SCOREBOARD: Spain makes hay

Markets rallied overnight as reports circulated that the Spanish government will speed up aid for its banks.

Solid gains were to be seen across most equity markets last night, especially in Spain where we saw gains just over 4 per cent, and this was backed by reports that the government is going to speed up agreed financial aid for the banks. In fact, the general news flow out of Europe has been quite positive of late and there is a growing expectation that maybe, finally, the Europeans might end this.

For last night, German Chancellor Angela Merkel said that recent comments about preserving the euro made by the ECB head were ‘completely in line’ with Germany’s thinking. Recall that Draghi had said the ECB would do ‘whatever it takes’ and Merkel backed this, correctly pointing out that this is something European politicians have been saying for two years now. As I’ve highlighted over the same period, the attention a possible dissolution of the euro zone received was completely out of proportion to the likelihood of that event occurring.

Moreover these concerns have been based on misunderstandings of the problem – that Europe was undergoing a debt crisis or a balance of payments crisis. Neither is true. The RBA for one seem to think that an end to the crisis is close at hand. Which it could be. As I’ve argued before the solutions are very simple and the Europeans could end it at any time they choose. Whatever your view, the tension has eased and this can be seen clearly in the decline in Spanish bond yields. The 10-year yield continued to decline overnight falling 12 bps or so to 6.51 per cent (-120 bps over the last month), although Italian yields were broadly steady at 5.69 per cent (up smalls).

As for the major European equity indices, they too were stronger although not of the same magnitude that we saw in Spain. The Dax rose 0.7 per cent, the CaC was 0.9 per cent higher and the FTSE ended flat 0.03 per cent.

Across the sea, the S&P 500 ( 0.7 per cent to 1415) and Dow ( 0.7 per cent to 13250) closed higher and aren’t too far off their 2012 highs. Good news out of Europe obviously helped but the data flow too signals that concerns over stall speed growth etc were way over done – for the third year running. US jobless claims were the key release and they were broadly flat in the week to August 11, rising 2,000 to 366,000. So far, claims have been fairly steady at around 364,000 over the last 4 weeks which is consistent with solid growth in payrolls. Claims at least signal decent jobs growth going forward.

True to say that other data wasn’t as great – so US housing starts were weaker-than-expected, falling 1.1 per cent in July, but this comes after a 6.8 per cent surge the month prior and the fact is, the housing market looks like it is picking up if just slightly. Similarly, the Philly Fed index improved, rising to -7.1 in August from -12.9 the month prior although the index is still well below average. But that isn’t the point, we’ve been here so many times over the past few years - and this index and other like it have always spiked back. The question for investors is whether that happens again and it looks it will. The index is still lower than average (7.7) but the pattern we’ve seen over past years is the same.

Sharp drop followed by correction. Again, this does seem to support my non-consensus view that the data dips we’ve seen were just noise and nothing to panic over. The hard data of course remains positive.

In any case we also saw some positive earnings from Cisco which aided the market and the bid was on. The Nasdaq then finished 1 per cent higher (3062), while our very own SPI was 0.7 per cent higher (4308).

On the commodity front we saw further solid gains for crude, the WTI up another 1.1 per cent overnight to $95.4 – the highest level in about three months driven by solid global growth, the pick-up in recent economic data, the drop in crude inventories and of course concerns over Iran. Copper too rose about 1 per cent while gold rose $11 to be at $1617.

Finally then, and trading on a 7 bps range, US 10-year Treasury yields ended a little higher, a couple of bps, to sit at 1.84 per cent. The 5-year yield was little changed at 0.82 per cent, while the 2-year yield is at 0.29 per cent. Australian futures were down 1 to 2 ticks, with the 3s at 97.12 and the 10s at 96.59.

Elsewhere, we found out that the world’s latest rogue state, the United Kingdom, saw decent consumer spending. While retail sales were flat in July, this is actually a good result considering it follows a 1.1 per cent increase the month prior. The expectation had been for sales to fall 0.2 per cent. Including fuel sales were up 0.3 per cent after a 0.8 per cent increase.

Then eurozone CPI remains well above target at 2.4 per cent in July, and while the ECB won’t act to deal with the clear inflationary problem the zone faces, it’s worthwhile remembering that these high inflation outcomes are occurring against the backdrop of weak growth. That market economists and commentators don’t focus on this isn’t the point. That they try to ignore it, doesn’t change the reality. Inflation is already a problem and its set to get worse.

Not really much in the way of data in our region today. So tonight, it’s worth watching out for German producer prices for July and eurozone trade data. In the US it’s a quiet one and the major data point out is the University of Michigan’s consumer confidence index.

That’s about it, hope you have a great day and a great weekend…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

@AdamCarrEcon on Twitter.

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