The Overnight Report: Cliff Overhangs Greece

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By Greg Peel

The Dow fell 89 points, or 0.7%, while the S&P lost 0.5% to 1398 (breaking solid technical support at 1400) and the Nasdaq dropped 0.3%.

"It's been hard work for us all," said IMF chief Christine Lagarde at a news conference yesterday following the wrap up of another marathon meeting between eurozone protagonists.

One might presume that the collective of eurozone finance minsters, the ECB and IMF would take a good three years to agree on a wine for a troika lunch. Because that's almost how long it's taken, effectively, to decide the Greek debt-to-GDP target in eight years' time should be lifted to 124% from 120%. Hallelujah, the world is saved!

Mind you, the actual conclusion in the Brussels wee smalls was that all parties believe "the elements are now in place" for member states to approve the payment of the next E44bn tranche of the Greek bail-out package from the EFSF. So don't be fooled ? we're not actually there yet. All we need is for a few parliaments ? well, seventeen to be precise ? to approve the payment. What could possibly go wrong? And of all the dictionaries that must exist for all the languages in the eurozone, it appears the word "definitive" does not appear in any of them. Here's the deal:

The interest rate on Greece's loan facility will reduce by 100bps. The guarantee cost for those loans will be reduced by 10bps. Interest payments might be deferred by ten years. Public tenders of Greek debt might take place. The interest rate on the loan might be reduced further. Other measures might be taken if necessary.

Go on all you parliaments. Go and vote on that lot.

Let's kid ourselves anyway, just for amusement sake, that Greece has now left centre stage for the umpteenth time and has faded into the background, to no longer worry the world (until its next stage call for the next tranche deadline). Now the spotlight can rest distinctly on Spain. Woohoo! And what new news from Spain and its bail-out situation? Nothing!

Stuff Europe anyway. It's currently just the side act. The headline is our friend Cliff.

After having bungled along during the morning, Wall Street fell off one just after 2pm local time when Democrat senate majority leader Harry Reid declared he was disappointed with the slow pace of progress in cliff negotiations and that it was time to "end the happy talk" and get real. Sounds like the "smile for the cameras" honeymoon is over, and now the gloves are off.

The Dow had been tracking slightly negative at that point, waiting to see what the meeting of a small business leaders' delegation and the White House might or might not achieve. That meeting is still underway, but the Dow has taken its tumble anyway. What's more depressing is that Cliff has overshadowed what was otherwise a solid day of US economic data releases.

Cliff? What cliff? The US consumer is untroubled. The monthly Conference Board measure of consumer confidence rose to 73.7 in November from 73.1 in October to mark its highest level since February 2008 (around the time Bear Stearns was being bailed out).

Growth in new durable goods orders was flat in October, but this was a great result given a lack of lumpy auto/aircraft/defense orders in the period. Economists were expecting a net fall in orders, but taking out the lumpy bits shows capital goods orders grew by a healthy 1.7%.

The FHFA house price index (houses with Fannie/Freddie mortgages) rose by 4.4% in the twelve months to September. The Case-Shiller 20-city house price index rose an equivalent 3.0%, the fastest growth since July 2010. Let there be no doubt that the US housing is staging a comeback.

The Richmond Fed manufacturing index has jumped 16 points in November from minus seven to plus 9. The contraction/expansion neutral point in this measure is zero.

Given all of the above, you'd be forgiven for thinking the US economy is firing on all cylinders. Thus, the US stock market should be firing on all cylinders, but no, Cliff is in the way.

A global stock market not firing on any cylinders at all is that of China, with the Shanghai Composite yesterday falling below 2000 for the first time since 2009. The SC hit its post-GFC peak in late 2009 at 3500, so the subsequent bear market has now notched up a 43% fall. Stock indices are supposed to be leading indicators, but this one keeps heading south even though other data, particularly the PMIs, indicate the Chinese slowdown has bottomed out. In which do we have faith? Yesterday's news was of a 0.5% rise in Chinese industrial profits in October ? the first positive move for nine months.

The euro jumped initially on the Greek news, but these days there is an army of sellers camped at US$1.30 and that's as far as the currency reached. Then the solid US data started hitting the wires and the euro turned tail, helping the US dollar index up 0.3% to 80.40.

London base metals initially surged on the supposed "risk on" impact of the Greek news, but fell back again once the dollar pushed higher. Nickel and tin still managed net 2% gains and lead 1%, but the others were mostly flat. Spot iron ore is down US30c to US$117.90/t.

The Aussie fell on the dollar's gain to land at US$1.0440 as did gold, which is down US$7.90 to US$1741.10/oz. With a tenuous peace still reigning in Gaza, Brent crude fell US96c to US$109.87/bbl and West Texas fell US47c to US$87.27/bbl.

Throughout all the cliff-related ups and downs of the US stock indices, the US bond market has continued to play it cool and the volatility has been low. The ten-year yield is sitting at 1.63%.

The selling on Wall Street accelerated into the close, suggesting we've all been kidding ourselves up to now this year's cliff negotiations will be all smiles and handshakes. Santa was ready to fire up the sleigh but has decided it's too cold and gone back inside. The local bourse drank too much ouzo yesterday, so the SPI Overnight is down 19 points or 0.4%.


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