SCOREBOARD: Spanish ruse
Despite an obvious ratings downgrade in Spain, stocks in Europe and the US were generally up - with Spain and Greece soaring.
Well, despite some bad news on Spain last night, US stocks and most commodities managed to push higher. By and large it was risk on – but it nearly wasn't. The ratings agencies are at it again, following a well-established pattern of issuing downgrades at the height of crisis, adding no value other than to contribute to the rising sense of panic. And I know many market participants who believe that to be the intention.
This time there was another downgrade on Spain obviously and Spanish bonds reacted negatively to that and other bad news. Like house prices. Data was released last night showing Spanish house prices were down 12.6 per cent in the year to the March quarter. Prices are now down about 25 per cent since a 2007 peak. Adding to that, reports were splashed around that Spain's banks borrowed €287 billion from the ECB in May, up from €263 billion the month prior. With all that to contend with, Spain's 10-year bond yield hit a euro era high of 6.96 per cent, before settling down to 6.87 per cent.
Luckily, the damage was largely confined to Spain – and to the bond market. Italian bond yields for instance fell and the 10-year was some 15 basis points lower at 6.01 per cent and that's with a bond auction. The Italian treasury sold €4.5 billion of bonds with solid demand at 1.7 times. They are paying for it, but there is no shortage of demand. So for instance the 3-years were sold at a yield of 5.3 per cent which compares to 3.9 per cent in May. The real magic however was in the equity space and while the major European indices ended mixed – Dax off 0.2 per cent, CaC up 0.1 per cent and FTSE down 0.3 per cent – stocks in Spain were up 1.2 per cent and Greek stocks, check this out, shot up 10 per cent.
Remember there is an election this weekend people – the world could end! Why are Greek stocks up 10 per cent – why are their banks up 20 to 30 per cent? I'm not going to pretend I really know, I'm sure these markets are manipulated every which way. It doesn't however indicate to me that punters are overly concerned about a bank run though. The catalyst apparently was an unofficial poll (recall that opinion polls are banned in the weeks prior to the election) that showed pro-reform parties in the lead. Not long to wait.
Over in the US, the S&P500 brushed off concerns over Spain, maybe getting a boost from the Greek news – who knows anymore - opening higher and continuing that trajectory throughput most of the session. The economic data wasn't all that supportive with jobless claims rising to 386,000 in the week to June 9 from 380,000. Still not a bad number though and so at the bell, the index closed up 1.1 per cent (1329) with a good chunk of that occurring in the last hour of trading.
I'm not 100 per cent sure, but it does appear that the hour of power was driven by an expectation of massive central bank coordination should the Greek election prove less than favourable. The Band of England is certainly very keen, with the BoE governor (Mervyn King) stating that the case for further easing is growing. Elsewhere, though, the Dow rose 1.3 per cent (12651), Nasdaq 0.6 per cent (2836), while the SPI was 0.6 per cent higher (4068).
For bonds, they sold off, the US 10-year yield was up almost 6 basis points (from 1630) to 1.64 per cent, the 5-year rose about 5 basis points to 0.74 per cent while the 2-year was about 3 basis points higher to 0.30 per cent. Aussie futures then sold off a bit, more so at the long end, with the 10s down about 5 ticks or so to 97.07. The 3s were off 2 ticks to 97.66.
Then for forex and commodities, risk on saw commodities higher and the US dollar lower. Specifically, NY trading saw gold up $6.4 to $1625, crude rose 2.1 per cent to $84.4, while copper was 0.9 per cent higher. The Australian dollar then punched through parity again to sit at 1.0023 or about 80 pips higher than at 1630 AEST. Euro was, up 70 pips to 1.263, while sterling rose over a big figure to 1.5557.
A few bits and piece otherwise. US CPI fell in May, about 0.3 per cent which was weaker than expected. Thing is it's all fuel and excluding this, core CPI was up 0.2 per cent which again was expected, but it isn't a good number. Annualised, CPI has been running at a 2.5 per cent pace over the last three months, up from 1.6 per cent in the three months prior – year-on-year prices are 2.3 per cent higher. Consumer prices in the eurozone were then down 0.1 per cent in May, with the annual pace unchanged at 2.4 per cent (above target).
So, looking at the day ahead, there really isn't much for Australia at all. This evening we see UK trade numbers with eurozone trade and employment numbers following soon after. Tonight, US data includes the Empire manufacturing index, industrial production, and the preliminary estimate of the University of Michigan's confidence index.
This time there was another downgrade on Spain obviously and Spanish bonds reacted negatively to that and other bad news. Like house prices. Data was released last night showing Spanish house prices were down 12.6 per cent in the year to the March quarter. Prices are now down about 25 per cent since a 2007 peak. Adding to that, reports were splashed around that Spain's banks borrowed €287 billion from the ECB in May, up from €263 billion the month prior. With all that to contend with, Spain's 10-year bond yield hit a euro era high of 6.96 per cent, before settling down to 6.87 per cent.
Luckily, the damage was largely confined to Spain – and to the bond market. Italian bond yields for instance fell and the 10-year was some 15 basis points lower at 6.01 per cent and that's with a bond auction. The Italian treasury sold €4.5 billion of bonds with solid demand at 1.7 times. They are paying for it, but there is no shortage of demand. So for instance the 3-years were sold at a yield of 5.3 per cent which compares to 3.9 per cent in May. The real magic however was in the equity space and while the major European indices ended mixed – Dax off 0.2 per cent, CaC up 0.1 per cent and FTSE down 0.3 per cent – stocks in Spain were up 1.2 per cent and Greek stocks, check this out, shot up 10 per cent.
Remember there is an election this weekend people – the world could end! Why are Greek stocks up 10 per cent – why are their banks up 20 to 30 per cent? I'm not going to pretend I really know, I'm sure these markets are manipulated every which way. It doesn't however indicate to me that punters are overly concerned about a bank run though. The catalyst apparently was an unofficial poll (recall that opinion polls are banned in the weeks prior to the election) that showed pro-reform parties in the lead. Not long to wait.
Over in the US, the S&P500 brushed off concerns over Spain, maybe getting a boost from the Greek news – who knows anymore - opening higher and continuing that trajectory throughput most of the session. The economic data wasn't all that supportive with jobless claims rising to 386,000 in the week to June 9 from 380,000. Still not a bad number though and so at the bell, the index closed up 1.1 per cent (1329) with a good chunk of that occurring in the last hour of trading.
I'm not 100 per cent sure, but it does appear that the hour of power was driven by an expectation of massive central bank coordination should the Greek election prove less than favourable. The Band of England is certainly very keen, with the BoE governor (Mervyn King) stating that the case for further easing is growing. Elsewhere, though, the Dow rose 1.3 per cent (12651), Nasdaq 0.6 per cent (2836), while the SPI was 0.6 per cent higher (4068).
For bonds, they sold off, the US 10-year yield was up almost 6 basis points (from 1630) to 1.64 per cent, the 5-year rose about 5 basis points to 0.74 per cent while the 2-year was about 3 basis points higher to 0.30 per cent. Aussie futures then sold off a bit, more so at the long end, with the 10s down about 5 ticks or so to 97.07. The 3s were off 2 ticks to 97.66.
Then for forex and commodities, risk on saw commodities higher and the US dollar lower. Specifically, NY trading saw gold up $6.4 to $1625, crude rose 2.1 per cent to $84.4, while copper was 0.9 per cent higher. The Australian dollar then punched through parity again to sit at 1.0023 or about 80 pips higher than at 1630 AEST. Euro was, up 70 pips to 1.263, while sterling rose over a big figure to 1.5557.
A few bits and piece otherwise. US CPI fell in May, about 0.3 per cent which was weaker than expected. Thing is it's all fuel and excluding this, core CPI was up 0.2 per cent which again was expected, but it isn't a good number. Annualised, CPI has been running at a 2.5 per cent pace over the last three months, up from 1.6 per cent in the three months prior – year-on-year prices are 2.3 per cent higher. Consumer prices in the eurozone were then down 0.1 per cent in May, with the annual pace unchanged at 2.4 per cent (above target).
So, looking at the day ahead, there really isn't much for Australia at all. This evening we see UK trade numbers with eurozone trade and employment numbers following soon after. Tonight, US data includes the Empire manufacturing index, industrial production, and the preliminary estimate of the University of Michigan's confidence index.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
Follow @AdamCarrEcon on Twitter.
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