The Overnight Report: Party Time!
By Rudi Filapek-Vandyck
The Dow Jones Industrial Average closed up 152.50 points, or 1.21%, at 12724.41 for its highest level in six weeks and the second triple digit gain in three sessions. The Standard & Poor's 500-stock index gained 17.96 points, or 1.35%, to close at 1343.80, led by the financial sector. The technology-heavy Nasdaq Composite rose 20.20 points, or 0.72%, to 2834.43.
In Australia, SPI futures are up 44 points (1%) at 4578 indicating a positive session ahead to close off the week.
We are not chartists here at FNArena, but we cannot help but observe how half of the world at times seems to get overly excited/focused on what appears an inevitable technical omen about to announce itself, and then, of course, it doesn't. Throughout July the financial media in the US became increasingly focused on how US equities appeared carving out a dreadful Head-and-Shoulders formation, which would have been a negative. All those dire predictions disappeared this week, because that's what two days of big rallies do to price charts: it changes the overall picture.
What chartists couldn't read in their charts is that politicians in the US and in Europe have been busy muddling through some serious macro obstacles and this morning (Thursday in overseas time zones) it was the chance for European leaders to step into the limelight. As it turned out, the event was a Belgian-French party with Herman van Rompuy carrying the scepter for the eurozone overall and with Christine Lagarde and Jean-Claude Trichet representing the IMF and the ECB respectively. One of the theatrical highlights of the event, and I admit I am a bit biased in this, was when Van Rompuy stepped in front of the camera and boasted (imagine a softly spoken Flemish voice with some French-influenced undertones): "when European leaders say they will do anything to save the eurozone, we mean it".
It was also an excellent opportunity for the fresch appointed Lagarde to show her charm in front of TV cameras. She did not disappoint. Taking questions both in French and in English, Lagarde ensured the world, her colleagues (Van Rompuy, Trichet and a handful of others) had never seemed so determined to solve this crisis. "I am happy not to be worried" she smiled and there was light in the European darkness.
The package announced consists of a broad mix to support debt-stricken Greece in staying solvent and keep the rest of Europe united and at arm's length. It includes E109bn in additional financing, plus further options for IMF participation. The latter will include loans for at least 15 years and up to a maximum of 30 years. The European Central Bank is not participating but will hold on to its Greek bonds. In a typical political move, the announcement also carries an intention to sidestep the credit rating agencies as these will probably conclude the package still comes down to a partial default.
The private sector will -"voluntarily"- contribute E50bn over 2011-14, E106bn from 2011-19.
Most importantly, however, is that while the news will be received as a short term positive, it does represent a negative further down the road. Part of the agreement struck is that the eurozone as a whole, not just the peripheral countries with too much debt, will embark on a path of fiscal restraint. This will have the direct effect, amongst other things, that Trichet at the ECB will have to tone down plans for further rate hikes. Again, short term positive for the euro, but a firm negative on a medium to longer term horizon.
In the end, it'll all boil down to how these measures, restraints and intentions will be followed up in practice and investors are reminded Greece still has to reach fiscal targets at any stage, but those are concerns for later. Right now, Christine Lagarde has smiled and the financial world melted, while Van Rompuy has assured (think Flemish-French voice) "we mean it".
Europe has been saved. Risk is "on" again.
On the other side of the Big Ocean Divide, in the US of A, rumours had it Republicans and Democrats had worked out a deal on fiscal restraint and the budget ceiling, but these were later denied. Regardless, news out of Europe (see above) was enough to keep risk on. The economic news was mixed.
The Philly Fed edged back to positive territory with a 3.2 print in July from minus 7.7 in June. This was higher than consensus (+2), suggesting the recent soft patch is improving. New jobless claims on the other hand rose by 10K in the most recent week, slightly more than expected from 408K in the preceding week, 3K more than initially estimated. The 4-week moving average, which typically gives a better reading on underlying labour market conditions, eased to 421K from 424K, still a fairly high reading in the general scheme of things. Continuing claims fell to 3698K from 3748K. As commented by economists at CIBC, these numbers are consistent with a continuing weak performance in US labour markets.
The same was the case in company reports. Morgan Stanley's results were well-received, while PepsiCo and Intel disappointed with a benign guidance. Morgan Stanley's result was depressed by restructuring costs but investors liked the fact the report showed resurgent revenue in the investment-banking, trading and wealth-management units. In a sign of the times, PepsiCo was talking "challenging developed-market conditions and higher commodity costs".
Technology benchmark Intel repeated the PepsiCo experience by releasing market-beating financial results, but toning down future expectations.
Yesterday, the HSBC flash estimate for China's July manufacturing PMI dipped into the negative, but all is forgotten and forgiven right now as Wall Street, and investors elsewhere, set their focus on the Q4 recovery story, and end-of-year rally everybody is hoping for.
Currency markets have been quick in translating the European announcement in swift FX movements. The Aussie dollar is back above 1.08 against the USD while the USD Index sits at 74.01, more than 1% lower on the previous day. Commodity markets have yet to respond in full but gold is down US$10 in a predictable knee-jerk response to the Risk On trade.
To stay with the Belgo-Franco theme of the day, all we require is for someone to dig into the old seventies music collection to find that one hit wonder that temporarily took England by storm, jumping up and down on a trampoline: Ca plane pour moi, ca plane pour moi, pour moi, pour moi, ca plane pour moi (Plastic Bertrand for those old enough to remember).