EmailFollowing a mixed session on Monday, the market is indicated to open relatively flat today.
That is a bit surprising given the news that eurozone finance ministers and the IMF have agreed to a debt reduction plan for Greece. Some key planks of the compromise include an agreement to cut Greece's debt by EUR 40 bln, to extend loan maturities, to cut interest rates on its loans, and to revise the debt-to-GDP target to 124% from 120% by 2020.
Greece is now slated to receive a EUR 34.4 bln aid tranche on December 13.
European bourses are up modestly in the wake of the deal, yet the euro is down 0.2%. Reportedly, there isn't a whole lot of faith in Greece managing to hit the 2020 debt-to-GDP target. In other words, there is a clear sense that Greece's creditors are again throwing good money after bad and that this is a deal that seems to work on paper, but which will break down in practice.
Time will tell, but recent history does not bode well.
Meanwhile, the compromise everyone is waiting for has still not happened. Congressional leaders and the White House are conversing on fiscal matters, but there is no deal yet. That remains a hang-up for the market, which is desperate for a compromise but frankly doesn't appreciate the point that any compromise is going to be a drag on economic growth.
On a related note, the OECD slashed its 2013 global growth forecast to 3.4% from 4.2% in May. It expects the U.S. economy to grow 2.0% in 2013 -- and that forecast assumes Washington avoids the fiscal cliff.
The consensus earnings growth forecast for 2013, though, is still a lofty 10%. That is overly-optimistic in our estimation and will likely come down as the economic reality of a fiscal compromise (or not) in the U.S. and other austerity measures abroad hit home in the coming calendar year.
For now, the market is digesting some more recent economic data in the form of the October Durable Orders report, which turned out to be better than expected.
Durable orders were unchanged in October (Briefing.com consensus -0.4%) after a downwardly 9.2% increase in September. Excluding transportation, orders jumped 1.5% (Briefing.com consensus -0.4%) on the heels of a downwardly revised 1.7% increase in September.
Nondefense capital goods orders, excluding aircraft -- a proxy for business investment -- increased 1.7%. However, shipments of nondefense capital goods orders, excluding aircraft -- the component that factors into Q4 GDP -- declined 0.4%.
The October Durable Orders report was an odd one of sorts considering pullbacks were seen in regional manufacturing surveys and in industrial production. The market may be cognizant of that point given that the futures market showed little reaction to the favorable headline numbers.
Interestingly, there has been little reaction to M&A activity that includes ConAgra (CAG) buying Ralcorp (RAH) for $90 per share in cash (28.2% premium) and Equity Residential (EQR) and Avalon Bay (AVB) jointly acquiring the assets of Archstone Enterprise LP for approximately $16 bln, including liabilities.
--Patrick J. O'Hare, Briefing.com
