The Monday Report

This story features METCASH LIMITED. For more info SHARE ANALYSIS: MTS

 By Greg Peel

Wall Street opened a bit weaker on Friday night, which is of little surprise given the near 300 point rally in the Dow on Thursday. Given US markets are closed Monday for the Memorial Day holiday, Friday was both the end of the month and a session in which traders usually get away early. Volumes were thinner on the NYSE than in recent sessions.

Good news then came in the form of the fortnightly Michigan Uni consumer confidence index, which rose to 73.6 from 73.3 a fortnight ago and 72.2 a month ago. Economists had expected 73.4. But the compilers noted quite a change in the break-down numbers. Whereas Americans had previously been more nervous about the immediate term given high unemployment, but more confident about conditions eventually improving in the longer term, in this survey they were less concerned about the immediate term (probably because recent US economic data have been positive) and now more concerned about slower growth ahead (no doubt given the European crisis).

Such concern was reflected in the April personal income and expenditure numbers. While incomes rose 0.4% following an equivalent rise in March, as economists had expected, spending only increased 0.1% compared to 0.6% in March and an expectation of 0.3%. Europe concerns clearly influenced Americans to once again rein in spending and put money away. Savings growth rose to 3.6% in April from 3.1% in March.

The Chicago purchasing managers' index (PMI), which measures manufacturing activity in the important Chicago region, dropped to 59.7 in May from 63.3 in April – a bigger fall than expected. But when one considers the April reading was the highest in five years, and that anything over 50 still means expansion, it wasn't so bad a result.

So Wall Street bungled along slightly lower through to lunchtime, before the latest European news was announced.

In his latest book entitled The Big Short (absolutely required reading for anyone who wants to try and understand the GFC), celebrated market cynic Michael Lewis notes that people who work in ratings agencies are simply people who were not smart enough to be considered by a big Wall Street firm. This, combined with a commercial desire by the agencies to accommodate Wall Street firms despite appreciating even less about the toxic make-up of subprime CDOs than the firms themselves, led to specious AAA ratings being granted and the impending GFC fuelled.

Once it became clear just how many of these toxic instruments the various firms were holding, the ratings agencies then began to downgrade the ratings of those firms, thus exacerbating liquidity and solvency issues, despite having been the ones to declare AAA ratings on CDO in the first place. It was laughable.

It is not so laughable that the ratings agencies are now downgrading the sovereign debt of weaker eurozone members, but what is completely unhelpful is the ratings agencies are simply being reactive. When the world learned of the budget deficits of Greece and Portugal the credit markets responded by selling their sovereign debt, and then the ratings agencies downgraded it, meaning more selling, which led to more downgrades, and so on. Now that Spain's debt has also been de-rated and the forecast for eurozone economic recovery dashed, ratings agency Fitch decided to downgrade Spain from AAA to AA+ on Friday night, albeit with “stable” outlook.

It would have been helpful if the agencies had actually been proactive, forewarning of problems in Europe rather than responding to them.

So around lunchtime in New York, Fitch downgraded Spain, the euro fell once more and Wall Street followed. The good news is that the Dow was actually down 163 points at 2pm but bounced to be down only 37 points at 3.30pm. But then came a familiar late selling wave, no doubt exacerbated by it being the last trading day in the month and there being by then a near empty trading floor, and the Dow closed down 122 points or 1.2%. The S&P finished down 1.2% to 1089 and the Nasdaq lost 0.9%. Again – no two consecutive days of rally.

The simple fact of the matter is that the ratings agencies are following the market, not leading it. Under the circumstances, for Spain to lose its AAA rating at this time is hardly a shock.

What it did mean is that Wall Street suffered a net 7.9% fall in May, being the worst monthly move since the bottom-nearing month of February 2009, and the worst May since 1962. That's quite a result given we don't have the cliché “Sell in May” for no reason.

The euro fell 0.8% to US$1.2274 and the US dollar index rose 0.3% to 86.78. The Aussie lost half a cent to US$0.8473.

London base metals had rallied earlier but closed on smallish net moves while gold added another US$2.30 to US$1213.30/oz. Oil lost US58c to US$73.97/bbl.

After the solid 1.8% leap in the ASX 200 on Friday, the SPI overnight closed down 42 points or 0.9%.

It's been a bit one step forward and two steps back of late, so let's hope we're now in more of a two steps forward and one step back phase. And remember that Monday in Australia is end of the month.

There will be no Wall Street on Monday, as noted, given the public holiday. But there follows a busy week of economic data.

Tuesday is PMI day across the globe, or the day when all of Australia, China, the UK, eurozone and US release their monthly performance of manufacturing data. The US number is considered an important lead indicator. Tuesday in the US also brings construction spending and the Dallas Fed manufacturing index.

On Wednesday its pending home sales and vehicle sales, and on Thursday factory orders, same-store sales, the service sector index, first quarter productivity, and the ADP private sector unemployment number. This is usually on the Wednesday, but must be late this month due to the holiday. Friday brings the all-important official unemployment data.

It's an important week in Australia this week, featuring both a rate decision and the first quarter GDP release. Two things to note in respect of these numbers is firstly that the May rate hike was made with a consideration that the European crisis would not impact heavily on Australia, but was made before the desperate announcement of the E760bn euro stability fund. In other words; things seem to have become a lot worse in Europe since. But then the RBA was always going to stay on hold in June anyway, and will clearly do so on Tuesday.

Secondly, Australian economic data have been to the weak side in recent times, probably reflecting European fears but also manifesting a response to the rate hikes over the past several months. But the first quarter ended a full two months ago, so Wednesday's number will still be looking strong. Forecasts are for a result of 0.4% quarterly, reflecting 2.3% growth annually.

It's a busy Monday in Australia, with first quarter data for company profits, inventories and the current account released, along with new home sales and private sector credit for April and the monthly TD Securities inflation gauge. Tuesday is RBA day along with manufacturing, building approvals and retail sales. Wednesday it's the GDP and Thursday the service sector index and trade balance.

The Bank of Canada will make a rate decision on Tuesday and the eurozone will revise its first quarter GDP on Friday.

On the local stock front, Metcash ((MTS)) provides its full-year earnings on Tuesday.

For further global economic release dates and local company events please refer to the FNArena Calendar.

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