10 out 17 Eurozone participants agree to rescue package...Germany to vote tonight

Finland's parliament last night ratified the agreement made in principal by Eurozone leaders last July to increase the European Financial Stability Facility (EFSF). A positive step forward to assist the beleaguered region and unite in their fight against a broad sovereign debt crisis. Tonight's acid test comes via the German parliamentary sitting as Chancellor Angela Merkel puts her political career on the line to sway her own coalition party to stand with her in approving the EFSF expansion. Fears that internal dissent may cause Merkel to rely on the opposition for support has fuelled rumours of political upheaval in the Europe’s largest economy.

Also weighing heavily on markets overnight was the continuance of the Italian and Spanish ban on short selling of financial stocks. The ban was introduced to protect investors from the wild swings in European Banks. Since the ban French Bank Societe Generale has seen an 18.5% fall in its share price however things could have been much worse.

In local news Australian HIA figures on new home sales rose 1.1% after falling 8.0% in July. Today we see Australian Job Vacancies for August.

Aussie stocks reflect optimism however doubts linger

Investors rallied behind risk assets overnight as confidence grows towards an EU solution. The Australian stock market added $40 billion bouncing back to record its largest one day gain at close yesterday the S&P/ASX up 3.6% and the All Ords up 3.5%. Tonight Germany votes on the controversial expansion of the European Financial Stability Facility and will be a key indicator as to the progression of such a plan going forward.

Today we receive local housing data and US duarble goods are out tonight.

Rumours pacify markets for now...

Political leaders have delivered enough positive rhetoric over the past few days to pacify investors sufficiently to take most markets into positive territory last night. The strong tones set by the IMF's chief Christine Lagarde in pledging her support for the embattled Eurozone have worked their way through to further rumours on potential ways to resolve the impending crisis. Markets took heart from the discussions about Government Debt Guarantees and increases to the European Financial Stability Facility in the absence of any strong economic data.

A European pledge to restore confidence and stability....markets wait but how patiently?

The Group of 20 Finance Ministers gathering over the weekend was expected to produce some decisive action to combat the worsening situation in European markets but risks moving too slow for the worlds global financial markets. The sharp drops seen on Friday may be a sign of things to come as our local bourse posted over $18 billion in losses for the week just ended, currencies and commodities also suffering as a consequence. The regions plans to boost the European Financial Stability Facility and prevent further contagion risks seem to be stalled in talks of conflicting ideas and as a result investor confidence will continue to erode in the short term.


The RBA's Review of Financial Stability continues to support the strong position of Australia's domestic postion however the risks from unknown offshore factors remain ever present.


No local data today.

TROUBLES ESCALATE

We had a few days at the beginning of this week where the waters seemed to calm. Last night and the night before saw these waters being whipped up into a frenzy of white water. The flight to safety has accelerated as Europe unravels. Ironically this flight to quality has involved moving funds to the US. As a result our dollar has dropped through parity and the high airplay this is getting on the news will likely cause consumers to hold onto their savings even more tightly.

The worries were prompted by a number of factors. One of the key ones was the fact that the market was not impressed by the Fed's 'twisting' move to re-jig their portfolio. It seems they believe another round of additional stimulus was warranted and this was not delivered. Comments by the Fed such as “strains in global financial markets” also didn't do anything to calm jittery markets.

Other overnight developments:
* EU is planning to force the re-capitalisation of 16 banks that were close to failing their recent stress tests

* Dow down 3.5%

* Gold down 3.7% (interesting due to it's safe haven status. The market is factoring slower global growth here)

* Copper down 7.5%. Net fall is 23% since peak of late July

Rates
One and 2 year swap rates are down around 4%. This level seemed like an over-reaction until recently considering cash rates are currently at 4.75%. Events of the last couple of weeks are beginning to indicate that perhaps the market's crystal ball is clearer and more accurate than suspected.

As you may have noted from this morning's email ADIs are dropping their rates pretty rapidly at the moment. There remain a number of specials today though - see above - if you have available funds.

US Acts

The Federal Reserve announced yesterday that it would be 'Twisting' it's investments. While not announcing further Quantitative Easings (a new round of securities buying) it will be lengthening the duration of it's existing portfolio thereby putting downward pressure on longer rates. It will be switching $400bn of their short-term Treasury holdings (up to 3 yrs) to longer term (6 to 30 years). They will also continue re-investing maturities. They made a point of confirming their commitment to holding their cash rate between 0-.25%

The US$ jumped on higher US short-term rates after the “twist”, the $A dropping US2½ cents to around parity.

In other news overnight Moodys downgraded the ratings of three major US banks and the Greek Cabinet met and decided to cut pensions and public sector payroll costs to shore up their budget.

RBA Deputy Battelino spoke in NY on “Whether Australia will catch a US cold”. He expressed optimism that Australia could weather global and US issues due to China ties. He noted that markets have priced in a very pessimistic outlook but that the RBA maintained an open mind on monetary policy.

In Australia yesterday Skilled Vacancies (Sep) -1.5%/-24.5%, indicating more labour market softness ahead

IMF lowers global growth expectations....RBA with room to move

The International Monetary Fund has revised their global growth expectations for the remainder of this year and into 2012 to 4% - down from their June assessment of 4.3% and 4.5% respectively. With grave concerns for the political and financial stability of Europe and US growth projections lowered, the IMF offered little good news in their six monthly review of global financial markets. The report stated "...Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing..."

The RBA minutes are released yesterday also acknowledged the "heightened volatility" surrounding global financial markets but once again reasserted the strong position of the local financial system backed by "...strong deposit inflows both on and offshore..."

The Board remains cognisant of the markets pricing in imminent rate cuts but maintained "...range of technical factors meant that market pricing might not be giving an accurate reading of expectations in the current circumstances...''

An ever changing international climate has provided an opportunity for interest rate markets to exploit potential downside risks however the RBA remains confident that Australia is well positioned “…to respond to evolving global and domestic economic conditions…'” ie interest cuts, rises or on hold for any length of time.

Surprise cut to Italy's sovereign debt rating....RBA minutes released to today

Standard & Poors cited poor economic growth as well limitations on the current current governments ability to deal with both "...domestic and external macroeconomic challenges..." as reasons to announce a downgrade by one notch to A/A-1 and retaining a negative outlook going forward. S&P has also acted on Spain, Ireland, Greece and Portugal this year as political leaders within the Euro Zone fight to keep an embattled region viable in worsening global economic conditions.

The RBA minutes are released later today detailing its review of the September monetary policy outcome.

EU Finance Ministers

EU Finance Ministers met over the weekend with some agreements made but issues over there are certainly ongoing.

Moody's are extending their review on Italy for a possible downgrade from Aa2

US consumer sentiment rose a little to 57.8 from their August low of 55.7

RBA minutes are out tomorrow and Deputy Governor Battelino is speaking Wednesday night in New York.

Political Leaders and Central Banks rally around a faltering European Economy

With Euro zone growth forecasts expected to slow dramatically over the final quarter of this year political leaders gathered in Poland this week to ensure stability and solidarity are paramount in these turbulent times. Facing the prospect of a Greek default in their midst the two days of talks were designed to ratify the austerity packages announced in July. A unified front stabilised markets last night and investor confidence was further bolstered by the ECB, BoJ, BoE, US and Swiss Central Banks pledging injections of US dollars over year end. A perceived shortage of dollars among French Banks sparked rumours damaging confidence causing central bankers to act swiftly to avoid year end funding issues.

Greece to remain in Eurozone

French President Nicolas Sarkozy and German Chancellor Angela Merkel held a press conference and released a statement supporting Greece's continued partcipation in the Eurozone economic region and pledging their next round of financial assistance.
This key measure is intended to "...provide stability to the euro zone..." according to the statement issued in Paris last night. The Greek bailouts are based on economic deficit reduction plans which must be adhered to by its political leaders. The market was mixed in reaction however all in all maintained an upward trend to the close despite a Moody's downgrade of two French Banks (Societe Generale and Credit Agricole) by one notch - Aa1 to Aa2.

Local data released yesterday suprised on the upside as the Westpac Consumer Confidence for September rose 8.1% after falling in the four previous months. This bodes well for the outlook heading into Q4 and may go someway into reassuring investors.

European leaders provide market reassurance

Reassurance from key European leaders brought about a much needed reprieve for financial stocks overnight as speculation French Banks were facing funding issues gathered momentum on Monday. The Wall Street Journal article in question identified BNP Paribas as having US dollar funding issues. Stocks fought back last night posting a 3.6% increase after dropping 2.2% post release of the damaging article.

German Chancellor Angela Merkel voiced positive sentiment toward Greece's ability to meet Finlands requirement for collateral in return for further financial aid. The Greek Prime Minister is expected to continue discussions with France and Germany later this evening in an effort to keep the European alliance informed.

Local Data today:
Westpac Consumer Confidence (Sep)

Greece

The swirling winds of default whipped European markets overnight with expectations of a Geek Debt default becoming iminent. The winds were fueled by comments such as "1-month of cash left' from the Greek Finance Minister and "orderly default" being discussed by the German Economy Minister Phillip Rosler. Expectations that Moody's will downgrade a number of the big French banks due to Greek debt exposure also didn't help.

US markets did however stage a solid recovery due to reports that the China Investment Corp may make significatnt purchases of Italian Bonds and investments in strategic companies.

Financial Claims Scheme & Overseas

You may have seen our earlier email on the extension of the $1m guarantee to Feb 1, 2011 for new deposits (after Feb 1 only the first $250k will be guaranteed). Existing deposits will be guaranteed until Dec 31 or maturity, whichever is first.

Turmoil continued in overseas markets with worries about Greece intensifying. Their 2 year bonds are now trading at 50% which effectively prices in a near-term default. Equity markets consequently sold off aggressively. Frankfurt sold off 4.0%, US sold off 2.7%. US 10 year bonds have rallied to 5 decade lows at 1.92%

Employment

Employment figures yesterday showed a reduction in the number employed of 9,700 after a revised fall in August of 4,100. Full-time employed dropped by 12,600. The unemployment rate lifted to 5.3% from 5.1%. Trend wise unemployment is going up slowly from a low of 4.9% in Feb and Mch.

The figures were a little disappointing and fuels those arguing for a rate cut this year. It's not good for a beleagued government either. Forecasts were for a lift in numbers of between 5k and 10k.

OBAMA
Has announced a stimulus package this morning to get the job market moving in the States. The cost of his plan is USD447 bln. The announcement came after the market closed. It dropped through disappointment thatBen Bernanke didn't also announce a stimulus package at a speech he made during the day.

National Accounts.

GDP showed solid growth in Q2 at +1.2%. March Qtr was revised up from -1.2% to -09%. Much of this is due to a bounce back from the QLD floods. It certainly paints a different picture to the doom and gloom that's been touted recently. The interest rate markets have overreacted to the need for easings in a big way and figures like yesterday's will serve to trigger a return to higher longer term yields. The 1 year annualised swap rate today for instance is 12 points higher than yesterday. The RBA stated the other day that "the board remains concerned about the medium-term outlook for inflation". This to me does not mean they are about to ease. They acknowledge that subdued growth may contain inflation but this just means they may not have to tighten. Despite this the markets have still factored in multiple easings - no doubt reflecting serious concerns about trouble coming over the water from Europe - the big wild card.

NAB GDP forecasts are for 1.75% in 2011 and 4.25% in 2012

Overnight: European markets rallied in response to a German court decision allowing Germany to participate in the euro rescue packages. Talk of Obama stepping in with a $300m job stimulus package also helped US equity markets.

Today: Employment forecsts are for a lift of 5000 in employment numbers and the rate to stay at 5.1%

RBA holds cash rate steady - 10 months in a row...

The Reserve Bank of Australia is heading toward the longest running period of rates stability since 2005 with the Board announcing yesterday afternoon the official cash rate was maintained at 4.75 for another month.
Interestingly the Statement by Governor Glenn Stevens began with a reflection of recent global market volatility acknowledging "..the outlook for the global economy is less clear than it was earlier this year...". Once again he highlighted the conflicting forces at work within the Australian domestic economy but most interestingly the Board toned down its voice on it concerns on the medium-term inflationary figures with a precursor that "...softer global and domestic growth will work, in due course, to contain inflation...". This type of language indicates that the RBA may infact maintain the status quo for some months as opposed to reacting to any short term pressure on the 2-3 per cent range.

RBA Cash Rate Announcement Today AEST 2.30pm - No Change Expected

All 25 economists surveyed by Bloomberg yesterday are predicting that the Reserve Bank of Australia holds the cash rate steady at 4.75% later today. There has been no change to the cash rate since the surprise Melbourne Cup rate hike last year. The Australian economy has been undulating in a sea of mixed data - a strong industry and mining sector counter balanced by the conservative household sector has provided some challenges for the RBA to keep inflation and growth forecasts in perspective.

The bullish company profits release yesterday indicates there maybe an upward revision to growth forecasts in Q3 however extreme global volatility may dampen any perceived hawkish sentiment delivered by strong Q2 data. The RBA is expected to maintain the language of last months statement indicating a careful watch on global proceedings in the short term.

RBA expected to maintain status quo as US employment data disappoints

Uninspiring is perhaps an underestimation of the poor employment data release in the US on Friday night however as Americans continue to languish in poor growth and productivity figures economic commentators look for inspiration in marking historically significant statistics.

Jobs growth for August was recorded at exactly nil – falling short of the market expectation of +68k and noted by Alan Kohler this past weekend as “…the first time that precise number has occurred since World War Two…” The unemployment headline figure remained at a troubling 9.1% and investors sought refuge in the US benchmark 10 year note driving the yield down to a new record low of 1.99%.

The flurry of domestic data scheduled for release this week will provide interest from the point of view of further local productivity measures however the RBA is expected to remain watchful for some time – no change expected in the cash rate release tomorrow AEST 2.30pm.

Headline domestic data releases surprise on the upside

Retail sales recorded in July rose 0.5% surprising market expectations forcasting a 0.3% increase. These figures perhaps represented the "optimistic consumer" that was beginning to appear pre - US Debt Ceiling issues and European contagion risk fears whom perhaps may retreat come the August realease. Nonetheless the figures look impressive when compared to the falls in the previous two months of May and June and provide valid ammunition to an over sold interest rate market.

Capex data released yesterday also strengthened the case against imminent rate cuts recording a bullish 4.9% increase in headline numbers above a forward market expectation of 4.0% largely supported by growth in building and infrastructure spending. Equipment, plant and machinery showed positive signs of advancement indicating a boost in business confidence in the three months to June.

Despite the Australian Dollar being a key beneficiary as a result of postive local data, a reversal in risk appettite in most offshore markets was due to impending key data releases in US ths evening. August non-farm payrolls is expected to deliver further bad news to an economy struggling to push forward as a result of high unemployment and low productivity measures.

Key Data:-

US Non-Farm Payrolls Aug mkt 68k/9.1%

Moodys downgrades Investec....Retails sales a key piece to the puzzle

Investec Bank (Australia) Limited suffered a suprise blow from Moody Investors Services yesterday with a downgrade to the long term senior unsecured ratings cut from Baa2 to Baa3 and their short term ratings moviong from Prime - 2 to Prime - 3. Moodys cited the property loan book as a weak link despite Investec's efforts to actively diversify into the retail "working professional" sector. Investec has recently reported a strong tier - one ratio of 13.5% and a liquidity ratio of 29%. The Bank does not have a Standard and Poors rating.

July retail sales provides another piece to the puzzle of consumer behaviour. Consensus is +0.3% however any suprise to the downside could see our market move from postive territory quite quickly. Yesterdays release of Private Credit growth reiterated a the cautious approach of Australian Domestic Houesholds increasing by just 0.2% whilst house price readings slipped.