SCOREBOARD: The outlooks grim

A combination of the IMF's uncertain global outlook and dire US earnings expectations hit equities overnight.

Global equities took a hit last night following a fairly grim global assessment from the IMF. It’s not that their growth forecasts are all that bad or anything. Indeed the IMF expects growth to accelerate over the next year (to 3.6 per cent from 3.3 per cent) and indeed it is accelerating as we speak. Yet the focus wasn’t on that, but on the assessment of risks – modest downward revisions to growth and a 17 per cent chance of severe global recession.

I would agree with the IMF that the risks have increased markedly, but the risks are not one way, as the IMF itself notes. There are substantial upside risks, as well as downside risks, and as usual they note there is a high degree of uncertainty associated with their forecasts. Having said that, they then spend the vast proportion of the time discussing extreme downside events which is interesting. There is little balance in this report that I can see. For mine, I think they downplay the significance of the ESM and the ECB’s commitment to buy bonds. Similarly, the US fiscal cliff is something not well understood and grossly exaggerated. I’ve discussed it elsewhere, but suffice to say it’s less a cliff and more a pothole or maybe a muddy puddle – equivalent to a very small increase in the Federal Funds rate from zero to something not too different from zero. So in my view the IMF are being overly gloomy, but then they have a very bad habit of doing this.

I don’t think we can say the IMF’s report by itself was a significant factor in the price action last night, but when you combine it with concerns over the US earnings season – not a lot of cause for joy. So with nothing else to really go on, stocks fell. In Europe the Dax was down 0.8 per cent, the CaC fell 0.7 per cent, while the FTSE was down 0.5 per cent. There wasn’t any major news-flow from the region – about the biggest was a visit from the German Chancellor, Angela Merkel, to Greece, although she didn’t say much.

Over on Wall St, punters are getting prepared for a disappointing earnings season but still managed to push higher on the open. After a couple of hours the offer came on, led by tech stocks and indeed the Nasdaq took some heavy hits, 1.5 per cent (3065) in the red toward the close. The S&P500 was marginally better but not much, down about 1 per cent (1441) while the Dow was off 0.8 per cent (13473).

Commodities had a better session of it, brushing off the IMF, especially crude which rose 3.2 per cent to $92.13 and this seems to be largely based on Mid East concerns. Turkey looks increasingly likely to invade Syria, to secure their border etc, and Israel looks increasingly likely to take action against Iran. Israel are holding early elections which is seen by some as a referendum on war. You’ve got to give the people what they want after all. Copper was then flat basically and gold declined about $10 to $1765. A stronger USD helped here (possible safe haven buying) and euro was off over a big figure to 1.2878, while Sterling fell about 50 pips to 1.5995. Otherwise Australian dollar was off about 60 pips to 1.0205.

As for rates, we saw US treasuries little changed, yields up a touch on the 10-year to 1.72 per cent. Otherwise the 5 and 2-year yield is at 0.66 per cent and 0.26 per cent. Aussie futures then did little – 3s at 97.65 and 10s at 97.035.

Looking at the day ahead, for the Aussie market the SPI suggests stocks will fall by 0.7 per cent. As for the data we get consumer confidence at 1030 AEDT. Bit of a lottery as to what we get. The global situation has certainly improved notwithstanding the IMF’s report yesterday and stocks have rallied. On the downside, we’ve seen a quite a few people suggest the mining boom is over, and the news flow itself or the discussion of it has been terrible. Throw in more RBA rate cuts and people might just feel that strong growth and a low unemployment rate aren’t all that good after all.

Apart from confidence there is little for Australia. Globally, it’s worth watching Japanese machine tool orders. For the US, we get the Beige Book and a couple of Fed speakers (Fisher and Kocherlakota).

Have a great day…

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