SCOREBOARD: Soft touch

Markets softened overnight as Spanish investors took fright, while all waited on US Fed and ECB decisions.

Equities took a bit of a hit last night and bond yields fell ahead of a batch of tier-one data over the next few days (ISM and payrolls) and the Fed and ECB meetings. The largest falls were in Europe (disappointing earnings from banks like UBS and Deutsche weighing), although the Dax was down only -0.03 per cent, the CaC was off 0.9 per cent and the FTSE was 1 per cent lower.

Certainly much of the news flows was negative overnight and revolved around an apparent pick-up in capital flight from Spain with €163 billion, leaving the country in the first half of the year (a record) with outflows in May alone at about €51 billion (about €10 billion at the same time last year). One consequence of this is that the proportion of debt being held by foreigners fell from over 50 per cent to something over 30 per cent (same for Italy).

Then there was Spain’s budget deficit, which came in at 4 per cent for the half-year (2.2 per cent this time last year) as revenues rose 2 per cent and expenses rose over 30 per cent – effectively due to transfers to the regions and welfare payments. That said, the government reiterated that it was on track to meet its deficit reduction targets, although Spanish and Italian bond yields still pushed higher – the Spanish 10-year up about 13bps to 6.67 per cent, while the Italian 10-year was at 6.06 per cent or 6bps or so higher.

There was data also to digest and one of the more interesting features was that European inflation remains stubbornly high, stuck well above the target at 2.4 per cent in July. And this is while the region is in recession. Talk of deflation is truly absurd in this environment and quite clearly inflation, taking a temporary respite, is still set to be the big scourge for the globe. The timing is delayed but the momentum is the same. Otherwise, unemployment remains high at 11.2 per cent for the eurozone, although German unemployment is much lower at 6.8 per cent.

Over on Wall Street, the S&P finished 0.4 per cent lower (1379) and the Dow was off about the same (13008), although for most of the session the indexes were broadly flat, bouncing around zero. Generally positive data offered some support and last night we found out that US home prices rose for the second straight month ( 0.9 per cent), consumer confidence lifted in July (3 points to a still below average 66) and the Chicago PMI bucked the trend and showed a lift in manufacturing – with the index up to 53.7 in July from 52.9. I also shouldn’t forget a solid rise in consumer incomes for June ( 0.5 per cent, although spending was flat). It was really only in the last hour or so of trading that we saw the definitive sell come on and there was no real catalyst.

As for forex and commodities, we saw the Australian dollar weakened, just managing to break through $US1.05 to be at $US1.0496 as I write (down about 90 pips from 1630 AEST). The euro was then up about 30 pips to $US1.2302 while sterling sits at $US1.5677 and yen at $US78.11. Crude was then off 2 per cent to $US87.96, copper was flat and gold was down about $US5.5 to $US1614.

On the rates side we saw US 10-year yields fall about 3bps to 1.485, while the 5-year was down about 4bps to 0.59 per cent and the 2-year is at 0.22 per cent. Aussie futures were up about 4 ticks a piece, with the 3 at 97.52 and the 10s at 97.030.

So for the Aussie market it looks like we’ll see another weak session and the SPI (at 4209) suggests stocks will fall about 0.4 per cent. Looking at the calendar for today, the headline Aussie data is June quarter house prices at 1130 AEST, followed by commodity prices this afternoon (1630 AEST). Other data for the region include the Chinese manufacturing PMI at 1100 AEST and then tonight, we see the ISM index, the ADP employment report and construction work done.

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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@AdamCarrEcon on Twitter.

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