Stocks are climbing this morning after yesterday’s EU summit in which the leaders of 25 European governments agreed on a pact for a tighter fiscal union, and signed off on the details of a permanent bailout fund for the euro-zone. EU leaders noted “tentative signs” of economic stabilization, but said tensions within the financial markets continue to weigh on the economy. After the summit, Greek Prime Minister Lucas Papademos met with senior European officials regarding the conditions to be imposed on Greece for it to receive financial aid. Afterward, Jean-Claude Junker, Luxembourg’s Prime Minister who attended the meetings, claimed the talks yielded no conclusions. Mr. Papademos said that Greece would continue negotiations with private sector creditors this week with a goal of reaching a deal that would not require further financing from official lenders. “It’s hard to predetermine if we will need additional financial support. Our intention is to avoid it,” Mr. Papademos said in a press conference.
U.S. stock market futures are up this morning as sentiment improves in the euro-zone after yesterday’s EU Summit and amid better than expected earnings. Eli Lilly advanced 1.2% after it reported earnings at $0.87 per share in the 4Q, compared with the average analyst estimate of $0.81. The world’s largest drug maker, Pfizer Inc., increased 1.3% after beating analyst estimates as the company’s non-pharmaceutical divisions helped make up for sales lost on its best-selling drug Lipitor which is coming under pressure from generic competitors. Archer-Daniels-Midland, the world’s largest grain processor, posted a 2Q profit that missed analyst estimates due to rising corn costs and lower than expected oilseed earnings; ADM was off 3.1% in early morning trading.
I recently wrote about the MOVE Index (Merrill Lynch Treasury Volatility Index) hitting near lows not seen since before the financial crisis began, but in the last several days we have seen a move even further to the downside. Back on Jan. 18, the index was as low as 75bps, but we have broken that level of support and the index now trades at 72.4bps. Low volatility in the treasury markets may currently indicate investors unwillingness to shed their safe-haven dollar denominated assets.
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EU Leaders gather in Brussels for their first summit of 2012, amid deteriorating economic conditions and a struggle to complete a Greek debt write-off that may make it more likely for Portuguese investors to be next in line to accept a loss. Germany has proposed the creation of a commissioner , appointed by euro-member states, with the power to veto budget decisions by Greece as a condition of a €130B bailout for Athens. “Our partners acknowledge that European integration is based on the institutional equality of nation-states and on respect for their national identity and dignity,” Venizelos said in an e-mailed statement from his office in Athens yesterday. “Whoever poses a dilemma between economic aid and national dignity is ignoring basic historical lessons.”
French President Nicolas Sarkoszy said he will impose a 0.1% financial transactions tax, sending shares of French banks broadly lower. European stocks are heading for their biggest two-day drop in two months as Greece signaled strong opposition to economic oversight in exchange for aid. As of 9am EST, the Euro Stoxx 50 was down -1.30%, led down by Spain’s IBEX 35 Index and Italy’s FTSE MIB, both down about -1.45%. Italy’s 10yr rose 23bps to 6.084% and the Euro tumbled 0.8% to $1.3112. Credit swaps now imply a 71% chance Portugal will default within 5yrs. Asian equities closed down today as well, with the Hang Seng Index down -1.66% and the Nikkei 225 down -0.54%. S&P 500 Index Futures had lost -0.9%, while the 10yr Treasury slipped 6bps to 1.827%; the U.S. Dollar Index had added 0.5%. Copper fell for a second day, and oil dropped 0.7% in New York to $98.89 a barrel.
Commerce Department figures released today showed consumer spending stalled in December, with purchases little changed this month, after rising 0.1% in November. 66% of the 169 companies in the S&P 500 that have reported earnings this year topped analysts’ forecasts, according to data compiled by Bloomberg.
Italy, Belgium, and Spain must sell €22B of securities this week. Spanish 2yr yields jumped 13bps today to 2.66%, and equivalent Portuguese yields were at 20.71%. The Markit iTraxx SovX Western Europe Index climbed 7.5bps to 331.5.
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Yesterday’s U.S. durable goods release may be pointing to a rebound in business investment. “We’re poised for a bounce-back in the first quarter in terms of business spending,” said Scott Anderson, a senior economist at Wells Fargo Securities LLC in Minneapolis.“Confidence is up, and there are some signs that the labor market is improving. We’re still facing issues with housing.”
It was the second day in a row for commodities and treasuries to rise, after the Fed extended their pledge to keep their benchmark rate interest rate low through late 2014 and said it was considering another round of quantitative easing (QE). U.S. stocks retreated from a 6-month high, with the S&P 500 closing down -0.57% on the day, led down by the Telecommunications and Oil & Gas sectors. The U.S. 10yr Treasury fell 6bps to 1.931% in late New York trading.
European stocks soared higher, with the Euro Stoxx 50 index up +1.62%, with almost all of the euro area indices broadly higher.
GDP climbed at a 2.8% annual pace, following a 1.8% gain in the prior quarter, showing the U.S. economy expanded less than forecast, as consumers curbed spending and government agencies cut back. The median forecast of 79 economists in a Bloomberg News surveyed called for a 3% increase. U.S. stocks lost around -0.4% as of 9:30am EST, sending the S&P into a loss on the week.
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