There was no improvement in investor sentiment last night and equities took another pounding. In Europe, most of the major indices were down over 1 per cent (DAX, CaC and FTSE all down 1.2 per cent) and it was pretty much the same story in the US as well. Greek stocks fell another 3.4 per cent and are down 16 per cent over the last week alone. There was no new catalyst, just the ongoing fear following the Greek election.
It’s interesting to note though that the VIX index is still well down on levels seen during other flare ups. This, amidst the carnage, is a key positive. Consider that for most of the second half of 2011 the index was up around the 40 mark and while we’ve seen the fear index shoot up, at 24 now from 15 to 18 previously, it is still well beneath those levels.
Moreover, and while yields in the secondary market have shot up, Spain is having no trouble raising funds at bond auctions. Last night they got out €2.5 billion in three years paying 4.876 per cent. Admittedly that is up something like 80 basis points from what they paid only two weeks ago, but just remember that these rates are similar to what Australia had to pay for most of 2009-2011. In absolute terms yields are not excessively burdensome. But the market is being whipped into a frenzy – the rumour mill is in full swing and the ratings agencies have been fully utilised. They had been a little too quiet, and now we know why. They were saving up a swathe of downgrades just for this occasion and they did a few more last night and threatened more at a later date. It’s a well-established pattern now. They no longer hold any meaning though.
As for the rumour, last night it was that there was a bank run on Spain’s fourth largest bank, Bankia. A newspaper reported that €1 billion in deposits were withdrawn, the bank for its part said there were withdrawals but they were seasonal in nature and normal – and that there was no run. It didn’t stop the stock falling almost 30 per cent overnight. Otherwise in Europe, the euro was off 50 basis points to 1.2693.
In the US with all these rumours and what have you stocks opened lower and stayed on that trajectory throughout. At the bell the S&P was off 1.5 per cent (1304) with financials, basic materials and consumer services hardest hit, although most sectors outside of telecommunications were down. After falls over the last week of 3.3 per cent, the S&P500 is at its lowest since late January and is down about 8 per cent from its recent peak. Elsewhere the Dow was off 1.2 per cent (12442), the Nasdaq fell 2.1 per cent (2813), while the SPI was down 1.9 per cent (4083).
Over in the fixed income markets, US treasuries had their biggest rally in a while and the yield on the 10-year treasury fell about 10 basis points to 1.69 per cent – a new record I believe. Interesting to also note very strong demand at the Treasury’s 10-year TIPS auction. It went out at a yield of -0.39 per cent and so investors are obviously willing to pay to protect against inflation. My bet is that it’s the US government buying up all this inflation protection, I mean they are the biggest ‘investors’ in the Treasury market after all. It makes sense give that inflation has already accelerated sharply and is currently above their own stated comfort zone. We’ll probably get a temporary slowdown following official efforts to manipulate oil prices (can’t have everyone buying inflation protection), but the trend is in place. The 5-year yield then fell about 2 basis points or so to 0.75 per cent while the 2-year was up almost a basis points to 0.28 per cent. As for Aussie futures, they rose 8 to 9 ticks with 3s at 97.47 and 96.87 – also new records.
As for the data out last night, jobless claims were little changed at 370,000 in the week to May 12 and the Philly Fed index fell to 5.8 in May from 8.5 (average is four). That's it though.
Otherwise for the price action we saw crude take another hit and WTI fell 0.2 per cent ($92) while Brent fell 2.5 per cent ($106.9). Gold was little changed at $1574 and copper fell 0.6 per cent. As for forex, the Australian dollar sits at 0.9896 or roughly 40 pips lower than 1630 AEST. Sterling then fell a big figure to 1.5794 and yen is at 79.33 from 80.31 dropping sharply just after the US open.
Today’s calendar doesn’t appear too heavy at all. There is nothing for Australia and not much else for the globe. German producer prices are out at 1630 AEST and apart from Canadian CPI tonight that’s it.
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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