Traders will have a hard time trying to find a down market today with the exception of JPY and USD as the market has taken a decidedly pro-risk tone this morning, which is a welcome relief to some. Both global stocks and commodities are trading much higher to start the US session. There are a few different factors driving this sentiment and it is this confluence that is driving markets higher.
So what’s going on this morning? For starters, the market is regaining confidence in the Euro zone and the ability of its leaders to tackle the debt crisis. 2012 is likely going to be a different year for EU leaders who appear to be out in front of the crisis unlike last year when they dragged their feet and let the politics play out in public forums which erased any credibility they had maintained up to that point. Yesterday’s meeting between Sarkozy and Merkel was viewed as positive and the news that they may accelerate payments to the bailout fund is welcome.
Today Merkel is meeting with Lagarde of the IMF and there is renewed hope that they will further the mission of tackling the debt crisis. So far they are winning the PR battle and have kept the bond vigilantes away for now, though there is a lot of bond issuances due out over the course of the next month so they are not out of the woods just yet. But yields are coming down for EU debt, though Italy’s 10-year is still above 7% which is problematic. Another good piece of news is that Fitch stated they would not downgrade France so long as the debt crisis doesn’t worsen.
However, news about the current Greek debt crisis has been met with mixed reviews. It now looks like bondholders may have to take a haircut of greater than 50% which could bring some noise to the markets as investors balk and would prefer default in order to be paid out on their CDS. This will be the story to watch going forward, as well as if this has any impact on future investment in other sovereign debt issues.
News out of the Euro zone showed that French Industrial Production figures came in better than expected showing positive gains vs. expected declines across the board.
In the UK, home prices fell less than expected and the market is looking forward to Thursday’s rate decision where the BOE is still expected to make no change.
Today is a slow day for economic data but one of the big drivers of the markets will be US corporate stock earnings. Last night earnings season kicked often with Alcoa (AA) posting better than expected results and a host of other equities look to beat expectations despite slowing profit growth. The correlative effect of higher stock prices still holds some weight and is a major driver of risk sentiment.
Another driver of risk sentiment is oil prices, rightly or wrongly. I have always contended that higher oil prices should be bad for risk sentiment and not contributing to risk appetite but I am just one voice out of many. Oil has been higher this morning to $103, mainly because of Iran’s sabre-rattling, which is threatening the supply of oil to the global market.
Overnight, China reported a much better than expected trade surplus as reduced imports pushed the balance higher as exports remained steady. The trade surplus of nearly 16B was almost twice what was expected so China needs to step up their importing if they don’t want to continue to draw ire over their currency peg.
There is no news of any significance due out in the US today but there is some Fed speak later today that could have a market impact, though unlikely. In today’s Twitter age, the Fed folks have really learned not to speak out of school and their remarks are carefully vetted ahead of time. So they will stick to the party line and will go un-noticed.
If things continue on this trajectory, then we could see further risk appetite if corporate earnings continue to be positive. The private sector appears to be in good shape at this point but government health is likely to be the topic going forward. 2012 is an election year so expect the powers that be to try to pull out all of the stops to juice the numbers to make it seem like they have been doing a good job.
Despite our ability to persevere, I can tell you that things could be a whole lot better. Don’t fall for the counter-factual argument that things could be worse, because the opposite also holds true, that things could be better. If business gains confidence from the government, not from the economic results, then we could be on the path to recovery.
