SCOREBOARD: Fear trade

There was no let-up in the fear trade last night, with stocks around the globe taking an absolute beating. In Europe we saw the Dax down 2.3 per cent, the FTSE was off 0.97 per cent, while moves on Wall Street weren't any better – shaken by a 0.2 per cent fall in personal spending in June (first fall since September 2009). Stocks were offered from the open and stayed on that trajectory throughout, closing down 2.6 per cent on the S&P (1,254). No sector was spared but the biggest falls were seen in industrials, consumer services and basic materials (all down 3 per cent or more). So far then the S&P500 is down just over 7 per cent from its recent peak and is pretty much at its lowest point for the year. The Dow then lost 265 points (11,866), the Nasdaq gave up 2.8 per cent (2,669) and the SPI fell 1.5 per cent (4,329).

Despite the weaker flow of data recently, last night's move appeared a fairly large overreaction. Trading tonight will be important as some fairly decent support levels have been reached. If stocks break through it could get very messy. Ultimately, I don't think the global economy is anywhere near as weak as perceived, as shown by the 7 per cent rise in US car sales for July. The data has been volatile, sure, and we've seen some weak points. Yet I am firm in my view that this supposed weakness reflects nothing other than quirks of the statistics, disasters, and fear over sovereign debt. The major problem is that these fears are purely political in nature.

There are solutions, easy solutions on paper, which I have highlighted in the past and given the extreme consequences of mismanaging these things, you'd think they would be embraced. The incompetence of politicians in both Europe and the US is breathtaking, but here we are. Sentiment is clearly atrocious and realistically it is difficult to see a catalyst for change. Indeed, the European crisis is getting worse and yields on Spanish and Italian debt continue to surge higher, although admittedly on light volumes. Spanish 10-year bond yields rose 8bps (6.28 per cent) and 12bps on Italian 10-years (6.12 per cent to euro era highs). One month ago the Spanish 10-year was at 5.38 per cent and the Italian yield was 4.87 per cent.

In contrast, US bond yields fell sharply again (yields on bunds and gilts also lower), the yield on the 2-year down 4bps (0.31 per cent), the 5-year down 8bps (1.22 per cent) and the 10-year down 12bps (2.61 per cent). After last night's moves, yields on the major coupons are at their lowest since November 2010 – the 5 and 10-year yields down 60bps over the last month alone. Aussie futures obviously rallied hard after it became clear yesterday that the RBA will no longer respond to high inflation (time to gear-up and fix in) and actually pushed even higher last night – it's as if they actually did cut and realistically they may as well have. So the 3s put on another 11 ticks from 1630 AEST (95.89), which brings the rally from yesterday to about 34 ticks. The 10s were up a more modest 4 ticks with about 15 ticks put on in total (95.33).

The RBA's new paradigm has also seen the Australian dollar come off sharply – 210 pips from yesterday morning with about 131 pips of that last night (1.0793). Some of that move obviously reflects generalised US dollar buying, but most of it looks to be RBA related. The euro was off only 50 pips to 1.4200, Sterling fell 16 pips (1.6300) and the yen slipped to 77.15 from 77.42. Not a lot else really. Gold hit a new record, rising $36 to $1661, WTI was down 1.7 per cent ($93.28), Brent fell 0.7 per cent ($116) and copper was 0.6 per cent weaker.

Looking to the day ahead, we get retail sales at 1130 AEST. As I have highlighted before, this is literally the only survey (of any credibility) showing weakness in retail spending, but it's also the survey with the narrowest scope. With that in mind it cannot be used reliably as an indicator of what is occurring in the retail space. Especially when company accounts continue to suggest sales are actually much stronger. Consequently, nothing other than a very strong result will be credible, but I don't expect that. Indeed the market looks for a 0.4 per cent rise while I look for a 0.7 per cent rise. Note that whatever the result is it won't matter for the consensus view that retailing is weak, or even in a recession, according to some. Nevertheless, the stupidity of this argument continues to be highlighted by robust sales from Woolworths, Wesfarmers (where even non-food sales were strong in volume terms) and, yesterday, sales data from Kathmandu. Kathmandu's Australian sales rose by 26 per cent year-on-year I believe. So much for the retailing recession. These results continue to highlight to me why the weak retailing argument reflects nothing other than the delusional rantings of rabid hysterics and industry lackeys. Facts clearly don't matter to these people given the solid sales reports we've seen. Only hysteria, hearsay and anecdotes are important it seems.

Other than the retail sales, watch out for Australian trade data and then tonight, check out the US factory orders, the ISM non-manufacturing report and the ADP employment report.

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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