SCOREBOARD: European valor

Europe saw its biggest market gains this year, but economic sentiment was mixed ahead of Italy's election.

Having spent the last couple of weeks not doing a great deal, the bid was back on stocks last night and with gusto in Europe. The Dax shot up 1.6 per cent, the CaC is up 1.9 per cent while the FTSE100 was almost 1 per cent higher. For the European bourses these are the biggest gains since the New Year. The catalyst was a sharp jump in the ZEW survey of economic sentiment, which is one of the better ones and certainly worth watching.

The sentiment index rose to 48.2 in February from 31.5 (and an expectation of 35) which is the highest in almost three years. Admittedly the current situation index fell to 5 from 7, but the focus is on the future. Besides, the fall in the current index may reflect the Italian election due this weekend. There will most likely be turmoil – that’s Italian politics – but in this market something which is normal could still spark a bout of something irrational.

The euro bounced around on the German ZEW figure getting a boost initially, which gave some of that back, before a firmer bid developed, taking the currency to 1.3389 or some 35 pips higher than yesterday afternoon. On the rates side, Spanish and Italian bond yields then eased slightly with the 10-years down 7 bps and 2 bps respectively – although the real hurdle is that election.

In the US, stocks pushed higher and with about an hour left to trade, the S&P500 is 0.6 per cent higher (1529), while the Dow is up 56 points (14,037) and the Nasdaq 0.5 per cent to 3206. Obviously there was the European lead to help things along, and at the open stocks shot up.

Additional impetus was given by all this talk of a mergers and acquisitions bonanza. Cashed-up corporates need to do something and according to deal logic they are. Rumours are flying around of another deal between Office Depot and Office Max this time, and those stocks are up 12 per cent and 22 per cent respectively – as soon as this week. There's been about $US160 billion in mergers and acquisition deals announced so far this year apparently, which is the highest since 2005.

The other news flow is about the sequester – cuts of $US85 billion per month kick in on March 1 unless congress decides otherwise. And Obama is asking them to decide otherwise – kind of. Just to delay it a bit. It’s a boring game – the Fed is monetising Obama's deficits. Give up the pretence.

Alrighty. In price moves elsewhere, crude was up 0.7 per cent to $96.49, then copper slumped 2.3 per cent, probably because of events in China yesterday. China’s stock market took a big hit on the back of a 4.6 per cent decline in the property index. The fear is that the government is and will continue to take further steps to cool property prices. Apparently some cities have already acted to tighten credit following a quadrupling in sales so far this year (sales by square metre). So if there are going to be fewer houses, then there will be less demand for copper. Gold was otherwise off 5 bucks to $1604.

Then in the forex space, the Australian dollar got a bid and is currently up about 43 pips or so to 1.0357; the British pound dropped 45 pips to 1.5428; while the yen was little changed at 93.50. Finally, US Treasuries were little changed – yields were up a bit with the 10-year at 2.03 per cent, the 5-year at 0.887 per cent and the 2-year at 0.28 per cent.

Bits and pieces otherwise on the data front, and on the downside eurozone construction output fell 1.4 per cent in December after a 0.4 per cent decline in November. In the US, the NAHB housing market index slipped to 46 in February from 47.

Looking at the day ahead, the SPI suggests our market will be up smalls (0.2 per cent). Then we get wage prices for Australia at 1130 AEDT. Not generally market-moving, wages growth is running at a 3.7 per cent annual pace at the moment – a pretty good non-threatening rate of growth.

Outside of that, there’s some Japanese trade data worth keeping an eye on. The flow tonight is quite heavy and for Europe includes German CPI, UK employment and the Bank of England’s policy minutes. Over in the United States, we see producer prices, housing stats and the FOMC minutes.

Have a good one…

Adam Carr is a leading market economist.

See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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