SCOREBOARD: Greek reversal

Another night where there was little in the way of meaningful news. European markets brushed off S&P's move to downgrade Italy, with stocks there rising 2.9 per cent on the Dax, almost 2 per cent on the FTSE and 1.5 per cent on the CAC. Apparently this optimism was all based on expectations that Greece would soon be getting the next tranche of bailout funds.

This expectation then saw the S&P500 up 1.3 per cent shortly after the open – so all looked good. Late into the session, though, news (citing unnamed sources) came out that a decision on Greece had been delayed until early October, although it was unclear at the time how reliable this news was.

It didn't matter though, and Wall Street went lower – the S&P500 losing 16 points or 1.4 per cent in the one-and-a-half hours to the close. At the bell, the S&P closed 0.2 per cent lower (1202) with basic materials, industrials and energy stocks the hardest hit. In contrast, utilities, healthcare and telecoms found a bid. The Dow was then 7 points higher (11408), the Nasdaq fell 0.9 per cent (2590) and the SPI was up 0.6 per cent (4071).

As it turns out – although this is from an unnamed source as well – Greece has agreed (in conference calls overnight) to front-load austerity measures and is close to securing a deal with lenders. The Troika are expected to return to Athens next week and discussions will continue in Washington this weekend, according to the Greek Finance Ministry.

On the debt side, there was no action at all. US treasuries traded within a 3-6bp range and ended the session little changed. The 2-year is at 0.16 per cent, the 5-year at 0.83 per cent and the 10-year is 1.93 per cent. Not much to say on Australian futures either – down a tick or two, 3s are at 96.41 and 10s at 95.8.

There was a bit more action to be found in forex. The Australian dollar is up 73 pips to 1.0272, euro is up 88 pips to 1.3704, while sterling is 55 pips higher (1.5734). Yen is at 76.42 (little changed). Finally, in the commodity space, gold was up just over $20 to $1803, silver was 1.75 per cent higher while copper fell 1.5 per cent. Crude was otherwise 1.4 per cent higher on WTI ($86.89) while Brent was 1.2 per cent higher ($110.49).

In terms of the data flow, US housing starts fell 5 per cent in August after a 2.3 per cent fall in July. At 575,000, starts are about 60 per cent below average. Across in Europe, German producer prices fell 0.3 per cent in August after a 0.7 per cent rise in July to be 5.5 per cent higher annually.

Finally, and still in Germany, the ZEW survey showed a marked deterioration in sentiment as you'd expect given the political crisis, the economic sentiment index rising to -43.3 from -37.6 (average 24).

The only other thing to note was the downward revision to global growth made by the IMF. World growth is expected at 4 per cent in 2011 and 2012 down from 4.3 per cent and 4.5 per cent. The 'advanced' economies suffered the largest downgrades (0.6 per cent and 0.7 per cent) to 1.6 per cent in 2011 and 1.9 per cent in 2012 which compares to an average growth rate of 2.7 per cent from 2003-07. There have been a bunch of downward revisions to growth of late, and this is the latest in this process.

Note, however, that forecasting at the best of times is more art than science and this isn't the best of times.

In 2009, for instance, the IMF forecast advanced economy growth in 2010 of 0.0 per cent. It ended up being 3.1 per cent. World growth was forecast at 1.9 per cent, the actual result was 5.1 per cent. I agree with the IMF that downside risks have risen markedly but I would put a large chunk of this down to the political crisis in Europe.

As the IMF have noted themselves, the crisis in Greece is manageable if the right steps are taken. Certainly there is no compelling need for Greece to default and indeed this would hands down be the worst strategy for them.

Not much today (except New Zealand current accounts at 0845 AEST), and tonight we get the Fed – 'operation twist Qe3'. The mind boggles. Other than that, watch out for the BoE minutes and any sign of further quantitative easing.

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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