Unfortunately it doesn’t appear that Ireland’s bailout has done much to stymie the contagion. Spanish 2yr bond yields rose to 3.7% from 3.48% while the 10yr rose to 5.42% from 5.17% (spread to bunds at a record high). Italian (10yr spread to bunds also at a record) and Portuguese yields were also up and in a move that makes no sense at all, Ireland ’s 10yr bond yield rose to 9.25% from 9.19%. It’s a tough one for the Europeans, as most of the ‘solutions’ presented, at their core, once you strip out the rhetoric and deceit, involve dissolving the union; which is hardly a solution at all. Indeed it would make things a lot worse and would do nothing to aid regional stability over the long-term.
But other than these extremist rantings, there is not a lot in the way of reasonable or practical advice on how to restore order. It‘s hard to see what will act as a circuit breaker to be sure. The market is in a frenzied state at the moment with no clear catalyst for change. Even agreement on the long-term European Stability Mechanism – a permanent European bailout facility agreed to on Sunday, failed to stop the rot. To me it seems that, rather than try and placate the market (which isn’t working), Spain and Portugal may find it more beneficial to have to look at the whole system, the process of how they raise money and issue debt. It’s not a process that appears to be working for the peripherals at the moment. The system is breaking down and it would probably pay for them to think outside the square. Food for thought at least.
Needless to say, eur was hammered again, falling by almost a big figure at the time of writing to 1.3121. Not that this is a bad thing for the euro zone. Sterling was off 35pips to 1.5567, AUD was little changed at 0.9623 while Yen was at 84.26 from 84.07.
There was also little love for European equities, down between 1.7% and 2.2% although moves across the Atlantic appear less sombre. With about an hour of trading to go, the S&P500 is up about 0.03% (1189), although at the low it was down 1.3.%. A late session rally seems to be developing, led by financials, energy and basic materials, in turn, sparked by decent rises in the commodity space. Punters here seem more taken by the stronger thanksgiving retail data in the US . Currently, crude is up 2.4% which, given USD strength, is especially remarkable. Copper is up 0.3% and gold rose smalls to $1367. Elsewhere the Dow is off 20pts to 11071, the Nasdaq is down 0.2% (2529) and the SPI is 0.2% lower at 4611.
Now on the debt side, treasury notes did rally, with the 5 and 10yr treasury yield off about 6bp each to 1.49% and 2.82%. Note however that both are well above pre-QE2 rates. The 2yr didn’t do a great deal and is off only 2bp. Considering everything going on, these moves aren’t huge and there still seems to be a great reluctance to take bonds higher (in price) and that’s with the Fed buying an additional $9.4bn of Treasuries last night. Aussie futures were a few ticks higher (on a 5 tick range) with 3s at 94.92 and 10s at 94.52.
There wasn’t a lot of data to speak of last night. The key release was probably the euro zone economic confidence survey which rose to 105.3 in November from 103.8. Interesting to see that European businesses and consumers don’t seem to be phased by the ‘debt crisis’. Otherwise the Bank of England report that 47k new mortgages were approved in October. In the US , Obama is proposing a 2yr public sector wage freeze.
There is a fair bit of data to watch today. We kick off at 0845 with Kiwi building permits. At 10 we get South Korean industrial production with Japanese industrial production out at 1050. Aussie data includes RP data-Rismark’s house price series (1030), and RBA Assistant Governor speaks at 11 and then building approvals, private credit and the current account (all at 1130). Tonight, watch out for euro zone CPI and unemployment and then in the US, we get house prices, consumer confidence the Chicago PMI and Milwaukie NAPM. Indian GDP is also due out at some point and the Bank of Portugal is due to issue its Financial Stability Report.
Risk was back on in volume last night and mostly because of the decent economic dataflow. It wasn’t all great mind you: new home sales fell 8% in October, which was much weaker than expected (1.6%) although it does follow an upwardly revised 12% gain in September. In any case, mortgage applications for new purchases surged by 14% last week which points to a turn around or at the very least a stabilisation. Then durable goods fell 3.3% in October and while all the headlines are telling you how bad this is, it kinda isn’t. There were some big swings in volatile items like aircraft (-11%) and defence orders (down 21%) and if you strip that stuff out; orders were still weaker but only 0.8% weaker (and after decent gains in the 2 months prior).
On the flip side it looks like things in the consumer space continue to improve and indeed are doing much better this month. In particular, new jobless claims fell to 407k in the week to November 20, from 441k, which is the lowest number of new claims in over 2-yrs. Added to that, continuing claims fell 142k to 4.18m (also the lowest in about 2-yrs). While there will be no shortage people to tell you this number is anomalous, the US department of labour haven’t cited any unusual factors affecting the data – so mayhap it is and mayhap it ain’t. Time will tell, but the downtrend is clear and consistent with the decent growth we have seen in private sector payrolls this year (1.1m jobs so far).
The good news continued with a 0.5% rise in personal spending (4th consecutive month of decent growth) and a 0.4% gain in income (all for October). With this dataflow you can’t help but wonder how the Fed managed to revise down their forecasts. It’s pretty clear the US economy is on a solid path to recovery and there can be no credible denial of that. Indeed I don’t know too many forecasters, who, in the face of stronger data and additional stimulus, manage to find slower growth. But it’s a crazy world I guess, full of crazy people.
Maybe that’s why treasury yields continue to rise. Volumes were pretty decent last night and while that’s mainly because of the better jobs and spending data, we also saw weak demand at the $29bn 7yr note auction. Cover at 2.63 was well down on the 3.06 and 3.04 ratio we saw in October and September and is the lowest ratio since March. Similarly indirect bidders took 42% of the issue which is lower than the 50% they had been taking. So at the time of writing, yields on the major t.notes had spiked higher – 7bp on the 2s (0.53%), 11bp on the 5s (1.56%) and 12bp on the 10s (2.91%), which is particularly noteworthy given the core PCE moderated to 0.9%y/y in October from 1.2% (headline at 1.3%y/y from 1.4%). The market is telling you that deflation isn’t a worry. So I have to say it – Qe2 has failed. Aussie futures bounced around on an 8-9 tick range and currently sit 4-7 ticks lower on the 3s (94.79) and 10s (94.46).
Equities then found a decent bid and at the time of writing, had offset most of the prior session’s losses. In Europe, stocks rose between 1% and 1.8% on the major indices and in the US, the S&P500 is currently up 1.4% (1197), the Dow is 143pts higher (11188) and the Nasdaq is 1.8% higher at 2540. While all sectors pushed higher on the S&P, industrials, technology and energy stocks outperformed. Other than that, the SPI was up 0.85% (4624).
Looking into the FX and commodity space, the USD was generally stronger with the dollar index up 0.4% (from 1630) with euro off 85pips, Sterling down 65pips (1.5762) and Yen up to 83.58 from 83.23. That said, Aud is a little firmer (+27pips to 0.9817). Noting the stronger USD, the surge in commodity prices was particularly impressive – crude rose 3.3% ($83.8), copper is up 1.4% although gold was down smalls ($1373).
In other news and data the Germans are getting more confident by the day and the IFO business climate index rose to 109.3 in November from 107.7 which is a record high. Both the current assessment index and the expectation component rose in the month, which stands in stark contrast to widely held expectations for a material slowing in 2H10 growth. Still in Europe , industrial orders fell 3.8% in September not quite offsetting a 5.1% rise in the month prior. Then in the UK , Q3 growth was confirmed at a strong 0.8% quarterly rate. Lastly, Michigan uni revised its November estimate of consumer confidence up to 71.6 from 69.3. I think that’s most if it. Ireland announced a 4yr austerity plan of spending cuts etc etc over the next 4yrs, although bond yields pushed higher (40bp on the 2yr to 5.72%) and 45bp on the 10yr to 8.86%). That said the 10yr bund sold off aggressively also and the 10yr yield spiked to 2.71% from 2.55% so we have to keep it in context.
With the Thanksgiving Holiday in the US there isn’t much data out and markets will be closed tonight. Indeed there isn’t much out in our region either. Japanese trade data and for Australia , private capex at 1130. Yesterday’s construction work done figure was weak but most of the weakness was concentrated in residential and public construction (after considerable strength). The main implication is that my GDP forecast is quite a bit weaker (0.2% from 0.7%) so far, but we have a few indicators to go yet so this will probably change. On the flip side there is nothing in this data that suggests the mining led business investment boom is at risk. This implies that the weakness we are seeing can be put down to volatility and certainly there is nothing to be overly worried about.
Midday: Aus shares trading in the red November 24, 2010 11:59 AM
The Australian share market is in the red at noon, following strong negative overseas leads. Local shares slid 0.6 per cent on concerns over conflict in the Korean peninsula and European sovereign debt. Financial and resource stocks are lower, with the big four banks losing ground.
The S&P/ASX200 index is points 30 weaker at 4,559 and on the futures market the SPI200 is down 36 points.
Company news: Japanese public broadcaster NHK has reported that trading house Sojitz Corporation has struck a $300 million deal with Lynas Corporation Ltd (ASX:LYC) for the supply of rare earths. Sojitz has secured the right to purchase around 8,500 tonnes of rare earth metals from Lynas for the next 10 years. Analysts say the amount purchased equates to almost 30 per cent of annual demand in Japan. Shares in Lynas Corporation are 2.89 per cent firmer at $1.425 at midday.
The Australian has reported that Lachlan Murdoch has paid $128.2 million for half of James Packer’s 17.9 per cent interest in Ten Network Holdings Ltd (ASX:TEN). Mr Murdoch’s purchase brings his stake to around 8.9 per cent. The investment comes one month after Mr Packer bought his stake for $280 million. Just yesterday Australia’s wealthiest woman, Gina Rinehart, secured a 10 per cent stake in the network. Shares in Ten Network Holdings have slipped 2.82 per cent to $1.55 at noon.
Turning to market indices: The best sector is Telco Services, with the index up 4 points to 951. Shares in Hutchison Telecommunications are up 5 per cent at $0.105 Shares in Telstra and iiNet are also higher. The worst performing sector at midday is Consumer Discretionary with the index down 17 points to 1,499. APN News and Media is down 3.92 per cent at $1.84. Ten Network Holdings and Harvey Norman Holdings are also lower at midday.
To New Zealand: The NZSX50 is down 11 points. Taking a look at the top 4 stocks by turnover, Telecom Corporation of New Zealand is at the top of the list with stock down 1.84 per cent to $2.13; followed by Westpac, Fletcher Building and ANZ.
To gold and the dollar: Gold is trading at $US1,374 an ounce and the Aussie dollar is buying 97.48 US cents.
Black Friday Is Coming, and I NEED EVERYTHING!
The Australian share market is lower at midday following a weak lead from Wall Street on concerns about European sovereign debt. Concerns over Europe’s debt problem remain even though Ireland formally requested a bailout from the European Union and International Monetary Fund. Fears of weaker demand from China have also lead shares lower. The major miners and banks gave up ground, coming in the red.
The S&P/ASX200 index is points 17 lower at 4,626 and on the futures market the SPI200 is down 24 points.
Qantas Airways Ltd (ASX:QAN) has announced it will resume its Airbus A380s after checking the engines of its superjumbos. The airline says two of its six superjumbos will resume flying on Saturday. Qantas grounded its A380 fleet after a Rolls Royce engine on one of its passenger jets exploded mid-air over Indonesia earlier this month. The first flight on Saturday will be a QF31 from Sydney to London via Singapore. Qantas CEO Alan Joyce says he is comfortable with the operation of the aircraft following an intensive engine inspection program. Shares in Qantas are 0.38 per cent higher at $2.64.
Macquarie Group Ltd’s (ASX:MQG) north American trading arm says it will help Freeport LNG Development build a $2 billion LNG export terminal at its existing Texas import facility. The proposed plant will reportedly take between two to three years to complete if permits are granted. Under the agreement, Freeport LNG will lead the development of the facility and remain the sole owner and operator of the plant. Meanwhile, Macquarie will be responsible for funding construction and arranging gas supply deals and sales. Marketing duties will be shared between both companies. Shares in Macquarie Group are 0.08 per cent lower at $36.67.
Turning to market indices: The best sector is Telco Services, with the index up 12 points to 934. Shares in Amcomm are up 0.03 per cent at $0.34. Shares in Telstra and IINET are also higher. The worst performing sector at midday is Materials with the index down 83 points to 13,461. BHP Billiton is down 0.55 per cent at $43.64. Rio Tinto and Newcrest are also lower at midday
It was pretty much a data vacuum last night and so much of the news flow remain focussed around Ireland and the ‘peripheral’ euro zone economies. Having now accepted a bailout, concerns are mounting that political instability will delay any bailout action. It’s a never ending saga. Nevertheless, short-term Irish yields fell sharply overnight with the 2yr at 4.84% from 5.26%, although the 10yr bond was only down 2bp to 8.096%. Portugal is apparently next on the hit list and seriously, in the absence of anything else to focus on, it’s a great bet ‘fears’ will escalate, noting that It’s going to be a harder target. All these ‘crisis’ offer a great opportunity to make money though.
There is very little risk, medium term, of any sovereign default in the euro zone and I reckon this should always be the main strategic position. Why is there little risk? Well as discussed earlier in the year, any default would likely fracture the euro zone and this simply isn’t going to happen. The economic and political costs are too high and the costs of bailout pale in comparison. Also note that as an economic entity, the euro zone is in a much, much better position than the US. They’ve got the money to deal with any flare ups and while conflicts will inevitably arise, things are under control. As a result, I still think trading tactically around these events will continue to be very profitable. Note however, that Portuguese yields fell slightly overnight with the 2yr down to 4.21% from 4.29% and the 10yr at 6.72% from 6.74%.
While yields in Ireland and Portugal were lower, the euro got smashed and as I write its down about 144pips to 1.3605. Sterling is down about 70pips to 1.5945, AUD is off about the same to 0.9856 while Yen sits at 83.31 from 83.45. The general mood from punters I’ve spoken seems to be one of indifference. No one seems to think the sky is falling or anything and there is certainly no concern that any of the peripherals will default or that the euro zone will break up. It’s more the case that going into the Thanksgiving holiday (and end of year more broadly), with everything going in Europe and while China is trying to rein in liquidity, there doesn’t seem to be any point in taking much risk.
The stronger USD and recent actions by China to restrain inflation saw commodities weaken across the board with crude down 0.3% ($81.74), copper was down 1.9%, and softs were generally softer. Gold pushed a little higher though to sit at $1362.
This generalised risk aversion helped a bid for Treasuries but the primary factor driving yields lower appears to be a strongly bid 2yr Treasury auction. Cover was at 3.7 which was better than the average of 3.2 and indirect bidders took 38.3% of the issue which is about average. At the same time, the Fed bought $8.257bn of treasuries ranging from Feb 2018 to November 2020. At the time of writing the yield on the 2yr was off 4bp to 0.47%, the 5yr was down 11bp to 1.43% and the 10yr yield fell 7bp to 2.81%. So far it looks like the new range for the 10yr post Qe2 will be in the order of 2.5% to 3% which is little changed since August.
In the equity space, stocks were down between 0.3% and 0.9% in Europe, while the Dow and the S&P look to be off 0.4% to 11155 and 1195 respectively. Most sectors look to have taken a hit but financials, energy and telecommunications are the key laggards so far. Otherwise the Nasdaq was up 0.2% (2523) and the SPI was 0.7% lower (4631).
That’s really about it, pretty boring. So looking at the day ahead, there is nothing out for OZ and across the Tasman, we get NZ 2yr inflation expectations at 1300 (AEDT). Tonight, look out for the final estimate of German GDP, the EC PMIs, the 2nd estimate of US GDP (expected to be revised up to 2.4% from 2.5%), existing home sales, the Richmond Fed manufacturing index and the FOMC minutes.
Hope you have a great day…
Market Wrap: Australian share market buoyed by miners November 18, 2010 05:25 PM
The Australian share market has inched up into positive territory after opening flat this morning. The banks offset mining gains as the share market edged up slightly. The Big Four all closed in the red today while miners BHP Billiton Ltd (ASX:BHP), Rio Tinto Ltd (ASX:RIO), Newcrest Mining Ltd (ASX:NCM) and Woodside Petroleum Ltd (ASX:WPL) made gains.
The S&P/ASX 200 Index closed 16 points higher to finish at 4,640. On the futures market, the SPI200 up 21 points.
The Australian Bureau of Stastics has reported that the average weekly ordinary time earnings for full-time adult employees has risen by 0.4 per cent in the three months to August. The figure represents a 4.5 per cent increase compared to the previous year.
National Australia Bank Ltd (ASX:NAB) is facing a shareholder class action as hundreds of institutional and retail investors are taking the bank to court for losses related to the subprime mortgage crisis. 250 shareholders are claiming to have lost around $450 million because NAB did not disclose its exposure to subprime securities in 2007 and 2008. In 2006, NAB bought over of $1 billion worth of debt-related bonds called collateralised debt obligations. The value of these investments dramatically plunged following the subprime crisis. Shares in NAB closed 0.25 per cent lower at $24.37.
Australia’s largest supermarket chain Woolworths Ltd (ASX:WOW) says it is looking out for big acquisitions and has reaffirmed its forecast for full year profit growth of between 8 and 11 per cent. The company’s chairman James Strong told shareholders at the group’s annual meeting today that the firm remains open and alert to a range of major acquisitions. Last month, the retailer posted first quarter sales growth of 2 per cent, amidst tight consumer spending and an uncertain economic environment. Shares in Woolworths closed 0.87 per cent higher at $27.74.
Toll road operator Intoll Group Ltd (ASX:ITO) says traffic and revenue has increased in the first quarter of the 2011 financial year on both its assets, one in Canada and the Westlink M7 based in Sydney.
Qantas Airways Ltd (ASX:QAN) chief executive Alan Joyce says up to 14 Rolls Royce engines on the airlines A380s will need to be inspected and potentially replaced.
AMP Ltd’s (ASX:AMP) $14 billion bid for rival fund manager AXA Asia Pacific (ASX:AXA) has secured the unanimous backing of AXA’s board, after one final dissenting director gave the deal his support.
David Jones Ltd (ASX:DJS) has recorded $466 million of sales in the first quarter of its 2011 financial year, a 1.2 per cent rise compared to the same period last year.
In the best and worst market performers: The best performing sector was Healthcare which closed 97 points higher to 8,479. The worst performing sector was Utilities with the index falling 32 points to 4,492. The best performing stock in the S&P/ ASX200 was Sundance Resources as shares were 6.78 per cent higher to 31.50. Shares in Panoramic and St Barbara also closed higher. The worst performing stock was Infigen Energy down 11.72 per cent to $0.64. Shares in Ausenco and Platinum Australia also closed in the red.
In commodities, gold is trading at $US1,350 an ounce. Light crude is up $0.90 to $81.34.
The Big Four banks should be prevented from taking over any more of their second-tier rivals, according to the head of Australia’s largest independent aggregator.
AFG’s managing director Brett McKeon has called on the government to implement a three-point plan to rapidly restore competition to the mortgage market. Chief amonst the three proposals is a call for a ban on further market consolidation by the Big Four banks.
“The takeover of Bankwest by CBA and St George by Westpac have had seriously damaging consequences on lender competition,” said McKeon. “No further consolidation should be allowed by the Big Four, to allow the second tier banks, perhaps the likes of Bendigo & Adelaide or AMP, the opportunity to organically grow and become a natural competitor, or for two to join together – although the former option is preferable.”
McKeon also called for the government to meet with smaller lenders to discuss future policy initiatives that will stimulate non-major market share, and to draft policies to create a more level playing field in providing access to funding for smaller lenders. One such policy could be revising the terms on which government guarantees on secutritisation are calculated.
“Rather than basing government guarantees on an institution’s credit rating – which gives the upper hand to the majors – they should be based on the quality of the debt within the securitisation.” he commented. “This would still leave smaller lenders at a slight disadvantage, but would lessen the gap and promote better competition.”
McKeon admitted that he had “no problem with the majors doing what’s right for their shareholders”, instead arguing that the government had made mistakes that had allowed a non-competitive environment to prosper.
“The government has a role in promoting competition, and the current measures being bandied about – such as potentially banning exit fees – will just make the situation worse. It needs to engage in a more robust dialogue with smaller lenders and support them to promote effective competition.
One of the criticisms of this government in its first term is that it only superficially engaged with smaller firms – whether in finance, retail or mining,” added McKeon. “It has a chance to improve upon that in its second term, to step back from big business and support smaller companies. After all, it’s from small and medium-sized enterprises that the tier one businesses of the future will come.”