SCOREBOARD: Mediterranean malaise

Offshore markets continued their downward trend after Spanish and Italian bond yields continued to rise.

A batch of mixed earnings reports and ongoing European concerns saw stocks off for the third session. Unfortunately there was no let up in yields for Spanish and Italian sovereign debt and the catalyst for such an action increasingly comes down to two equally unpalatable, and what should have been unnecessary, options: the ECB printing money or a bailout. The problem with a bailout of course is that it would guarantee that Italy would also need one at some point, as ridiculous as that is. So I’m not sure that’s the best option. But, if there is one thing the Europeans have been consistent in, it’s choosing the worst option. We may get a better idea of what’s going on over the next day or so as there is currently a crisis meeting between the German and Spanish finance ministers being conducted.

So anyway, while the finance minister for Catalonia was out and about telling everyone that they would need aid, yields on Spanish 10-year debt shot up 16bps or so to 7.62 per cent (eased slightly to 7.54 per cent). That’s despite solid demand at a bill auction, where they sold off €3 billion in bills at slightly higher yields. The 84-day bill for instance went out at a yield of 2.43 per cent compared to 2.36 per cent in June. Spanish stocks were then off 3.6 per cent, while the major indices were off 0.5 per cent (Dax, 0.9 per cent CaC and 0.6 per cent (FTSE).

Over on Wall Street, stock markets took their cue from Europe and ended weaker, although as I mentioned, earnings reports were a little mixed and the data that there was, and there wasn’t much, was bad. So that wouldn’t have helped. It was the Richmond Fed manufacturing index last night and it tumbled to -17 in July from -1 (average 2). Recall that this index and others like it, are extremely volatile and tend to have a coincident relationship to market sentiment. Market sentiment rebounds, so do they. But there was certainly no cause for a rally. At the bell, the S&P500 was down 0.9 per cent (1338), the Dow fell 0.8 per cent (12,617) while the Nasdaq was down 0.9 per cent as well (2862). As for our SPI, it fell a further 0.7 per cent (4055).

Forex and commodity markets moves were generally mixed. Gold and crude pushed marginally higher to $US1580 and $US88.2 but moves were small. Copper was off 0.6 per cent. Then the Australian dollar slipped 50 pips or so to 1.0224, euro was off over a big figure to 1.2065 given those debt concerns and that was pretty much the exciting stuff.

Needless to say nothing exciting happened on the US treasury front – yields were lower given the investor preference for ‘quality’, well the Fed’s preference given they are the ones doing all the buying. So the 10-year yields fell a few basis points to 1.39 per cent, the 5-year was down about a basis point to 0.55 per cent while the 2-year is at 0.22 per cent.

That’s largely it, not much else to talk about. Maybe the European PMI – it was unchanged in July at 46.4.

So the big Australian data today is consumer prices (1130 AEST). The market looks for a rise of 0.6 per cent for the quarter, following a 0.1 per cent rise last quarter, with the annual rate expected to fall to 1.3 per cent year-on-year. Core prices which exclude the fruit and veg effect are forecast to rise about 1.9 per cent, although I suspect true underlying CPI is closer to 2.5 per cent year-on-year. recall that CPI, even core CPI, has been extremely volatile, so trying to determine what underlying CPI really is, has been very difficult. With an unemployment rate at 5.2 per cent and strong economic growth, what we do know is that it is unlikely to be below 2 per cent – this is probably just a statistical illusion due to seasonal adjustment problems and other effects that will wash out over the coming year.

Elsewhere, we see the German IFO survey this evening, followed by UK GDP. US data tonight is largely confined to US home sales.

Have a great day...

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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