SCOREBOARD: European belting

The information flow wasn't heavy last night but European stocks certainly were. Some of the moves were huge. So, for instance, the Dax was off 3.4 per cent, the CaC 2.8 per cent and the FTSE down 1.9 per cent.

Investors are left wondering what future there is for austerity after one of the Dutch government's minority partners (on the far right) pulled out of an austerity deal. So the Dutch PM and his cabinet offered to resign, although the Queen hasn't accepted as yet.

You've got the French elections, upcoming Greek elections – investors are just a bit nervous it seems and none of that was helped by the European PMIs overnight. These are still showing weakness and the European composite index fell to 47.4 from 49.1. The European economy is weak for sure, but are we at the trough? Are things deteriorating? The PMIs suggest things are getting worse, although they stand in stark contrast to some of the data we are getting out of Germany. Recall that the more highly regarded German Ifo survey and ZEW survey are showing an uptick. The German PMI is showing the opposite.

Whatever your view, the euro wasn't belted around as much as equities so the pessimism on Europe last night isn't unanimous. It was certainly weaker, and we saw some selling late yesterday afternoon, but from the high, the unit was only off about 90 pips. As it is, the euro is only 15 pips or so weaker (1.3155) than at 1630 AEDT. Not massive and not inconsistent with moves in the Australian dollar, down about the same to 1.0319. Sterling on the other hand is up about 20 pips to 1.6127 and yen naturally is little changed at 81.15.

Over on Wall Street, the mood was grim, though not as grim as Europe. The S&P500 managed a more modest but still sizeable fall of 0.8 per cent (1366), with all sectors down – consumer stocks and basic materials the worst performers. The Dow then fell 0.8 per cent (12927), the Nasdaq was 1 per cent lower (2970) and our own SPI fell 0.7 per cent (4329). Not much to say then on commodities – copper was the biggest mover here falling about 1.7 per cent, yet gold had a smaller move (down $4 to $1638) and crude was mixed; WTI down 0.8 per cent to $103 and Brent up 0.1 per cent to $118.

In the debt space, US treasuries managed to push a little higher, but again, activity is weak and moves were far from spectacular. The yield on the 10-year fell about 2 basis points to 1.93 per cent, the 5-year was off about the same to 0.82 per cent, while the 2-year yield fell just over a basis point to 0.26 per cent. Wow. Aussie futures followed suit and outperformed as the 3s and the 10s bounced about 4 ticks (96.9 and 96.33 respectively).

There isn't much else to report and certainly there was no major data. So for today, Australian inflation data is going to be the big one. Out at 1130 AEDT, the market now expects both the headline and the cores to rise by 0.6 per cent in the quarter which, if achieved, will almost certainly see a rate cut next week. In terms of the risks to the number, I'd say they're equally balanced. Most folk are expecting a big move in fruit and veg and of course there are seasonal price moves – which are seasonally adjusted. And as we know, with the magic of seasonal adjustment, anything is possible! (Especially when you can debate the existence of seasonalities in some items.) Yesterday's producer prices don't really mean very much at all for today's number as the correlation is very low. The numbers do suggest a drop off in upstream price pressures. Nevertheless, the drop off has only been over the last two quarters which is a relatively short period of time. I'll talk more about that at another time though.

Outside of Aussie inflation there isn't a lot. We see UK public debt and there are a few speakers in Europe – German Chancellor Angela Merkel, her finance minster and also some ECB speakers. In the US, all we see are S&P/case Shiller house prices.

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

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