Hopes of a coalition government in Greece, sans extremists, sparked optimism on European markets.

A little bit of optimism seeped into the market overnight, with investors thinking that perhaps Greece won’t fall into the hands of extremists after all. Pasok leader Evangelos Venizelos (finance minister under the former government) suggested that he saw good omens in attempts to form a coalition government with the Democratic Left Party who hold 19 seats. Recall that Pasok and the new Democracy (previous coalition partners) only missed out on being able to form another coalition by two seats.

That was enough to stem the bleeding though and stocks in Europe were bid, solid earnings from companies like Deutsche Telekom and Repsol also giving the market a boost. Stocks in Greece and Spain managed to outperform the market rising by 4.2 per cent and 3.4 per cent respectively, while gains on the major indexes were more modest – Dax up 0.7 per cent, CaC up 0.4 per cent, and the FTSE up 0.3 per cent. Even Spanish and Italian bonds managed to ease off, the 10-year yield falling 8 to 9 basis points a piece to 5.99 per cent and 5.51 per cent respectively. The euro for its part didn’t do a great deal and ended 20 pips lower to 1.2948.

Gains in the US were a little more subdued at the close, although at the high (mid-session roughly) the S&P was up 0.8 per cent. Apart from events in Europe, investors had to digest a couple of key releases out of the US. First up the jobless claims numbers were little changed in the week to May 5 at 367,000 from 368,000 the week prior. So the message is the same here, the labour market is recovering and will continue to do so. Continuing claims fell to 3.2 million from 3.3 million – also a good result at a four-year low.

However, I think the really good news was in the trade figures. The US deficit widened to $51 billion in March from $45 billion, but the growth signals we are getting are very positive. Exports and imports surged with exports up about 3 per cent or so and imports up 5 per cent. Very good news for the US and very good news for the globe. Nevertheless, equities were soon offered and hit the session low (plus 0.0 per cent) just before the close. In the end, the index did manage to lift 0.3 per cent (1357), with utilities, telecoms and healthcare the key outperformers. Otherwise, only basic materials and tech stocks ended in the red. As for the Dow, this index rose 0.2 per cent (12855), the Nasdaq fell 0.04 per cent (2933), while the SPI was 0.1 per cent lower (4297).

We did see a more marked reaction to the data in debt markets, with US treasury yields pushing higher soon after the data. At the high, the 10-year yield was up to 1.92 per cent or just under 5 basis points higher from yesterday at 1630 (AEST). Yields followed equities lower in subsequent trading and so the 10-year yield ended little changed from yesterday at 1.86 per cent. The 5-year yield followed a similar pattern and ended at 0.75 per cent, while the 2-year is at 0.26 per cent. Aussie debt futures in turn only ended the session one or two ticks lower from 1630 (AEST) at 97.29 on the 3s and 96.69 on the 10s.

Price action elsewhere was reasonably unexciting and there wasn’t too much other news. Metals for instance generally pushed higher, but magnitudes were small as gold was up smalls ($1593) and copper rose 0.5 per cent. As for crude, WTI was flat ($96.81) and Brent fell 0.6 per cent to $112.5.

As to the calendar today there is a run of Chinese data, inflation at 1130 AEST and then industrial production at 1530. India’s production numbers are out at about the same time. Tonight it's worth watching producer price numbers out of the US and UK and we also see the final estimates of German CPI and the preliminary May estimates of consumer confidence from Michigan University.

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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