SCOREBOARD: European swell

Another good session for equities overnight as hope builds that a solution will be found to the European political crisis. Now remember that nothing substantive has been announced and indeed the Germans are trying to play things down, suggesting that any package announced won't be a 'miracle cure'. A bank recapitalisation plan has apparently been agreed, but the sticking point, reportedly, is what to do about Greece. Press reports suggest some Germans and other nations want to restructure Greek debt again. Most other European nations don't.  
 
Many economists have thrown their support behind the default view but, unfortunately, the key issue of how to prevent market hysteria building over Spain and Italy should Greece default or restructure again has not been adequately addressed by these people. Not to mention the fact that if Greece restructures its debt again, Portugal has indicated it would like to restructure its debt as well. Those in the default camp ignore it or suggest the ECB should just print money (which is not possible given the ECB's mandate) and so seem to think it's sufficient to recapitalise banks. Clearly this is wrong and unfortunately the default view is based on an incomplete or rudimentary understanding of the issues at hand. Market pricing shows this and realistically the default view is clearly not sensible. Don't be fooled by the PR slogan that a Greek default/restructure is inevitable. It is neither inevitable nor desirable.
 
Looking forward, the European Union summit meeting scheduled for October 17 has been postponed to October 23 (to allow the 'troika' time to evaluate Greek finances). It is proposed that this meeting will yield the final decision on Greece and also outline any bank recapitalisation plan.
 
Now this wasn't the only reason that equities found a bid. Recall all the drama about a European recession and the broad-based rush to revise growth forecasts? It appears this has been extremely premature. As I've been highlighting for a long time, there has been a marked disconnect between some sentiment indicators (most notably the PMIs) and the hard economic data – an idea that is now fast gaining traction. This was highlighted again last night and we saw a number of indicators that suggest that rather than deteriorating, European growth actually accelerated in the third quarter. French industrial production was forecast to fall 0.5 per cent in August. Instead, it rose 1 per cent. Similarly, Italian industrial production was forecast at 0.2 per cent and ended up surging 4.3 per cent. Finally, German exports rose 3.5 per cent in the month to a new record and well above the market forecast of 1.1 per cent.  
 
No recession? A possible solution to the European crisis? The bid was heavy and European stocks were up 3 per cent in Germany, 2.1 per cent in France and 1.8 per cent in the UK. The euro shot up almost two big figures to sit at 1.3650. Across the sea, and noting that the Treasury market was closed for the Columbus Day holiday, Wall Street stocks surged higher. The S&P500 closed up 3.4 per cent (1194), with financials, energy and basic materials the key outperformers although all sectors were up strongly. The Dow then put on 329 points to 11432, the Nasdaq rose 2.97 per cent (11432), while Australia's SPI was up 1.2 per cent (4249).  
 
For forex otherwise, the Australian dollar is sitting just below parity ( 172 pips to 0.9987), the British pound is 78 pips higher at 1.5673 and Japanese yen sits at 76.67, little changed. Commodities saw a solid bid driven by stronger growth, due to optimism on Europe and also the weaker US dollar. Gold spiked $26 to sit at $1676, silver was 3.8 per cent higher and copper rose 2.9 per cent. WTI then put on 3.4 per cent ($85.78) and Brent was 3.2 per cent higher ($109.3). 
 
In the debt space, bunds and gilts then sold off (with the 10-year yields up 8 and 11bps, respectively) and we saw Australian and US debt futures belted as well. The 2-year Treasury futures fell from 110 to 109-31, while the 10s fell from 128.-21 to 127-28. The Aussie 3s then lost 11 ticks (96.26) and the 10s fell 10 ticks (95.58).
 
Not much out otherwise. To the day ahead then, NAB puts out its monthly business survey at 1130 AEDT. We know confidence has been hit hard, this has happened around the globe and reflects the combination of natural disasters and the political crisis in Europe. Australia is no exception. So far, activity still remains healthy. The main impact of this low confidence has been on the labour market – obviously firms are more cautious in hiring. 
 
Tonight, watch out for UK industrial production and the FOMC minutes.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.