The Overnight Report: All A Mistake?
By Greg Peel
The Dow fell 110 points, or 0.8%, while the S&P lost 1.0% to 1441 and the Nasdaq dropped 1.5%.
Yesterday during the Asian session the IMF cut its global GDP growth targets to 3.3% from 3.5% for 2012 and to 3.6% from 3.9% for 2013 and suggested the world is in a slowdown from which no recovery is evident in the foreseeable future. The IMF also suggested Spain, France and other eurozone members will fail to hit the budget deficit reduction targets set for them by the troika, which includes the IMF.
The IMF downgrade comes hot on the heels of Friday night's similar World Bank downgrade. I implied yesterday that when the World Bank downgrades a rebound must be close. Well if the World Bank is always late to a party, the IMF usually turns up after the beer's run out. The signs are starting to look ever more bullish. Note also that the new French government is pro-growth and thus has no intention of hitting budget reduction targets.
The news wires are at pains, and at odds, in trying to explain why Wall Street tanked last night. The IMF has been thrown up as one explanation, yet the downgrade clearly had little effect on the Australian market yesterday and the US indices were steady for a good hour from the opening bell. The euro, too, was steady until around 10.30am New York time when it plunged into a hole, falling almost a full cent in a heartbeat. The IMF report had been out for hours.
Other wires decided it must have been news from the eurozone finance ministers' meeting in Luxembourg that the attendees were having trouble reaching an agreement on what to do about Greece. Talk is the IMF ? yes, them again ? is prepared to withhold the next bail-out tranche if Athens does not comply. This explanation might have had some credence if it were not the three-year status quo.
Then there were the riots in Athens to protest Merkel's visit. That must be scaring the Wall Street natives, it was suggested. Riots in Greece? It must be Tuesday.
The most plausible explanation offered is a simple one. A certain data provision service who will remain nameless (Bloomberg) momentarily and erroneously posted prices for the benchmark Spanish ten-year bond which were actually those of the 2024 maturity, not the 2022. Sounds trivial, but the result was an apparent 40 basis point jump in the benchmark yield to over 6% (correct yield 5.78%, up 12bps). The print sent computer algorithms into apoplexy, the euro plunged, and as we all know, where goeth the euro goeth Wall Street. The Dow fell 100 points in a blink.
The obvious question is as to why, noting that the error was only momentary, markets did not quickly correct. The answer is likely (1) that it's hard to tell an algorithm that an error has occurred and (2) when such sharp shifts occur, sensible humans tend to just jump out of the way until the dust settles. And then there's (3), apparent in this report, that Spanish bond explanation is only one of many explanations offered post the event.
So take last night's move as you will, but either way it was a sad way for Wall Street to celebrate the anniversary of the all-time high (in both the Dow and the S&P) posted on this day in 2007. After five years, the Dow is about 600 points shy of that high today following a 17% rally in 2012 alone.
And they say QE doesn't work.
The plunge in the euro means the US dollar index is up over 0.5% to 80.01. This should have been a slap in the face for commodities, but while gold is off US$11.00 to US$1764.00/oz, base metals are only off marginally. And the big news is the Chinese iron ore spot price is up another US$6.80 or 6% to US$117.20/t after a similar move on Monday. Must have been a good holiday.
Behind this news, however, and rather lost in the wash of Spanish bond-gate, is yesterday's second huge PBoC liquidity injection in two weeks ? the first being before the Chinese holiday break ? into the Chinese banking system, to the tune of US$42bn. It would appear Beijing has settled on liquidity as its latest preferred monetary policy tool rather than RRR or interest rate reductions.
This news provided a boost for the local market yesterday, and the second big iron ore price jump will no doubt help again today if traders shake off the supposed Wall Street anomaly. It also provided a spark for oil prices last night, it would seem, as well as the Aussie, which is still sitting on US$1.02 despite the big jump in the greenback. And it probably prevented bigger falls in base metals prices.
Oil has really gone haywire of late, and last night was no exception. Stuff the IMF downgrade, between Chinese stimulus, an escalation of the war in Syria beyond its borders, and more bellicose rhetoric from the Madman of Tehran, Brent jumped US$2.26 to US$114.13/bbl last night and West Texas jumped US$2.89 to US$92.29/bbl.
It was also notable last night that an auction by the US Treasury of three-year notes received very solid demand at near record low yields. Whether the fact bond markets were closed on Monday, or the Dow had plunged at that point, or the IMF downgrade was resonating, it seems safe havens remain firmly in favour.
The SPI Overnight was down