US equities initially sold off, following what was a sluggish session across the pond – the Dax closed 0.2 per cent higher, the CaC was up 0.4 per cent, while then FTSE100 rose 0.1 per cent. The thing is those modest moves don’t really capture the moment for me – the bigger picture.
Europe is healing, there is no question of that, and while equities didn’t reflect it but Spanish and Italian bonds certainly did. We saw some huge moves with the Italian 10-year yield down about 15bps to 4.54 per cent – the lowest yield in two years. That’s something. That’s important. The Spanish equivalent fell almost 20bps to 5.31 per cent.
What we’re seeing here is probably a realisation by the market that European politicians are committed to the eurozone – and the union. A realisation that political imperatives trump economic considerations and that neither Spain nor Italy are insolvent. So the calm descends.
The new news for last night was that the EU has approved funds that were allocated to bailing out Spanish banks – €37 billion in total. This was agreed some time ago, but the funds are now to be spent. Recall that conditions were attached and they involve significant restructuring to bring Spanish banks down to a sustainable size – balance sheets will be shrunk (60 per cent over five years) and jobs are to be lost. Toxic assets are to be moved into a ‘bad bank'.
Harsh but necessary for a country whose public debt position is actually not that bad – the concern people had was how that debt situation would look if the Spanish financial system collapsed. People need not worry about that now. The sovereign is now much less risky, not that the ratings agencies know this yet. CDO anyone?
In any case, everyone is watching a new show – ‘The Cliff” – and it was commentary from the House Speaker and Obama that ended up placing a bid under US stocks. Both expressed optimism that a deal will be reached – Obama reckons before Christmas (beware the pre-deadline deadline) – and voila! Risk on. Sort of.
As I write, the S&P500 is up 0.4 per cent to 1403, the Dow has put on 76 points to 12,954, while the Nasdaq is 0.3 per cent higher at 2975. Modest gains but a decent turn around compared to what the opening suggested.
In terms of the macro, there wasn’t a great deal. New home sales in the US fell 0.3 per cent in October after a 0.8 per cent rise the month prior, while the Fed’s Beige Book (anecdotal reports of chief executives compiled by Fed) suggests economic activity grew at a "measured pace” in recent weeks – impacted negatively by the east coast storm and of course fiscal cliff concerns. The report overall was upbeat on consumer spending, real estate and employment although there were snippets of weakness in each. Conditions in manufacturing were noted as being mixed ”though on balance, most districts reported that conditions had weakened since the previous report”.
So – to price action elsewhere, the Australian dollar is up about 25 pips to 1.0478, having hit a low of 1.0428 overnight. The euro is little changed at 1.2933. Commodities then are all weaker – gold is down $23 to $1718, copper is off 0.6 per cent and crude is down 0.6 per cent ($86.6). US Treasuries did little with yields on the 10-year down a bp or so to 1.62 per cent. The 5-year is then at 0.63 per cent and the 2-year is at 0.25 per cent. Australian futures were off 1-3 ticks on the 3s and the 10s respectively – 97.35 and 96.895.
For the Australian market today the SPI suggests stocks will be up 0.3 per cent to 4465. Then on the macro side, the key focus will be the private capital expenditure estimates at 1130 AEDT. The market looks for a gain of about 2 per cent. Elsewhere we see German employment numbers tonight, alongside the European business climate indicator. Another US GDP estimate is out tonight, for the third quarter and growth is expected to be revised up to 2.8 per cent from 2 per cent. Trend growth is between 2.2 per cent and 2.4 per cent.
Hope you have a great day…