SCOREBOARD: Eurozone seesaw

Markets bounced around as the impact of S&P’s EFSF move was tempered by rumours of a fund boost.

There wasn’t a lot of new news flow for most of the night and much of the market action seems to have been dominated by S&P and their decision to place the eurozone on negative credit watch. Again, very interesting timing coming a day after positive announcements by Merkel and Sarkozy. Europeans are none too happy and the Austrian central bank governor described the S&P action as "a very politically motivated action”. Incidentally, they’ve also decided to place the EFSF on negative credit watch as well. But that was pretty much it until a Financial Times article came out suggesting the Europeans may double the size of the EFSF, helping the risk bid.

The Australian dollar, for instance, has shot back up to where it was just prior to the Reserve Bank’s interest rates decision. That makes sense I guess, because if the RBA is cutting over Europe, and Europe does deteriorate, we can cut by however much we like, but unless we start printing we just can’t compete against other central banks – who will just print more! So from a low of 1.0156 (1800 AEDT), the Australian dollar has put on about 100 pips or so to sit at 1.0265 as I write. Most of that was made prior to the FT article, but it put on another 20 pips or so straight after. The euro, in contrast, did little until the article (almost a figure range) but has subsequently put on 34 pips to sit at 1.3413. Sterling is 20 pips lower (from 1630 AEDT yesterday) at 1.5582.

Equities in Europe were mixed. The Dax had a fairly rough session of it and lost about 1.3 per cent. Consumer services were the main culprit, down over 8 per cent, and utilities were belted as well. The thing is the Germans actually pumped out some decent data. Check it out: German factory orders rose 5.4 per cent in October, which is just phenomenal given it follows a 2.4 per cent increase in September, and clearly stands in stark contrast to what the PMIs have been saying. This is the strongest increase in orders since March 2010, driven by foreign demand for capital goods. There are some seriously confusing signals coming out of Europe – certainly a two-speed situation if manufacturers and exporters are anything to go by. That's vastly more optimistic than financial markets. Otherwise, the CaC lost 0.7 per cent while the FTSE was flat ( 0.01 per cent).

On Wall Street, stocks were bouncing around 0 for most of the session (between 0.3 per cent and -0.4 per cent). At the close, the S&P500 was flat ( 0.11 per cent, or 1.42 points, to 1258.5), with basic materials, energy and healthcare outperforming although financials, consumer services and technology were weighing. The Dow for its part was up 0.43 per cent, or 52.22 points (12150.05) and the Nasdaq slipped 0.23 per cent, or 6.2 points (2649.56), while at 0724 AEDT the SPI was 1.2 per cent higher at 4318. As for commodities, they’re up a bit (FT again) with crude 0.2 per cent higher as shown by WTI ($101.2), while Brent is 0.8 per cent higher ($110). Gold is then up about $20 to $1729 (from 1630 AEDT time) while copper is down 0.6 per cent.

Other than that, US Treasuries did little – on a 1 to 6bps range the major notes look to have sold off a bit, although again, most of that action has just occurred. At the time of writing (with about an hour to go) and the 2-year sits at 0.25 per cent, the 5-year is at 0.95 per cent (up just over 1bps), while the 10-year is at 2.10 per cent (just under 4bps higher). For Australian futures and following a solid rally after the RBA yesterday, the 3s eased off about 4 ticks to 96.82, while the 10s are down about 3 ticks to 95.99.

Bits and pieces otherwise. There wasn’t really much in the way of dataflow for the US and other than the factory orders, the Europeans released the detail of the third-quarter GDP number. It looks like exports and household consumption drove the 0.2 per cent quarterly rise. Other than that, the BoC kept rates unchanged at 1 per cent and held a pretty neutral stance, while Canadian building permits surged 11.9 per cent in October after a 4 per cent fall in the month prior.

Looking at the day ahead, we get Aussie GDP at 1130 AEDT. So far the partial indicators suggest a number in the order of 0.6 per cent, driven entirely by consumers and business investment – on the expenditure side that is. So private demand should be strong. This number is a sizeable downgrade from my 1.3 per cent forecast on Monday and that is because it looks like inventories, net exports and public spending will all make sizeable detractions to growth. Overseas, we just get UK and German industrial production tonight.

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

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