In a late rally US stocks climbed to end the day in positive territory. The SPX closed up 0.81% to be back in positive territory year on year. Whilst the markets expected a unified vote by the German government to be duly ratified disappointing consumer confidence figures weighed heavily in mid afternoon trade. Consumer confidence in the USA slumped last week to the second-lowest level on record as Americans grew more concerned with their financial situation and the buying climate worsened. The Bloomberg Consumer Comfort Index dropped to minus 53 in the period ended Sept. 25 from minus 52.1 the prior week.
The full outcome of the latest troika meeting is still to be revealed. Presumably the markets have, in similar fashion to the German bailout vote, already priced in a positive outcome. The depth of the rabbit hole has been potentially exposed by the head of Europe’s markets regulator who is warning banks to be consistent in their valuations of sovereign debt amid concern some lenders have failed to record sufficient losses on Greek bonds. Quite where they’ll move the hidden losses to remains to be seen. Steven Maijoor, chairman of the European Securities and Markets Authority, likened the lack of transparency about banks’ individual holdings of government debt to the subprime mortgages that triggered the credit crisis.
[quote]Lack of transparency regarding exposures to subprime mortgages created a situation of uncertainty about the financial positions of banks, a lack of transparency from banks on their exposures to sovereign debt and related instruments are generating new suspicions about the conditions of individual banks and this requires similar answers in terms of transparency. We are currently looking at how banks are applying International Financial Reporting Standards for the valuation of sovereign debt, It is very important for ESMA that financial institutions apply IFRS correctly, and are consistent in their valuations of sovereign debt exposures.[/quote]
The International Accounting Standards Board have accused banks of failing to write down the value of their Greek government debt to reflect market prices; the mark to model as opposed to market phenomena is alive and well. Lenders’ impairments on Greek government ranges from 6 percent to as much as 51 percent in the second quarter, according to analysts at Citigroup Inc.
Bigger challenges loom for the euro zone now. Financial markets are already anticipating a likely Greek default and demanding more far-reaching measures to prevent the crisis that began in Athens from spreading far beyond Europe and its banks.
Despite the German vote, developments in Spain and Italy highlight the challenges facing the euro zone’s sovereign debt crisis. Spain’s ruling Socialists shelved plans to sell part of the state lottery for up to 9 billion euros. Italy had to pay the highest yield on a 10-year bond since the introduction of the euro in 1999 at an auction on Thursday, the first long-term sale since Standard & Poor’s cut the country’s sovereign credit rating.
Rome’s funding costs remain under pressure. Analysts say the government’s tentative crisis response has harmed investor confidence. Italy sold 7.86 billion euros of long-term bonds, moving closer to a target of 430 billion euros for the year, but the 10-year yield rose to 5.86 percent at the auction, up from 5.22 percent a month ago.
“That’s eye-watering yield levels,” said David Schnautz, a rate strategist at Commerzbank.
Whilst there was a brief wave of market optimism regarding the latest USA job numbers an excellent report from Reuters has delved deeper to uncover the levels of harmful stagnation the jobs market is currently suffering. The major concern being that short term cyclical unemployment has in fact transformed into something not seen since the USA great depression, long term structural unemployment.
NFP figures due next Friday are likely to show the unemployment rate stuck at 9.1 percent in October (despite near-zero interest rates) as an unprecedented 30 percent of the jobless have been out of work for a year, a stagnant pool of workers whose job prospects can only decline as their skills rust. Having lost circa 9 million jobs since the onset of the great recession the USA has a massive fight back on its hands in order to recover to pre-crash territory, or accept that previous employment levels are unlikely to return in the medium term and organise policy accordingly. Perhaps time has finally come for Americans to think the unthinkable; full employment is a distant memory and may take a generation to return and only then by way of a complete re think by the incumbent politicians.
European markets mainly closed up on Thursday, the UK FTSE breaking the mould by closing down 0.4%. the STOXX closed up 1.64%, the CAC closed up 1.07% and the DAX up 1.10%. The UK FTSE equity index future is indicating a positive opening for the London session, currently up circa 0.4%. the SPX is currently up circa 0.3%. The Euro pared most its gains during the main indices retracement and late rally to remain fairly flat versus the major currencies. Sterling followed a similar pattern.
There is a raft of USA data publications that could be a sentiment changer on or after NY open, in the morning London and European session the key publications are;
10:00 Eurozone – CPI September
10:00 Eurozone – Unemployment Rate August.
A Bloomberg survey of analysts shows a median estimate of 2.5% year-on-year core inflation, unchanged from the previous figure. Economists polled by Bloomberg gave a median forecast of 10% for the Eurozone unemployment rate, which would be unchanged from last month’s figure. This static expectation should hold firm given Germany’s positive employment figures released on Thursday.
