SCOREBOARD: European poise

European markets rallied overnight following Angela Merkel's strong show of support for Greece.

After another strong session in Europe – the Dax up 1.1 per cent and the CaC up 0.9 per cent (with the UK closed for a public holiday), US stocks closed basically flat and the session was pretty dull. So the S&P finished 0.05 per cent lower (1410, 6 point range), the Dow was 0.25 per cent lower (13124), while the Nasdaq was up 0.02 per cent (3070). For the US, there wasn’t really a lot of news.

Most of the flow concerned Samsung’s court loss to Apple (whose shares hit a new record) and what that would mean for newer models and patents going forward (there has been no decision here). Similarly the dataflow was minor, although positive. So the Dallas Fed manufacturing index spiked in August, rising to -1.6 from -13.2. I wouldn’t so much focus on the levels here but the volatility – could that index be at 15 next month? Could jobs spike 200,000? No one can say they won’t.

As to why Europe outperformed, well as we know, both the German and French leaders suggested just last week that there would be no Grexit, as they have for some years now, and the German Chancellor took that a step further by warning her colleagues against unnecessarily pessimistic Greek commentary. Which she argued is counterproductive. This is a tip of the hat to the Greek prime minister who said it was difficult to privatise state assets while everyone was talking about the eurozone imploding etc – and it is – and a good sign that it’s not all Merkel’s way or the highway. Maybe European leaders are more united than previously thought.

There was some pretty decent European economic data as well I should add – and this clearly aided the bid for stocks. This came from the German IFO survey which showed only a modest decline in the business climate index to 102.3 in August from 103.3. Now recall this survey has a much a better relationship to activity than the PMIs and the thing is, it's above trend (100). Only just, sure, but the fact it hasn’t collapsed says it all. It is still above trend which points to a very modest downturn indeed. Although that’s not to say German industry are unscathed by the European crisis. The expectations component for instance fell to 94.2 from 95.5 which is below average (100). But the assessment on current conditions remains strong – this index at 111 (stronger than expected) which is well above the average of 102.

For the price action elsewhere, increasingly positive European sentiment initially saw the euro up a big figure to 1.2534. The offer came on in the US session however and in the end there was only a modest upward movement in the unit – 1.2497. As for the Australian dollar, the currency was modestly weaker from 1630, down 20 pips or so to 1.0366. Sterling is then at 1.5792 from 1.5808 and yen is at 78.75.

Commodities then were modestly weaker, crude down 0.4 per cent $95.73 and in the metal space it was mixed – gold down $6 or a it over to $1666. Silver was up smalls and copper fell 0.4 per cent.

Finally, US Treasuries didn’t have much more excitement but then at these yields they rarely do. The fact is the Fed is the market for US Treasuries and with that level of distortion there is never a lot to say. For last night the 10-year yield eased off a couple of basis points to 1.65 per cent, the 5-year is at 0.69 per cent and the 2-year yields 0.27 per cent. Australian futures were little changed with the 10s at 96.885 and the 3s at 97.40.

It was bits and pieces otherwise but not much – Spain’s economy is weaker than thought with the economy growing 0.4 per cent last year instead of the 0.7 per cent previously thought.

As for the calendar today, we see HIA’s new home sales at 1100 AEST, while tonight the key data includes the S&P Case Shiller home price index for the second quarter, US consumer confidence for August and the Richmond Fed manufacturing index for August.

That’s about the lot, hope you 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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