SCOREBOARD: Manufacturing downer
After a promising start, stocks and commodities took a hiding as data highlighted manufacturing slowdowns.
It didn’t start off that way, though. US markets largely brushed off the PMIs that had been released earlier, showing manufacturing in China and Europe slowing. These aren’t good indicators after all and get much more attention than they deserve. Well, maybe brushed off isn’t exactly right as the S&P was only up 0.2 per cent at the high. But the general point stands, there wasn’t an obvious reaction. The catalyst actually appears to be the Philly Fed index – good solid America data – which dropped to negative 16.6 in June from minus 5.8 (average: 7.6). I’m sure a 1.5 per cent fall in existing home sales (May) didn’t help the market’s mood either. And so it was that the offer was put on, the S&P closing just off the low.
Crude had a big fall as well, following a similar pattern for equities – modest boost at the NY open, again, ignoring that European and Chinese PMI data, before sellers came over the top after the Philly Fed index. Longs were squeezed hard as WTI fell about $2.5 or 3.1 per cent to $78.27. This is the lowest price since about October and the thing is it was accompanied by an equally large fall on gold. From 1630 AEST, the metal is down $23 to $1565 which is the lowest price since about late May – down $60 over the last week alone.
There was some serious US dollar buying overnight and that helps explain some of the moves we saw. Whether it’s safe haven buying or what have you isn’t clear. The data points out last night were very minor and it could just be some dollar buying from any number of central banks, etc. You know, the currency wars and the like. But the US dollar was up against most currencies which saw the Australian dollar hit pretty hard in all the carnage – it's off about 120 pips from 1630 AEST to 1.0037. Ditto euro which is at 1.2543, or 130 pips lower. Sterling was then off nearly a big figure to 1.5592, while yen is at 80.26 from 79.67.
I was actually surprised, in this environment, to see that US treasuries didn’t do much at all. The 10-year was off a basis point or so in the end (1.62 per cent), but yields had actually pushed higher initially. Price action is very weird I have to say. It’s not like the Philly Fed index is a major release or anything. The 5-year was off less than a basis point to 0.72 per cent and the 2-year is at 0.3 per cent. Aussie futures in contrast rallied hard, having sold off aggressively in the previous session. Someone is having fun. So 3s ended at 97.59 (up nine ticks), while the 10s were eight ticks or so higher at 96.955.
Something else that rallied hard were Spanish and Italian bonds. And this was pretty much the only positive overnight. The 10-year yields fell almost 20 basis points for the Spanish, to 6.54 per cent, while the Italian yield was down 5 basis points to 5.75 per cent – but it was down 17 basis points at the low. Obviously there was some good news for the Spanish and it involved the analysis of two independent consultancies on the Spanish financial system.
These two consultancies, one Germany one American, have come up with independent estimates of how much Spanish banks would need in an adverse economic scenario – A comparatively paltry €16 to €62 billion. Apparently in a base case scenario they need between €16 and €25 billion over three years. That’s €5 to €8 billion per year. Not sure about you, but I reckon a $1.5 trillion economy would have no trouble raising that cash. Especially when they’ve already got one of the best public debt/GDP ratios around – much, much lower than the US, UK, Germany and France. Under the adverse economic scenario which the independent consultants described as 'harsh’, included things like assuming the economy shrinks 6.5 per cent or so, a 26 per cent drop in house prices and an 85 to 90 per cent drop in land prices – they may need between €51 and €62 billion.
Recall they’ve already be given €100 billion and two things are clear from this. One, they didn’t need the money and two, even if they did they didn’t need any external assistance to get it. The problems in Spain’s banking system are not broad-based. The top three banks, which account for the vast proportion of the financial system, don’t need any additional capital even under the adverse economic scenario. It really comes down to the same banks who’ve have already got aid – Bankia, etc. Spain is a very wealthy country, they would have no problems dealing with this. We saw that last night actually when Spain auctioned off €2.22 billion, receiving over €7 billion in bids. That’s very strong demand and you can see now why I view any concerns over Spain and Italy as irrational hysteria. It’s completely over the top on any reasonable analysis. Even so, the Spanish government is set to put in a formal request for the agreed aid in coming days. Specifically, for the ESM/EFSF to recapitalise its banks. I can only assume that this is just a little bit of theatrics, for the benefit of the market, to demonstrate to the market that the EU has the funds and will use them. Also helping is news that the ECB is set to ease collateral rules, accepting a broader array of collateral in its lending programmes, such as asset backed securities, etc.
Bits and pieces otherwise, UK retail sales rose 0.9 per cent in May after a 1.1 per cent fall. Then US jobless claims came in at 387,000 in the week to June 16 from 389,000. The data for today is light. Look out for the German IFO survey and that’s about it.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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