\n\tBy Greg Peel<\/p>\n
\n\tCongratulations New Zealand.<\/p>\n
\n\tThe second worst thing about this week is that we will not know anything concrete about Europe's plans until Wednesday night, which means Thursday in Australia, and hence we'll have to endure at least another three days of tired speculation. We knew Wednesday had been set as the deadline but it hasn't stopped a feeling of disappointment that no announcements were forthcoming following the weekend's EU summit in Cannes. At least none that get us any closer.<\/p>\n
\n\tOn Friday night it was decided at the meeting of eurozone<\/span> finance ministers to approve the next E8bn<\/span> tranche<\/span> of bail-out funds to Greece in the wake of the Greek parliament's passage of further austerity measures. The tranche<\/span> has to date been delayed and without it Greece would run out of cash.<\/p>\n \n\tOf course each of these tranche<\/span> payments represents only enough to keep Greece afloat until the next tranche<\/span> is required. When Greece next needs to roll over sovereign debt the interest cost implied by where the markets are pricing Greek debt are so high as to ensure Greece will forever go backwards. Strict austerity measures to cut budget spending only serve to undermine any GDP growth opportunity needed to provide the funds for those interest payments. It's a slippery slope.<\/p>\n \n\tThat's why Greek bond holders must take a “haircut”, and the current suggestion on the table is that the face value of their investments needs to be cut by 50-60%. If so, Greece's debt burden is halved and its debt servicing obligations become manageable. Without the haircut, Greek default is inevitable.<\/p>\n \n\tEuropean banks are the biggest holders of Greek debt, and French banks the most substantial. If their investments are forcibly halved, some, but not all, of those banks would become insolvent. Those banks that could handle the haircut would still be caught up in a cascading collapse of the European banking system. Hence the suggestion, as was further debated last night, is to recapitalise<\/span> those banks indiscriminately.<\/p>\n \n\tOn Friday night the news was that France and Germany still remained firmly at odds over bank recapitalisation<\/span> and requisite leveraging of the EFSF<\/span>. At stake is France's AAA credit rating which may end up being cut if the French government effectively has to hand out a chunk of bail-out money to its banks in the form of equity injections. As next year is an election year, President Sarkozy<\/span> does not want to lose that rating.<\/p>\n \n\tGiven the apparent stalemate on Friday, one wonders why European and US equity markets, and currency markets, were quite so optimistically exuberant in Friday night's trade. The Greek tranche<\/span> payment was good news, but a 3.6% rally in the German DAX and 2.8% in the French CAC<\/span>? One can only assume traders decided the odds are more in favour<\/span> of resolution than not, and that the subsequent global rally is not worth missing out on.<\/p>\n \n\tWhich is why the Dow closed up 267 points or 2.3% on Friday as well, with the S&P gaining 1.9% to 1238. The common theme across the globe was, however, light volume.<\/p>\n \n\tWall Street had some additional impetus, in the form of a solid earnings beat from McDonalds (Dow). The surprise did not come from strong sales growth in emerging markets as one might have assumed, but from outperformance<\/span> in the US and Europe. Mickey D shares closed up 3.3%. Yet General Electric (Dow) shares closed down 2.4% despite earnings matching expectations. Analysts noted slower growth in industrial orders.<\/p>\n \n\tSo one might suggest Friday night's trading was all a lot of hot air. The euro is rather the leadership asset at present, and it rose 0.7% on Friday to send the US dollar index down 0.9% to 76.27. Dollar weakness easily explains an US$18.80 rise to US$1640.00\/oz for gold, but base metal activity was quite extraordinary.<\/p>\n \n\tOn Thursday night copper tanked 5.5% on fears a Chinese clampdown on grey market loans using copper as collateral would mean a lot of sudden selling of the red metal. Copper took the whole complex down with it on a night that the US dollar was relatively steady. But such a consideration is an “alpha” risk for copper compared to the “beta” risk of commodity price strength in the wake of a well-received European resolution. Thus with the dollar weak on Friday night and prices having plunged on Thursday night, the speculators moved in. <\/p>\n \n\tAnd so all the metals turned around and went the other way. Copper was up 5.2%, and everything else was up 1-7%. Such whiplash suggests there are not a lot of “real” players in metals markets at present given European uncertainty, so the cowboys are running riot. By contrast, the oil markets didn't do much at all on Friday night.<\/p>\n \n\tThe Aussie was up a cent to US$1.0352 and the SPI<\/span> Overnight rose 45 points or 1.1%.<\/p>\n \n\tFor now we wait, we watch, and we hope ill-informed news stories don't hit the wires in the meantime and spark undue volatility.<\/p>\n \n\tThis week sees a tidal wave of US earnings reports, with highlights including Amazon, ConocoPhillips<\/span> and Ford, Dow components 3M, DuPont, US Steel, Boeing, Merck, Exxon, Chevron and Proctor&Gamble, and foreigners Deutsche Bank, UBS and Credit Suisse.<\/p>\n \n\tOn the economic data front, tonight kicks off with the Chicago Fed national activity index. Tuesday sees both the Case-Shiller<\/span> and FHFA<\/span> house price indices, the Richmond Fed manufacturing index, and Conference Board consumer confidence, while Wednesday brings durable goods and new home sales.<\/p>\n \n\tOn Thursday, the first estimate of US September quarter GDP will be released. Following from 1.3% growth in June, economists are expecting 2.3% (annualised<\/span>). Thursday also sees pending home sales, and then Friday wraps up with personal income and spending and fortnightly consumer sentiment.<\/p>\n \n\tToday HSBC will release its “flash” estimate of China's October manufacturing PMI.<\/p>\n \n\tWill the RBA<\/span> cut its cash rate on Cup Day, between Wednesday's supposed Grand Plan revelation and the G20<\/span> meeting beginning November 3? Well that will depend generally on that Grand Plan and specifically on Thursday's release of the local September quarter CPI. Today sees the PPI, and tomorrow the Conference Board leading index.<\/p>\n \n\tThere will be an avalanche of AGMs<\/span> this week in Australia – too many to highlight – while quarterly reports will be forthcoming from Oil Search ((OSH<\/span>)) on Tuesday, Beach Energy ((BPT<\/span>)) and Macarthur<\/span> Coal ((MCC<\/span>)) on Wednesday, Austar<\/span> ((AUN<\/span>)), PanAust<\/span> ((PNA<\/span>)) and Woolworths ((WOW)) on Thursday, and Paladin Energy ((PDN<\/span>)) on Friday.<\/p>\n \n\tOn Thursday National Bank ((NAB)) will release its FY11<\/span> result and on Friday Macquarie Group ((MQG<\/span>)) will provide its half-year.<\/p>\n \n\tRudi will appear on Sky Business on Thursday at noon and FNArena's<\/span> Market Insight program will air on the BRR<\/span> network Thursday at 4.30pm<\/span>. <\/p>\n