(MONDAY 12TH SEPTEMBER- 07:19 - JAMES GERRISH)... MKTs got the shakes on Friday night with increased concerns that Germany was readying itself for a Greek default with the Govt & major banks working together to mitigate the likely damage.
Looking at credit default swaps, that mkt had already priced in a 90% chance of Greek failing so the fact Germany (being the biggest holder of Greek sovereign debt), is getting a contingency plan in place seems to be just a natural progression - but its hard to a put a positive spin on any discussion of a Greek default particularly in this type of nervous environment.
If we do get a Greek default, which I'd have to say at this stage seems likely, the markets reaction will be interesting. The first thought would be that mkts would plummet but when you look at the progression of the situation, investors have had time to position themselves for the event. Don't get me wrong, its likely to be a negative for mkts but the actual default in itself may not be the issue.
The real concern would come from what a default would mean to the major European Banks. If we see for instance one of the major European institutions get into trouble, that would have major flow on implications to the credit mkts.
Its important to note that Australian banks have no direct exposure to Greece but they do rely on overseas funding. If funding markets seize or the ability to source credit gets more difficult (expensive) then our banks will be hurt.
Adding the situation, we did hear rumours over the weekend that the major French Banks, BNP Paribas, SocGen and Credit Agricole are likely to be downgraded by the rating agencies this week which would give counter parties (other institutions) an excuse not to deal with these guys.
Another important development over the weekend came from the G7 meeting of Finance Ministers. The meeting was flagged as a forum to develop a coordinated response to the current situation but all we saw was the great divide between member nations, the difference of opinion and no new measures/responses put forward. In aggregate, the meeting I think would be a negative for mkts given the expectations leading into it.
Another negative for the mkt on Friday is what some a calling a dummy spit from Jurgen Stark from the European Central Bank. You're not alone if you've never heard of this guy but his resignation from the ECB on Friday (for personal reasons supposedly) was enough to indicate discontent amongst the ranks, and was probably the start of the negative move on Fiday's session.
Countering the obvious negativity coming from Europe, we did have what I thought was a positive plan put forward by Barrack Obama. The $450 million jobs plan would likely ad between 2% & 3% to US GDP in 2012 - which is a positive if they could get it through. The mkt however has discounted the bill actually getting through Congress given their recent form we've seen in Washington. This sets up the possibility for a positive surprise if the bill passes in a form that reasonably resembles to original...!
In other data at the end of last week, we had China come out with CPI (inflation) at 6.2% - smack on expectations and down from the 6.5% we saw last month. This was a positive print and as we wrote on Friday, does give evidence that Chinese inflation may have peaked which would spell the end for further tightening - a positive for Australia. We get Trade Data from China today so we're looking for further confirmation that export growth has plateaud.
Aussie GDP was also a positive last week with a strong rebound (+1.2%) from the flood induced -0.9% in the March quarter. Australia remains in pretty good shape despite the global issues.
THE NUMBERS
On Friday night the DOW JONES lost -303pts while the S&P 500 lost -2.67%. Locally, the SPI FUTURES MKT is pricing a drop of -70pts when trading kicks off this morning.
Last week, the ALL ORDS fell by -1%, the WORLD INDEX was down -0.5%, the S&P 500 lost -1.7% while the AUSSIE DOLLAR fell -1.2% against the USD.
WHAT'S IMPORTANT THIS WEEK
All eye's will be on Europe this week and the fluid situation unravelling out of Greece. This is certain to ensure that the volatility we've seen recently will continue and it may even be enough to send markets down for a re-test of those recent lows (around 3800-3900 on our mkt). As we highlighted last week, the 4075ish level on the ASX 200 is key.
On the economic front, the NAB release their business survey results, we get international trade data & consumer confidence.
In the US there is a fair bit out that could move markets depending on what happens in Europe. We see manufacturing and consumer spending numbers, the Empire Fed and Philly Fed manufacturing indices (remember the poor Philly Fed number last month), while we also get retail sales, business inventories, CPI & PPI.
NO MODEL PORTFOLIO UPDATES
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp fell by US$0.30 to US$16.71, equivalent to A$16.04, A$0.20 below its last close on the ASX.
ResMed fell by US$0.70 to US$29.00, equivalent to A$2.78, A$0.02 below its last close on the ASX.
In London, Rio Tinto fell 5.5 pence to £35.00, A$0.08 lower in Australian currency terms.
BHP-Billiton rose 11.5 pence to £19.44, A$0.17 higher in Australian currency terms.
Henderson Group Plc rose 1.9 pence to £1.27, A$0.03 higher in Australian currency terms.
