SCOREBOARD: Market flip

Positive data from the US and Germany saw risk return, with the Australian dollar a chief beneficiary.

The reversal was on last night, following what was a fairly dour session previously, risk appetite given a significant boost by a strong 9.3 per cent surge in US housing starts for November and some positive signs out of Europe. Starts were well above the market expectation for a 1 per cent gain and the largest number since early 2010, although they are still well below average.

The Australian dollar shot up after this and within about an hour was up just under a big figure to 1.095, having already pushed through parity around midnight. The unit has subsequently given some of those gains back, but, as I write, sits comfortably above parity at 1.0063 (or 120 pips higher from late yesterday afternoon). The euro spiked up about 50 pips on that data to a high of 1.3132, but got a bigger leg up after some interesting German business confidence data ( 80 pips). Nothing can shake these guys, it seems, and resilience is just a way of life. The IFO German business climate index rose to 107.7 in December from 106.6 which, yes, is barely half a point higher, but the fact is it rose. Expectations were the key here, with that index up a point roughly to 98.4 (a bit below average). The current assessment index was otherwise unchanged in the month and sits comfortably above average despite the ongoing eurozone crisis. A very interesting contrast with business confidence and conditions here. Apparently the German media don’t really give the European crisis the attention that the Anglo press do. If that's true, I’m sure it’s got a lot to do with it.

In any case, the euro currently hovers around 1.3083, or about 75 pips higher than 1630 AEDT yesterday. Sterling is then at 1.5661, or 140 pips over 1630 AEDT yesterday, while Japanese yen is at 77.84, down small from yesterday.

On Wall Street, equities then surged at the open and pushed higher through the rest of the session. The S&P has shot up to close some 2.99 per cent stronger (1241.42). All sectors seem to have pushed higher thus far but energy, basic materials and financials were the leaders (up 3.7 per cent or more), and a solid rebound in the commodity space is clearly helping things here. So for instance WTI is up 3.6 per cent ($97.22), copper is almost 2 per cent higher and gold is up $17 to $1615. Elsewhere, the Dow ended 2.84 per cent higher (12,100.25) and the Nasdaq 3.1 per cent stronger (2601.35), while our very own SPI is 1.7 per cent higher (4109).

In the debt space, Italian and Spanish bonds continued to rally overnight, in part on very strong demand at a Spanish bills auction. A total of three million bills went out at 1.73 per cent, well down on 5.11 per cent in November while cover was strong at 2.9. The 6-month auction was similarly very well bid, which would have added to the overall risk bid. At the very least it’s a good sign that the ECB’s 3-year unlimited cash tender (held last night) is doing the trick. The Italian 2-year fell an additional 16bps to 4.97 per cent, while the 10-year was down 22bps to 6.61 per cent. Treasuries, bunds and gilts in contrast sold off – the yields on the major t-notes up 8bps on the 10s (1.92 per cent), 5bps on the 5-years (0.85 per cent) (a $35 billion 5-year auction was solid with cover at 2.86), while the 2-year yield was up 2bps to 0.25 per cent. Aussie futures were off about 8 and 6 ticks on the 3s (96.97) and the 10s (96.175) respectively, at the time of writing.

Bits and pieces otherwise. In the Americas, Canadian CPI was at 2.9 per cent year-on-year in November, which was as expected, while core was at 2.1 per cent (2.2 per cent expected). In Europe, the Riksbank then cut rates 25bps to 1.75 per cent, as expected. As for central bank speak, the Fed’s Kocherlakota said that further policy stimulus would be inconsistent with the data.

I think that’s about it, so turning to the day ahead we get the New Zealand current account balance at 0845 AEDT and then credit card spending at 1300 AEDT. Tonight we get the BoE’s minutes, the result of the ECB’s 3-year tender held last night and US existing home sales.

Hope you have a great day.

Just note that this is my last report for 2011. It wasn’t a particularly good year really, was it, and in many respects it was downright awful, despite what were strong growth outcomes for Australia and despite the fact that the US managed to avoid another double dip. I for one will be happy to see the back of it. Despite the current difficult circumstances, I hope you manage to switch off and have a very Merry Christmas. Here’s hoping that 2012 is a happy one. Business Spectator's Scoreboard will run until December 23 and return in the new year.

All the best.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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