an update on Australian consumer confidence for June. Yesterday’s business figures showed yet again the confidence destroying influence that rate cuts are having in this environment. That business ‘feels’ so blue can be put down to four things. The European crisis, the carbon tax, the domestic economic debate and rate cuts. Think about what we read after the GDP figures. In a predictable move, many business commentators and economists resorted to the old ‘I don’t believe the figures’ chestnut. The glaring logical fault with that strategy is that those same people were more than happy to accept and believe the GDP figures when they showed below trend growth. They didn’t raise one objection to those figures then, did they. Nor did they talk about strong nominal growth. Weak nominal growth is all the rage now. They are not being consistent then, which means their ‘arguments’ are flawed, irrelevant even and most likely guided by embarrassment or a severely bruised ego. Whatever the case, they did try to talk the figures down. This is what I find so remarkable, even when the arguments they had were so weak. As remarkable and sloppy as it was though, it does weigh on confidence.

True to say that consumer confidence made an ever so small lift in May, of 0.8 per cent. But so far it remains soft relative to our economic fundamentals and weaker than what it was prior to the RBA’s easing cycle. Before that (0930 AEST), the RBA governor makes another speech, this time at the Prime Minister’s Economic Forum in Brisbane. I haven’t seen a topic at this point. This afternoon we see the final estimate of German CPI (for May) while tonight we get eurozone industrial production, US retail sales, producer prices and business inventories.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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