U.S. stocks began Friday’s session higher on the EU agreement and the buying accelerated into the afternoon session, nearly recouping Thursday’s losses.  The economic data was mixed as domestic releases were positive, while industrial production out of China continued to weaken.

Financials, energy and industrials led the rally.  Telecoms and consumer staples were the laggards, but posted meaningful gains.

So on Friday EU ministers attained the required 85% of EU members (actually got 26 of 27) to agree on fiscal rigors, or penalties for running deficits above 3% of GDP.  But to get there they had to settle for intergovernmental agreements as the votes weren’t’ there to change the Lisbon Treaty.  As a result, there’s a big question over just how binding any of this will be.  The other question is since even Germany is above that stated deficit/GDP ratio and Spain’s budget deficit is 9.3% of GDP, when exactly are they going to put these restraints in place?

In addition, I believe they stated that private investors would not be asked to take losses on government bonds merely because of the damage such talk did to the euro-zone bond market on the very mention of it a couple of weeks back (this doesn’t mean investors won’t take losses, they certainly will when this stuff is ultimately restructured, but they just won’t be asked to take voluntary haircuts).  Wow!  I can’t see that as a positive, since the whole voluntary restructuring route is supposedly a non-triggering CDS event. So when the involuntary restructuring eventually occurs it will most likely bring the EU banking system to its knees.

Overall, the agreement is not the bazooka that Merkel, and certainly Sarkozy, portrayed would result from this summit, it’s more like an air rifle – and stock-index futures are trading as such this morning as weakness has set in again.  I still think EU finance ministers are relying on Draghi to provide the bazooka, eventually coming to the rescue by printing euros to buy bonds and thus keep these rates from blowing out further.  That’s exactly the wrong approach, an approach that will end the eurozone as we know it.

Market Activity for December 9, 2011

Sector Activity for December 9, 2011

Trade Balance

The U.S. trade gap narrowed a bit in October, down 1.6% to -$43.466 in nominal terms.  On an inflation-adjusted basis, which is what counts for the GDP report, the deficit narrowed by 3.7%. That’s about the same degree of narrowing relative to the average of the previous three months.  Thus, it appears that trade will help boost fourth-quarter GDP, but of course we still have two months of data so that could still change.

In real terms, exports rose 1.2% in October, but it was all from increases in telecom and commercial aircraft as every other major export time declined.  Imports fell 0.3%, led by a 5.2% decline in crude oil deliveries.

Again, this result is GDP enhancing, but it’s not a healthy report as it appears too many export orders are feeling the pinch from weakness overseas (primarily Europe, but Asia isn’t looking all that great either).

U of M Confidence

The preliminary look to the University of Michigan’s consumer confidence gauge for December (we’ll get the final print in two weeks) showed additional improvement, extending the bounce from the crisis low at which it returned to in August.  The measure rose nearly four points to 67.7 from the 64.1 in November.

All of the gain came from the economic outlook side of the survey though (expectations of better times to come a year down the road), as that segment rose nearly six points to a reading of 61.1.  That’s up 14 points in five months, but still 17 points below average.  The present conditions segment rose just 0.3 point to 77.9, which kept it still 20 points below average.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900