SCOREBOARD: Rumour sale

Not content with just one day of repackaging old and well known news as breaking news, some English newspapers and some newswires persisted again today with the idea that there is a split within the European leadership on the Greek issue and that the terms of the bailout might have to be renegotiated. These facts have been well-known for a long time. The new information was harder to come by and included the fact that Finland's parliament ratified the July 21 bailout package (103 in favour and 66 against), a key feature of which was the beefing up of the EFSF. This is a very good sign and don't forget the Bundestag votes tonight.

Now there is little risk, according to the political experts, that the vote won't pass, so don't be distracted by the press on this issue. The main opposition party, the SPD, have said they will support measures to enhance the EFSF and have indicated they would support a eurobond. The side issue is whether Angela Merkel's Christian Democrats can pass the legislation without the SPD – ie. whether their coalition partners will vote against it. But then again, the FDP haven't been doing that well in elections so it's not clear whether they can really afford to vote 'nein'. In the end, it doesn't really matter how it's passed though, as long as it is. EU and IMF inspectors also return to Greece today and realistically, a lot will depend on what they have to say as well, so watch out for that.

In the interim, equities and commodities were belted again overnight. In Europe, stocks were down 0.9 per cent on the Dax, 1.4 per cent on the FTSE and 0.9 per cent on the CAC. Wall Street fared worse, with the S&P500 closing down 2.1 per cent (1,151), the Dow off 180 points (11,010), the Nasdaq down 2.2 per cent (2,491), while the Australian SPI was off 1.5 per cent (4,003).

These moves seem somewhat aggressive, however, when you consider US economic data out overnight. Recall the claims of dribbling fantasists and lunatics that the US is already in or close to a recession, or whatever, and that the world is ending. I've long pointed out that this is not the case, that there is simply no evidence for these claims and that we are not even close (although Europe has the potential obviously). Well, durable goods orders out last night again back my view. Headline orders were down 0.1 per cent in August after a 4.1 per cent gain the month prior ( 14 per cent year-on-year) but core orders were up 1.1 per cent after an upwardly revised 0.2 per cent fall (was -0.9 per cent). Core shipments rose 2.8 per cent after a 0.4 per cent rise, which puts annualised growth near 20 per cent – ie. very strong and certainly not recessionary.

This fact, however, didn't inspire commodity traders and we saw a decent reversal of the previous session's gains. Gold fell about $45 to $1,608, while silver fell 4.5 per cent and copper was down 5.6 per cent. WTI was then off 4.7 per cent to $80.5 and Brent was off 3.6 per cent to $103.1. Needless to say, basic materials and energy stocks were a key underperformer on the S&P, but financials didn't do that well either (off almost 3 per cent) given the EU is actively considering a financial transactions tax. In part this was a US dollar story, as the dollar index bounced a bit, in turn seeing the Australian dollar off 85 pips to 0.9785, euro off 28 pips to 1.3544, the pound down 52 pips to 1.5579, while the yen was broadly unchanged at 76.54.
On the debt side, US treasuries didn't do a lot in the end, although ranges were reasonable on the 5-year and 10-year (between 8-12bps). At the close though, the 2-year was little changed at 0.25 per cent, the 5-year was at 0.94 per cent and the 10-year was up 2bps to 1.98 per cent. Australian futures also rose, with the 3s up 3 ticks from 1630 AEST to 96.4 and the 10s up 4 ticks to 95.7.

Not a lot else otherwise. German inflation unexpectedly accelerated again, to 2.8 per cent year-on-year in September from 2.5 per cent in the month prior. This should rule out any chance of a rate cut from the ECB. Then we saw some comments from Kansas City Fed President Hoenig overnight, his final official comments before he retires on Saturday. Hoeing was, and has been, a key opponent of the Fed's extreme policies and rightly pointed out that by "inhibiting your interest rates from rising to their equilibrium level , you will in fact buy problems, and we have in fact bought problems.” His retirement is a great loss for the Fed, an institution that has clearly lost any idea of how to conduct prudent monetary policy. I, for one, salute him. He was a much needed voice of reason.

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

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