SCOREBOARD: On the up

Markets finished mixed but the US recovery appears to be on its way and the European downturn past its trough.

Global equities saw another modest bid overnight, well really it was a mixed session for the US – S&P500 up 0.4 per cent (1460) into the close, Dow 5pts lower (13545), while the Nasdaq was up 0.1 per cent (3104. For mine, none of this quite captures the significance of some of the data flow. Although fair to say the session prior was quite solid.

So for instance in the US, housing starts surged in September, up 15 per cent following a strong 4 per cent gain the month prior. This brings annual growth to 34 per cent and we’re talking the largest number of starts in four years. Now I don’t want to overplay it. At 872,000, starts are still comparatively soft – about half, or less even, the average of the prior decade. But the momentum is there, the recovery is underway. That’s what matters.

Similarly across the pond, European data was good with construction output up 0.7 per cent in August, after a 0.1 per cent rise the month prior. Further evidence that the European downturn is modest and probably past the trough. At the very least close to it. Even in Britain there was cause for some optimism – unemployment fell from 8.1 per cent to 7.9 per cent as 212,000 jobs were created (3 months to August) after a 236,000 gain previously. Equities had a reasonably decent bid as a result and we saw the Dax up 0.3 per cent, the CaC up 0.8 per cent, the FTSE was 0.7 per cent higher and the euro was up about 30 pips to 1.3122.

There were a few other things worth noting – S&P downgraded five Spanish regions yesterday while Moody’s kept Spain’s investment grade Baa3 rating but have them on a negative outlook (the next review is in June). Personally, with both the ESM and ECB providing a backstop, the ratings agencies should be giving Spain an upgrade, I don’t see how they can justify not doing so, in all seriousness. Neither nation is close to insolvency and the liquidity crisis has been resolved. This is why investors appear to have calmed down significantly, with the Spanish 10-year down another 30bp to 5.46 per cent. The 2-year fell about the same to 2.68 per cent, while the Italian equivalents were about 16bp (4.64 per cent) and 10bp (2.02 per cent) lower.

In terms of the price action elsewhere, the other noteworthy event for the session was the spike in the Australian dollar. The unit shot higher last night, up about 70 pips to 1.0384, sitting higher now just than prior to the RBA’s cuts. Again this shows that the RBA’s easing cycle has had little to no lasting effect on the strength on the Australian dollar as I argued it wouldn’t. Consequently, it is somewhat surprising that people still cite the strong currency as a reason to cut rates. I mean it not like this fact is new, it’s been a consistent feature – it doesn’t work. This fact is observable in the data and we need to be smarter than this quite frankly. Excessively low rates do carry significant risks, the GFC showed us this. The problem is there is a very aggressive and vocal part of the community who don’t seem to have learned those lessons –economists included.

There wasn’t really much to say on forex otherwise, and it’s the same for commodities. Gold was up smalls ($US1750), copper was 1 per cent higher although crude was down a touch ($US92). There is a big effort underway on crude – plenty of press about the world’s coming oil glut (peak oil anyone?), the IEA cutting their demand forecasts (into an accelerating global economy) and of course we know the US is keen to avoid any move over $100. Offering some support was an article in the European press suggesting Iran may flood the Strait of Hormuz with oil. Hey why not - there’s just so much of the stuff apparently – a glut people, a glut - I might even start hosing down my drive-way with it.

As for rates, US Treasuries had a decent sell off, traffic was one way as the 10-year yield rose about 8bp to 1.81 per cent. The 5-year rose about the same to be at 0.77 per cent, while the 2-year sits at 0.29 per cent. Aussie futures then sold off about 10 ticks a piece with 3s at 97.45 and 10s at 96.865.

Looking at the day ahead, the SPI suggests the All Ords will rise about 0.4 per cent. As for the key data in our region, this includes Chinese GDP, industrial production and retail sales figures. GDP is expected to rise 8 per cent in the September quarter (annualised or 7.7 per cent year-to-date), while industrial production is forecast up 10 per cent. Tonight the data to watch includes US jobless claims and the Philly Fed index – recall that huge fall last week to 339,000 in jobless claims, the question is how much they’ll bounce back.

That’s about the lot, have a great day…

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