SCOREBOARD: GDP jitters

One would think, after the negative impact that the proposed global bank tax had on markets last year, that particular dead horse would have been put out to pasture once and for all, but no – it's managed to rear its ugly head again. Given the market volatility of last week, France's president Nicolas Sarkozy and Germany's chancellor Angela Merkel had been given the task of rebuilding confidence in Europe and to work on solutions for the ongoing sovereign debt crisis. The best, however, that the pair could come up with was to introduce a new tax on financial transactions and to squash eurobond speculation – a one-two combination that sent markets spiralling lower.

While politicians continue to fiddle around and stall rather than make tough decisions, the crisis has clearly been weighing on the global economy. Germany's second quarter GDP came in well below expectations (2.8 per cent over the year vs 3.2 per cent forecast), raising more questions about whether France and Germany will be able to bail out larger European countries that get into trouble.

Although falling commodity prices, easing inflation pressures and recovery from the natural disasters that disrupted the global economy earlier this year may help business conditions to improve later this year and support stock markets, the ongoing debt crisis in Europe and more negotiations in the US scheduled for the spring (Australian time) could limit market upside. This suggests that the coming months could see markets swing back and forth within trading ranges, favouring more active trading strategies.

Wall Street bounced around overnight with some traders taking short-term profits after two consecutive days of gains. Soft GDP data out of Europe weighed on trading in the early going but then the positive industrial production data (0.9 per cent vs street 0.5 per cent) and housing starts figure ( 1.5 per cent vs street -4.6 per cent) helped to shore up support before the summit results dumped a bucket of cold water on proceedings. Ratings agency Fitch reaffirmed its triple-A rating on the US with a stable outlook and this pared some of the losses on US markets in the afternoon. The Dow Industrials traded on either side of 11,400 while the S&P continued to struggle just below 1,200. In the end the late rally pushed the Dow to 11,405.93, a loss of 0.67 per cent, or 77 points. The S&P 500 closed 0.97 per cent lower at 1,192.76, while the tech-heavy Nasdaq was harder hit – falling 1.24 per cent to 2,523.45. The SPI was down 5 points to 4,223.

European indices started the day off sharply lower, dragged down by the poor GDP news, but bounced back toward their close enabling the FTSE to eke out a small gain, with the other major indices posting small losses. Treasury markets were relatively quiet for a change, indicating that sentiment continues to stabilise. However, disappointment over the results of the summit meeting – which was after trading hours in Europe – could impact tonight's trading.

It was an odd day in the currency markets, with the usual groupings performing differently to normal. One would think that the defensives would rally with stocks retreating, but the Swiss franc has been declining again as the street remains wary of more central bank intervention. The risk of central bank intervention also continues to put a cap on the typically defensive yen. Similarly, European currencies have been heading in opposite directions with the euro retreating along with eurozone sentiment, while the British pound has at least partially taken the place of the Swiss franc as a haven for European capital, staging a big rally. Resource currencies were also uneven, with the New Zealand dollar staging a big rebound, the Australian dollar consolidating and confirming yesterday's break-out, while the Canadian dollar was relatively soft. At 0720 AEST the Australian dollar was trading at 104.7 US cents.

Finally, in the commodities space, gold started out strong but stalled in late trade (spot gold lifted 1.1 per cent to $US1,784.99 an ounce by 0534 AEST), while silver edged above the key $40.00/oz level. The US dollar has been soft as some of the capital that found its way there last week due to a lack of alternatives has moved out.

The energy group has started to retreat again with concerns over global demand weighing on US crude in particular. US crude traded down $US1.23 to settle at $US86.65 a barrel, having touched an intraday low of $US85.62. September Brent crude futures fell 44 cents to settle at $US109.47 a barrel. Natural gas also sold off with cooling temperatures pushing traders to look ahead to shoulder season and the part of the year that is traditionally the weakest for gas. Copper also drifted lower, bouncing around the $4.00/lb level.

A relatively quiet day ahead for economic news, with producer prices for New Zealand at 0845 AEST. Back home, and Australia's leading indicator and wage cost data is due. Wages strength will be closely watched, with the RBA looking for any signs that there could be further pressure on inflation. A strong number could yet bring an interest rate rise back onto the agenda – provided there's no further shocks overseas.

Then, overnight, the newsflow is quite steady, with the Bank of England meeting minutes and the British employment report scheduled. Elsewhere, the focus on inflation continues with eurozone consumer prices and US producer prices scheduled.

Colin Cieszynski is a market analyst and education manager at CMC Markets Canada. Michael Hewson is a market analyst at CMC Markets UK. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

* SCOREBOARD's Adam Carr is currently on leave, returning Thursday August 25.