SCOREBOARD: European drag

Markets dipped overnight, while Greece entered its fifth year of recession as the country continued to debate austerity plans.

The first fall in seven sessions ain’t bad and it’s not like magnitudes were big or anything. The S&P 500 finished the session down 0.1 per cent (1404), the Dow was off 0.3 per cent (13169) and the Nasdaq fell 0.02 per cent (3020). So realistically we’re still talking about a flat market.

By sector, energy (-0.6 per cent) and basic materials (0.9 per cent) seemed to be the key underperformers following some decent falls in the commodity space. Copper for instance was off 1.2 per cent (otherwise has been broadly flat for some months now), silver fell 1.1 per cent, and gold was down about $10 ($1612). Overall, the CRB index was down just under 1 per cent, although crude is holding up well, falling only 0.1 per cent to be at $92.77.

News overnight was light and the data flow almost non-existent. One of the more interesting tidbits is that the Greek economy shrank 6.2 per cent year-on-year in the June quarter. The results are broadly in line with the government expectation that growth will contract 7 per cent this year and the fall marks the fifth year of recession. The bigger picture for Greece is that the government is still debating an €11.5 billion austerity plan, of which they have agreed €6.5 billion. The deadline is October apparently when the troika will decide whether Greece gets the next aid instalment. The Greek government for its part plans to have things finalised by September. Same old.

Otherwise Italy sold off about €8 billion in bills with the 364-day bill going out at an average yield of 2.767 per cent compared to 2.697 per cent in July. Bid to cover was solid at 1.69 compared to 1.55 last time. This helped yields further along the curve ease somewhat, with the Italian 10-year yield down a few basis points to 5.8 per cent, while the Spanish 10-year yield fell about 6bps to 6.81 per cent. Having said that, European equities generally underperformed, with the Dax off 0.5 per cent, the CaC down 0.35 per cent and the FTSE off 0.3 per cent.

In forex land, the Australian dollar lost about 20 pips or so to be at 1.0522 as I write. The euro is up 61 pips to 1.2339 following the decent Italian debt auction, while sterling is at around 20 pips to 1.5688. Yen sits comfortably at 78.32.

On the rates side, things were, as usual, very boring. The US 10-year was up about 3bps to 1.66 per cent, the 5-year was up maybe 2bps to 0.71 per cent, while the 2-year sits at 0.28 per cent – ranges were narrow. Australian futures in turn were down 5 ticks on the 3s to 97.27 and almost 4 ticks on the 10s to 96.79.

It was bits and pieces otherwise. Yesterday we found out that Japan’s economy is still doing okay, posting annualised growth of 1.4 per cent in the June quarter. This was weaker than expected but it follows a 5.5 per cent gain the previous quarter. That’s 3.4 per cent growth for the first half of 2012 – solid growth – which, given Japan is the world’s third largest economy is pretty important.

Then we heard outgoing Bank of England policy member Adam Posen suggest the monetary policy committee should ditch ethics in determining what instruments the Bank should buy under QE. Thankfully he is outgoing. He also suggested that the bank should have acted earlier and more aggressively with QE, ignoring all the evidence that QE is actually a highly unsuccessful strategy that only serves to exacerbate financial risks.

Looking at the day ahead, the SPI suggests Australian stocks may lift a bit as that index rose 11 points or 0.3 per cent to be at 4261. Otherwise the calendar today shows that we get NAB’s business survey for July at 1130 AEST, with motor vehicle sales for July also out at the same time. We know that confidence has been atrocious -3 and below average (just over 6) but how business interprets recent events is anyone’s guess. The fact the RBA is on hold should help though. This afternoon at around 1600 AEST we see French and German Q2 GDP figures (eurozone GDP follows at 1900 AEST). In addition to that we see eurozone industrial production figures and the German ZEW survey.

Outside of Europe, UK CPI is to be released at 1830 AEST and is expected to remain elevated at 2.3 per cent year-on-year. For the US, the run of data includes July retail sales and the producer price index.

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.

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