Markets rally around US positive data on the eve of the last trading day before Christmas

Investor sentiment was bolstered overnight by the release upbeat consumer confidence figures and 3year low US jobless claims. The US dollar and Treasury bonds rose on the news that US GDP expanded slightly slower than the 2% consensus growth projection at 1.8% however global equities maintained the optimistic sentiment to close.

With Australia’s last trading day before Christmas upon us markets are expected to be then and centred around the positive rally.

European Central Bank provides 490million Euro Christmas present

European banks were the beneficiaries of a boost to their liquidity overnight as the ECB offered reduced rate 3 year loans to ease funding pressures. It was reported that 523 banks took up the offer topping analyst forecasts of around 310 billion euros. A welcome relief in the short term however a long way from the end to this current debt crisis.

Moodys reaffirmed Australia’s AAA credit rating commenting, "…Economic resiliency is demonstrated by the country's very high per capita income, large size, and economic diversity…”

US economy boosted by positive data…RBA concerns over Asian impact from Europe’s woes

A welcome amnesty to risk assets overnight as US housing starts revealed an improvement in the labouring GDP for the struggling nation. Stocks and commodities rebounded and the Aussie dollar peered over parity. News out of Europe also
contributed as the short dated Spanish bond auctions performed well and German Business Confidence improved.


The RBA minutes revealed the cautious stand being taken by the Board in relation to global events. It seems although the domestic economy is well positioned in it inflationary and growth targets however the quandary that is Europe at the moment has forced the RBA to ease its Monetary Policy. A key factor discussed in the statement related to the potential impact to Australia’s trading partners as “global uncertainty persists” and therefore any future impact to our nation down the track. What is certain is that RBA is poised to act if signs of Asian distress risk the balance of Australia’s current good fortune.

Report acknowledges default risk has increased since 2007

The Financial Stability Report released by the ECB over night acknowledges that the risk of default occurring by two Eurozone banks simultaneously has increased to a 1 in 4 chance. This figure was closer to zero early 2007 and highlights the contagion risk amplified within the 17 nation strong Euro currency block. It should be noted that the calculation, which determines such a probability factors in credit default, swaps and share prices on the banks, both of which have been privy to drastic momentum shifts over the last 4 years.


Closer to home the RBA December minutes are due to for release today.
The Board made a back to back rate cut decision over the last two months, its first since moving 1.25 per cent from December 2008 to February 2009. Investors keenly await any signs of further easing early in 2012.

Threat of Sovereign Issuer downgrades persist in Europe

EU members will conference again today to ratify and expand on the discussions held earlier this month all in the shadow of ratings agencies warnings that action must be swift and conclusive. Fitch voiced concerns late last week that a pact among the Euro Region pertaining to budget disciplinary action may not be enough in itself to prevent possible downgrades. Fitch put France on a “negative” ratings outlook while Moody’s downgraded Belgium by two notches.

Markets buoyed by US Jobless figures ….a sombre message from IMF and ECB

US jobless claims surprised the market on the positive side dipping once again to their lowest level since Q2 2008. Consensus forecasts pitched 390k with the result a significant 19k better at 366k. Equity markets clawed up higher however the Australian dollar dipped below parity as the US dollar was favoured.


Grim warnings out of Europe were seemingly overlooked in favour of the positive Spanish 5 and 10year bond auctions raising almost twice the initial issue. IMF head Christine Lagarde and ECB President Mario Draghi both cautioned of the uncertainty that lies ahead for the Euro Region with neither pledging the much sort after long term government bond support being demanded by investors.


In breaking news this morning Bendigo and Adelaide bank (A-/A2) has announced plans to buy the Bank of Cypress (unrated) for approximately $AUD130 million.

Risk assets pummelled with no reprieve in sight

Equity stocks and global commodities took a battering overnight as investors fail to buy into the European rescue proposals delivered last weekend. Gold dived 5.6% to close $1567 an ounce as investors took profits, which this year has been few and far between. The 5 year Italian bond auction pushed the borrowing costs of the debt ridden nation up to a 14 year high of 6.47%.


Australian consumer confidence fell 8.3% yesterday as expected and Consumer Inflation expectations released today fro December are expected to be benign.

US moves QE3 a little further away…a pessimistic end to 2011 a strong possibility

The FOMC last night opted to leave the Fed Funds rates unchanged at 0-0.25% as widely expected but investors reacted adversely to the Fed downplaying US growth forecasts and pushing the suggestion of quantitative easing into 2012. Risk assets beared the brunt of the onslaught and the Aussie dollar struggled to maintain parity.


In local data yesterday business conditions proved to be slightly more buoyant than expected as the market awaits todays Consumer Confidence figures.

The smoke screen is lifted – Moodys and Fitch weigh in on the EU Summit outcome

The relief rally in markets post the gathering of EU Leaders over the weekend was somewhat short-lived as investors judged the outcomes to the European Debt Crisis to be a protracted process. Moodys announced plans to review sovereign risk ratings for the region early next year and commented that little in the way of “decisive policy measures” came out the Key Leaders assembly. Similarly Fitch offered that a “significant economic downturn” would occur before Europe was able to structurally adapt the fiscal measures that are intended to be implemented next year.


In local data the headline housing market data revealed a continued weakness in loans approved for the month. Today we also expect business confidence to be lower post the RBA’s recent rate cut decision.

The solution hinges on future fiscal constraint and reprisals – investors buy in big time

Global markets were pacified over the weekend as EU leaders banded together to agree to tougher budgetary measurers by participating Euro Zone countries and also implied penalties for those countries that breach their budget deficits by more than 3% of their GDP. These structural solutions will have consequences some time in the future however investors sought to capitalise on a bounce and buy in and at good levels.

This positive sentiment may face tougher times this week with a raft of data both locally and offshore.

Key this week in Australia includes housing finance and consumer sentiment. In the US November retail sales, Industrial Production and CPI will provide valuable insights for the coming new year.
In Europe PMI and CPI will close out a busy week.

ECB provides 25bps relief and extends support to Banks…not Euro Zone Governments

The European Central Bank eased the benchmark borrowing rate for Euro Zone banks to 1.00% last night and added some key long-term refinancing options (LTRO) in an effort to improve liquidity and funding pressures. The ECB however declined to assist Governments within the region by buying bonds citing the boundaries of their mandate did not extend to specifically financing such activity should remain the focus of the European Financial Stability Facility.


Investors were unimpressed by these statements of policy by the ECB and hammered the Euro and European stocks sending global risk markets lower.

Mixed markets as speculation mounts on European stimulus measures… Aussie GDP up

Marginal moves on stocks and commodities overnight as investors pause to consider the outcomes of the EU Leaders Summit beginning today. Doubts linger that any strategic policy will be announced post this latest gathering and will indeed impact investors confidence as we approach the New Year. S&P has placed the European Union on credit watch “negative” potentially threatening its AAA standing.

A strong Australian GDP release yesterday was the result of increases in business investments but surprisingly household consumption contributed 0.7% rising 1.2%. Construction and mining figures were also strong.

The November labour force release today is expected to see unemployment steady at 5.2% with 10,000 jobs added over the month.

RBA cuts cash rate to 4.25%...global focus remains on Europe

The RBA noted although the Australian economy has reported output “close to trend” it is the moderation of global growth over 2010 that remains a concern, in particular “a significant slowing in economic activity in Europe” having lead in affects to growth in Asia and other parts of the world.


Turbulence in the financial markets as a direct result of the European sovereign debt crisis has no imminent sign of abating. The EU summit beginning tomorrow is expected to produce a possible solution at “ring fencing” the European zone to appease financial markets however this perhaps is naive in the current borderless global markets we have created.

French/German pact welcomed ahead of EU Leaders Summit…RBA once again a close call

As a precursor to the EU Leaders Summit scheduled later this week French President Sarkozy and German Chancellor Merkel were bolstering hopes of continuing progress to relieve the Euro Region of its debt struggles. In a move designed to appease the ECB and promote action by the central bank in talks planned later this week the French/German alliance promised stiffer penalties for Euro Zone countries that breached deficit limits and/or were lax in the countries implementation of proactive deficit reduction policies.

Standard & Poors also warned that the Euro Zone may face possible downgrades if the EU Summit failed to achieve its desired outcomes. Six AAA nations are among these countries facing a negative outlook over the next three months.

The RBA Board meeting scheduled for today AEDT 2.30pm will indeed be a close call. 13 out of 25 surveyed economists have predicted back-to-back rate cuts – the first since February 2009.

Good news overnight but local market focus on what lies ahead

A drop in headline unemployment in the US on Friday provided a reprieve to risk assets and boosted the Aussie dollar along with commodities and equities. The reported jobless figure of 8.6% was the lowest level since March 2009. European positivity off the back of the newly elected Italian Government approval of Euro $30 billion rescue package further bolstered markets.


Investors will weigh up encouraging developments in global markets over the weekend as closer to home the RBA Board meeting may be a close call. 13 out of 25 surveyed economists have predicted back-to-back rate cuts – the first since February 2009.

Australian Major Banks downgraded by S&P….Global markets take a dip

Standard and Poors released a revised Rating Methodology and Assumptions paper back on the 9th of November in relation to Banks globally and their associated Country of Origin. The release last Tuesday of 37 ratings actions on the worlds largest financial institutions is now being felt closer to home.
The Four Australian Majors – CBA, ANZ, Westpac and NAB have been downgraded to AA- from AA.
The boost to global markets was tempered overnight partly in response to large Spanish and French bond auctions and future-funding cost rises. The move by central banks to support a struggle European region remains at the forefront of any short-term market rally.

GLOBAL CENTRAL BANK ACTION

Overnight the global central banks co-ordinated moved to bolster available reserves available to deal with the looming crisis in Europe.

Markets were bolstered by the move

Westpac Euro economist quote: "I've never been as scared about the outlook for [the] global economy, and particularly in Europe, at any time in my past 25 years as an economist," Shugg told a Westpac conference in Rockhampton yesterday.

US Consumer Confidence bolsters markets…European Finance Ministers regather

US Consumers have embraced a little holiday spirit it seems as consumer confidence reported overnight was up to a 4 month high of 56.0 from 40.9 in October. Markets reacted positively taking the opportunity to buy off the lows that have been persistent this last week.

A gathering of the EU Finance Ministers this evening was also perceived favourably by investors whom are expecting positive news with regards to continued IMF and ECB intervention if required. The Italian bond auction was outdone with the hopefulness of future positive outcomes.