SCOREBOARD: Spanish strife

Markets were disappointed overnight after Mariano Rajoy dismissed speculation of an imminent bailout request.

Initially it looked like it would be a fairly decent session. There wasn’t really much news or data flow as such, but punters were in the mood.

So over in Europe, and at the high, the Dax had actually shot up 1.3 per cent – other major indices following suit and this was a trend that flowed across the Atlantic. So shortly after the open, the S&P was up 0.5 per cent – in fact all the major indexes were higher – perhaps getting a modest boost from the pick-up in the New York ISM index. This rose to 52.9 from 51.4 and while I’m not suggesting it’s a tier one indicator to get all excited about, it wouldn’t have hurt following the surprise bounce in the broader ISM index.

Cue Spain. The Spanish prime minister, at a press conference following meetings with regional leaders, said that a bailout request was not imminent, or rather said ‘no’ when asked if one was. This follows press speculation that Spain would put in a request as soon as this weekend. Spain doesn’t seem to be in a rush though, and this is something other ministers have said also.

It really comes down to bond action. The 10-year yield at 5.7 per cent, while comparatively high, isn’t especially high relative to history. And indeed the Spaniards themselves point out yields are down sharply from earlier in the year. No doubt they are negotiating terms, if such a request was made. Actually while we are on the issue, the Spanish 10-year yield fell another 15 bps or so overnight to 5.7 per cent. Italy’s 10-year fell 5 bps to 4.95 per cent.

In any case – risk off elsewhere! And most of the gains up to that point were given back. The Dax dropped 1.4 per cent in subsequent trading, to close 0.2 per cent lower. The CaC then ended 0.6 per cent weaker and the FTSE was off 0.2 per cent. It was similar action over on Wall Street, the offer on, although in the end stocks were mixed around zero (S&P500 0.1 per cent to 1445, Dow off 0.2 per cent to 13482, Nasdaq up 0.2 per cent to 3120).

Over in the commodity space the price action was almost identical to equities, bid on early, given back in subsequent trading following those comments from Spain. Crude ended 0.8 per cent weaker to $91.74, gold was off $6 or so to $1777, while copper pushed modestly higher, rising 0.3 per cent.

In the forex space we saw some decent moves on the Australian dollar, which saw some more selling pressure in the US session, having been fairly steady through European trading.

From just prior to the RBA’s decision, the unit is down 110 basis points (1.0265). Note however the rate cuts have so far proven to be unsuccessful in leading to a sustained depreciation. In every instance the Australian dollar has recovered, usually to higher point. The euro then was about 10 pips higher (1.2919) having hit a high of 1.2965 or thereabouts. Not much else, sterling and yen were little changed in the end at 1.6132 and 78.16 respectively.

Finally for the price action. US treasuries initially sold off (10-year yields up 4 bps to 1.65 per cent at the high), but then rallied as stocks and commodities sold off. At the close, yields were little changed with the 10-year at 1.62 per cent, the 5-year at 0.61 per cent and the 2-year at 0.23 per cent. The Australian dollar saw little action then, off smalls with the 3s at 97.68 and the 10s at 97.12.

In other news, European producer prices surged in August, rising 0.9 per cent after a 0.3 per cent rise to be 2.7 per cent higher annually (up from 1.6 per cent).

Still in Europe, we saw the European Commission – well, a panel reporting to them – recommend that banks should split their trading arms from their deposit taking arms. If implemented this would lead to the break-up of pretty much all the major European banks. The rational, according to the panel, is that this would enable better supervision of banks, transforming them into simpler institutions, which would also reduce the need for tax payer funded bailouts.

With that out of the way, the SPI suggests the All Ords will get a modest bid (0.4 per cent to 4450). Apart from that, we have one piece of data for Australia today – international trade in goods and services – at 1130 AEST.

Prior to that, at 1100 AEST, we see China’s non-manufacturing PMI which is currently running over 56. Tonight, it’s worth watching eurozone retail sales, the US ADP employment report and the non-manufacturing ISM.

That’s about the lot, hope you 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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