Investment Markets Overview – w/e 9 December 2011

We are back to normal this week for the “week ending” overview, albeit that there has been some positive feedback in respect of the truncated versions of the past fortnight. Whilst this fuller format serves a dual purpose, in providing readers with an overview of current economic data and hopefully some thought provoking comment at either end of it, whilst also acting as an archive of economic and political events for yours truly, certain subscribers have expressed a preference of a single topic or two, including relevant charts. We welcome further comment on preferences, likes and/or non-likes of the current style, plus indeed any ideas that you may have to hopefully improve it.

On the 20th anniversary of the Maastricht treaty, which created the euro and a rafter of regulations for member states including “Deficit limits,” all eyes were on the EU summit this week, in the hope that an end to the region’s sovereign and bank debt problems could be seen. The “solution” was as follows:-

  •  To sanction Euro 200BN more debt (150BN from the euro-zone members and 50BN from the other 10 EU members,) lending it to the IMF, who will leverage it up by a possible 1000% (as its rules apparently allow) enabling the IMF to then lend to troubled EU states.
  • A planned July 2012 Euro 500BN bailout fund, called the European Stability Mechanism, funded by yet more debt underwritten by the tax-payer, whilst reversing a recent demand that any losses incurred should be shared by bondholders (mainly the banks.)
  • A planned “Treaty within the existing EU Treaty,” for the 17 euro-zone members, which will include another rafter of regulations, including deficit limits and swinging additional costs just as economic growth is faltering.

Britain’s Prime Minister, David Cameron, promptly vetoed the latter, effectively taking a “rain check” from further European integration, whilst the nine other non-euro EU members indicated that they may follow suit after consulting with their parliaments.

US economic statistics announced this week included slightly disappointing ISM non-manufacturing numbers for November, but better than forecast consumer confidence figures for December, an improved trade deficit for October and higher than forecast consumer credit usage in October, mainly for auto and student loans. The Dow gained 1.4% whilst the S&P 500 and the NASDAQ were higher by 0.9% and 0.8% respectively.

Euro-zone retail sales for October surprised on the upside, rising by 0.4%, whilst Q311 household consumption came it as expected, at 0.3%. The ECB cut interest rates for a second consecutive month, by 0.25% to 1%. For the UK, house prices fell by 1% in November year on year, according to the Halifax, whilst new car registrations in the same month contracted by 4.2%. As expected, the Bank of England MPC left interest rates on hold, at 0.5%. The FTSE 100 eased by 0.4%, whilst the French CAC rose modestly by 0.2% and the German DAX fell by 1.6%.

Out East, Q311 forecast GDP for Japan came in at 1.4%, which was slightly ahead of expectation but lower than Q211, whilst October machine orders fell by 0.6%. Elsewhere, Australian consumer prices rose by 2.1% annualised in November, whilst China’s services PMI declined to 52.5 in November from the 54.1 seen in October. The Nikkei fell by 1.2% whilst the Hang Seng lost 2.4%.

The $US index remained level, at 78.1, with weekly risers including the Yen and the British pound, up by 0.4% and 0.5% respectively. Losers included the $Singapore and the South Korean Won, off by 0.6% and 1.4%. It was a wild week for Sovereign debt yields, with the UK gilt yield lower by 13bps to 2.16%, Japan’s JGB yield also lower by 5bps at 1.02% and the German 10 year higher by 1bps to 2.145%. Meanwhile, Portugal’s 10 year yield fell by 91bps to 12.47%, whilst Irish yields dropped by 34bps at 8.52%. Spanish yields gained 9bps at 5.71% whilst Italian yields ended the week lower by 33bps at 6.33%.  The Greek 2 year yield rose by 11bps this week to 109.5%, whilst the 10 year surged by 380bps, ending the week at 32.3%. US Treasury 5 and 10 year yields diverged, with the 5 year lower by 4.6%, at 0.89% and the 10 year rising by 0.5%, ending the week at 2.05% .

Within the commodities complex, the $crude oil price fell by 1.2%, ending the week at $99.8 a barrel, whilst in the precious metals space, the price of $Gold gave up 2% at $1714oz and the $Silver price fell by 1.5% to $32.2oz.

Next week sees the FOMC meeting plus the latest on retail sales for the US, the UK, and for Japan. CPI data is also due out for the Euro-Zone, the US and for the UK. The latter will announce 3 month unemployment stats to October, whilst the Euro-Zone provides Q311 employment figures. Japan’s Q411 Tankan survey rounds off the week ahead.

Returning to the EU summit, a beaming Christine Lagarde, Managing Director of the IMF, said, “it is encouraging to see that members  have decided to add to the resources of the IMF by an amount of USD 270 billion which is to be confirmed within 10 days,” so why wouldn’t she smile? The problem is that the $270BN is hoped to be followed by contributions from other IMF and G20 members, to provide the so called “big bazooka,” a euphemism for sufficient firepower to deal with the raging debt problems. The lead member of the IMF, America, with 17% of it’s voting power, immediately made it clear that they would not be contributing and it’s debatable as to whether any other solvent G20 members chip in, unless there is a change to voting rights, giving them more say. Meanwhile, euro area governments have to repay more than 1.1 trillion euros of long and short term debt in 2012, with half of it due within the first half whilst European banks have about $US665BN of debt coming due in the first 6 months.

 “Fiscal responsibility starts with Government being responsible for its own debts.” 

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