SCOREBOARD: Poor euro vision

European markets were hit by political scandal, with a flow-on effect for Wall Street.

It doesn’t take much. There was absolute carnage over in Europe with the Cac off 3 per cent, the Dax down 2.5 per cent and the FTSE 1.6 per cent lower. In Spain and Italy it was worse, with stocks down 3.8 per cent and 4.5 per cent respectively. These are big losses and we haven’t seen these sort of moves since the middle of 2012 when the world was ending again.

The catalyst, apparently, was a corruption scandal in Spain that has rocked the conservative government. The prime minister and others are accused of receiving payments over two decades (in brown envelopes – I’m not joking), from construction companies and others seeking government contracts. Envelopes? These people are amateurs! If there is nothing else they do well (and there isn’t), they know how to do that.

Then throw in an apparent surge in support for Silvio Berlusconi (elections later this month) following his promise for nationwide bunga bunga parties. Okay, that bit isn’t true. It is true that he has promised to scrap property taxes and throw off the shackles of ‘German imposed’ austerity. Anyway, that’s when we saw Spanish and Italian 10-year yields shoot higher – 21 bps higher for Spain to be exact, which is the biggest lift since September, while the Italian equivalent was up 11 bps to 4.42 per cent.

Over on Wall Street and with about an hour to go, the Dow is off 123 points (13,883), the S&P500 is 0.9 per cent lower (1499) and the Nasdaq is down 1.3 per cent (3139). Most of the fall is due to Europe, not that anything has really happened mind you. Maybe it’s the case that markets have had a good run, and everyone was talking about a correction. Then human nature – and the herd – being what it is, the first excuse, no matter how minor, was pounced on.

There wasn’t much news otherwise to drive things. US Factory orders rose 1.8 per cent in December following a 0.3 per cent fall the month prior.

You can guess that US Treasuries rallied and the 10-year yield is down some 7 bps to 1.97 per cent; the 5-year is off about 6 bps to 0.84 per cent, while the 2-year sits at 0.25 per cent. Aussie futures followed suit with the 3s up 6 ticks to 97.12 and the 10s up 7.5 ticks to 96.51.

Then, apart from the euro which fell about a big figure on those European concerns, there wasn’t too much going on in the forex space.

The Australian dollar is little changed at 1.0435; the British pound is up 60 pips to 1.5767, while the yen is at 92.35.

Finally, for commodities, metals were mixed with gold up $4 to $1673; silver and copper were weaker (-0.3 per cent), while crude fell 1.5 per cent on WTI ($96.3).

There are a few other things to note. China’s non-manufacturing PMI rose to 56.2 in January from 56.1. And on the news front, S&P faces civil charges over its role in the GFC and in particular its rating of mortgaged-backed securities.

Looking at the day ahead, the SPI suggests the All Ord’s will fall 0.6 per cent today. Then, in terms of data, we'll see December quarter house prices from the Australian Bureau of Statistics; the Aussie trade balance; and, of course, the Reserve Bank's decision at 1430 AEDT. Markets aren’t pricing a cut for this meeting, although the majority of analysts expect at least one more cut at some stage – exciting stuff. My favourite are those economists who freely acknowledge that rate cuts to date – record low interest rates – have gained little traction (done nothing). Knowing this, they then go on to argue that the Reserve Bank should cut some more! A more bizarre rationale I have never seen. Still, it goes to show how lame the arguments for a cut are now, if that is the best argument in favour. Having said that, this is a board not afraid to invent reasons to cut. Maybe they’ll cite heightened anxiety in Europe again?

For the rest of the world, it’s probably worth keeping an eye on HSBC’s estimate of the China services PMI, although we already have the official results. Tonight we get eurozone retail sales and some PMIs (final January estimates for Europe), while in the US we get the non-manufacturing ISM. The services sector is about 80 per cent of the US economy and this index shows a decent expansion underway with an index of 55.7.

Have a great day…

Adam Carr is a leading market economist.

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