SCOREBOARD: Housing hope?
US new home sales surged in June, but mainly because May was revised down sharply. At this stage, it's hard to tell whether the housing market is recovering.
It appears that it's now official. With the weekend gone and a full-day of trading behind us, the European stress tests have been deemed a success. To prove it, credit spreads continue to narrow, the euro is up another 83 pips (1.2996) and European equity markets rallied. More to the point, financials were generally the key outperformers across the major indices. The Dax rose 0.5 per cent with financials up 1.2 per cent, while the FTSE was 0.7 per cent higher – financials up 1.7 per cent.
People can quibble about the detail – and they are – but the point of this whole exercise was to prove, as they have done, that the system isn't on the brink of collapse. Now we can have a sensible discussion about what precisely is needed. And this is one of the key positives of this whole exercise. A barrage of information was released and many analysts are now running their own tests based on slightly different assumptions – like stress testing banking books rather than just trading books etc. Or testing an 8 per cent tier 1 ratio than 6 per cent. This is all reasonable and makes a strong contribution to the process. In the end though, the results don't change markedly. The amount of capital needed obviously increases (€20bn, €30bn), yet these amounts are still modest overall. They don't change the fact that the European financial system won't collapse under reasonable assumptions.
Importantly, there hasn't really been any criticism of the economic assumptions underlying the 'adverse' scenario – which there shouldn't be given policy makers are effectively assuming another GFC. And only an extreme, fringe element are still demanding that European policy makers assume the disintegration of the euro zone and the collapse of the financial system (as would occur in the case of sovereign default) to add more 'rigour' to the tests. Obviously this is ridiculous. What kind of test is that? Would an engineer test the structural integrity of a building with 100 tonnes of TNT?
Coming into the US session then, the mood was already positive when optimism was buoyed further by a surge in new US home sales – up 24 per cent in June to 330k – and a more upbeat outlook by FedEx. Home sales blitzed expectations for a 3.3 per cent rise (310k) and while it's all very positive news, we shouldn't get too excited. This is because May's number was revised down sharply to 267k from 300k. About the only thing I reckon we can take from these numbers is that they are extremely volatile. More broadly, I don't think anyone suggests the housing market is healthy at the moment. It's a key area of weakness for sure, although in an economy that's otherwise on a healthy path to recovery. The only question is whether housing is recovering or not and at this point I don't honestly think we can make an accurate assessment.
That said, it overcame some of the fear and equities pushed higher throughout the session, with the S&P500 closing 1.1 per cent higher (1115 and highest close in just over a month). The Dow rose 100pts to 10525, the Nasdaq was up 1.2 per cent (2296) while the SPI bounced 0.6 per cent (4502). As in Europe, financials were a key outperformer, alongside industrials and telecommunications.
A weaker USD (AUD 71pips to 0.9023, GBP 42pips to 1.5490 Yen at 86.87 from 87.54) and the generalised rise in risk appetite gave little support to commodities. Crude was flat at $US78.88, copper was 1.4 per cent higher although the CRB index was only 0.2 per cent higher. Gold was otherwise down $US6 to $US1183.
US treasuries barely reacted. They finished little changed (2s at 0.6 per cent, 5s at 1.73 per cent and 10s at 2.99) on light volume and narrow ranges (4-6bp). Aussie futures saw a bit more action but finished only 2pts down to 95.19 on the 3s and 94.73 on the 10s.
Not a lot today. In fact, there is nothing for Australia and the rest of the region is fairly quiet as well. Tonight just watch out for CBI's UK retail report, US home prices and the Richmond Fed manufacturing index.
Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
People can quibble about the detail – and they are – but the point of this whole exercise was to prove, as they have done, that the system isn't on the brink of collapse. Now we can have a sensible discussion about what precisely is needed. And this is one of the key positives of this whole exercise. A barrage of information was released and many analysts are now running their own tests based on slightly different assumptions – like stress testing banking books rather than just trading books etc. Or testing an 8 per cent tier 1 ratio than 6 per cent. This is all reasonable and makes a strong contribution to the process. In the end though, the results don't change markedly. The amount of capital needed obviously increases (€20bn, €30bn), yet these amounts are still modest overall. They don't change the fact that the European financial system won't collapse under reasonable assumptions.
Importantly, there hasn't really been any criticism of the economic assumptions underlying the 'adverse' scenario – which there shouldn't be given policy makers are effectively assuming another GFC. And only an extreme, fringe element are still demanding that European policy makers assume the disintegration of the euro zone and the collapse of the financial system (as would occur in the case of sovereign default) to add more 'rigour' to the tests. Obviously this is ridiculous. What kind of test is that? Would an engineer test the structural integrity of a building with 100 tonnes of TNT?
Coming into the US session then, the mood was already positive when optimism was buoyed further by a surge in new US home sales – up 24 per cent in June to 330k – and a more upbeat outlook by FedEx. Home sales blitzed expectations for a 3.3 per cent rise (310k) and while it's all very positive news, we shouldn't get too excited. This is because May's number was revised down sharply to 267k from 300k. About the only thing I reckon we can take from these numbers is that they are extremely volatile. More broadly, I don't think anyone suggests the housing market is healthy at the moment. It's a key area of weakness for sure, although in an economy that's otherwise on a healthy path to recovery. The only question is whether housing is recovering or not and at this point I don't honestly think we can make an accurate assessment.
That said, it overcame some of the fear and equities pushed higher throughout the session, with the S&P500 closing 1.1 per cent higher (1115 and highest close in just over a month). The Dow rose 100pts to 10525, the Nasdaq was up 1.2 per cent (2296) while the SPI bounced 0.6 per cent (4502). As in Europe, financials were a key outperformer, alongside industrials and telecommunications.
A weaker USD (AUD 71pips to 0.9023, GBP 42pips to 1.5490 Yen at 86.87 from 87.54) and the generalised rise in risk appetite gave little support to commodities. Crude was flat at $US78.88, copper was 1.4 per cent higher although the CRB index was only 0.2 per cent higher. Gold was otherwise down $US6 to $US1183.
US treasuries barely reacted. They finished little changed (2s at 0.6 per cent, 5s at 1.73 per cent and 10s at 2.99) on light volume and narrow ranges (4-6bp). Aussie futures saw a bit more action but finished only 2pts down to 95.19 on the 3s and 94.73 on the 10s.
Not a lot today. In fact, there is nothing for Australia and the rest of the region is fairly quiet as well. Tonight just watch out for CBI's UK retail report, US home prices and the Richmond Fed manufacturing index.
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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