SCOREBOARD: European breather

Sharp falls in Spanish and Italian bond yields gave European markets a reprieve, while US earnings left Wall Street mixed.

Spanish and Italian bond yields fell sharply overnight with the Spanish 10-year plunging 30bps (to a still high 7.34 per cent) while the Italian 10-year fell just over 20bps to 6.44 per cent. Big moves which helped put a halt, even if just in some cases, on the equity market rout that we’ve seen.

So what lay at the heart of it? I’d like to think it was a joint statement made by the German and Spanish finance ministers, who highlighted that many in the market don’t seem to understand Spain’s fundamentals. So I’m kind of hoping there was a collective Homer Simpson style ‘doh’ reverberating around the world as this fact slowly dawned. And it is a fact. The ministers were right in highlighting that market rates do "not correspond to the fundamentals of the Spanish economy, its growth potential and the sustainability of its debt.” These are mathematical truisms. Unfortunately I don’t think this was the case. The discussion over sovereign debt remains largely irrational and dominated by hysteria .

Perversely, if you are an investor and you know all of the above, and many do, it becomes rational (or at least profitable) to behave irrationally. Don’t forget there are two sides to a balance sheet. Not just liabilities, but there are also assets and this fact is overlooked in the public discussion, which serves to highlight the finance minister’s point. And it's publicly available information, that’s what I can’t get over. We’re not even talking information asymmetries, which often act to inhibit the functioning of free markets.

Maybe we need fewer economists in the world and more accountants? So it was that the fall followed ECB commentary suggesting the European Stability Mechanism should be given a banking licence. The thing is, the man who made the comment, Bank Council member Nowotny, added that he is not aware of any such discussion taking place.

Whatever the case, the sharp drop in those yields saw some European equity markets post modest gains, after three consecutive falls. The Dax rose 0.3 per cent, the CaC rose 0.23 per cent, although the FTSE didn’t share in these gains, falling 0.02 per cent. The euro then rose almost a big figure to sit currently at 1.2152.

Over on Wall St the mood was mixed. As were earnings I guess. While companies like Caterpillar and Boeing reported decent profits, Apple's results weighed heavy and in fact if it wasn’t for the performance of Apple, the Nasdaq would have ended in positive territory. As it is, the index fell 0.3 per cent at the bell (2854), the S&P500 was then 0.03 per cent weaker (1337) although the Dow ended 0.5 per cent higher (12,676). The boost to commodity prices would have helped here and we saw some solid gains. Gold shot up $US27 to $US1603, silver as up 1.8 per cent, copper 1 per cent and then there were reasonable crude gains – WTI up 0.6 per cent to $US89.07.

Otherwise for the price action we saw Australian dollar up 80 pips to 1.0311, sterling then whipped around after the GDP report but ended little changed at 1.5496, while yen is at 78.18. On the rates side things were very boring – US Treasury yields made small moves generally to the upside. The 10-year is at 1.39 per cent, the 5-year at 0.55 per cent and the 2- year at 0.22 per cent. Aussie futures were down 2-3 ticks with the 3s at 97.86 and the 10s at 97.285.

Bits and pieces otherwise. As mentioned, the British had some data suggesting their economy shrank for the third consecutive quarter, 0.7 per cent in the June quarter, with GDP 0.8 per cent weaker annually. Then for the Germans, the IFO survey eased a bit to 103.3 from 105.2 – the current assessment index is still good at 111.6, which is well above average. Over in the US, new home sales slumped 8.4 per cent in June following a 6.7 per cent gain the month prior. Volatile for sure.

Looking at the day ahead there isn’t too much for our region. So the major data tonight would be US durable goods orders and initial jobless claims.

Have a great day…

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

@AdamCarrEcon on Twitter.

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