Daily Market Reports | Jun 28 2010
By Greg Peel
Friday night's trade on Wall Street was a story of the financial sector on the one hand and everyone else on the other. The broad market responded negatively to the downward revision of US first quarter GDP, from 3.0% to 2.7%. Economists had expected 3.0% to be retained. The first estimate had come in at 3.2% so the final revision meant US GDP grew in the first quarter by 15.6% less than originally estimated.
The first quarter featured ongoing inventory rebuilding which was also the significant factor within the 5.6% growth reported in the fourth quarter. A sudden return to growth out of recession is a typical response, with inventory rebuilding driving the economy. But once those inventories are rebuilt, it's a case of will the consumers come to the party? Unfortunately Friday's downgrade in the first quarter GDP was affected mostly by a negative revision to the consumer spending element.
So it was that consumer stocks copped the brunt of the selling on Friday. Given the second quarter ends this week, one might say this was a delayed response. Soon we'll begin the second quarter reporting season in the US and thus learn specifically how consumer stocks have fared. In the meantime, the fortnightly Michigan Uni consumer confidence reading hit a two-year high of 76.0 in Friday's release which helped to stymie the slide. But given the historical average is 87, Americans remain under-confident.
So the overall tone was weak on Friday but the Dow closed down only 8 points and the S&P rallied 3 points to 1076. This was because the financial sector is the biggest by market cap within the broad market and it posted a healthy rally on Friday in response to the latest concessions in Congress on the financial reform bill.
While most of the original proposals were included in the final bill, including increased capital requirements and regulation of over-the-counter derivatives, the “Volker Rule” element was tempered. This part of the proposal initially suggested commercial banks must divest of all their proprietary operations in order to, in simple terms, prohibit punting with depositor and shareholder funds. However, banks won a concession that recognises “facilitation” of client trades as being separate to pure proprietary risk-taking, such that only the riskier operations need be divested.
This was enough to give the banks a boost.
Commodities were strong on Friday despite little change in the US dollar index. Copper rallied 2% and oil shot up 3% to US$78.86/bbl as the first tropical storm of the season begins to brew in the Caribbean. Gold rallied US$12.30 to US$1255.70/oz to be just shy of its record high as investors set themselves ahead of the G20 meeting of world leaders held over the weekend.
Gold's move reflected expectation the G20 would back the use of further fiscal stimulus to reignite a flagging global economy now that most earlier stimulus packages have expired. However, the G20 went the other way, ignoring US support for stimulus and instead supporting German efforts to step up austerity measures to reduce sovereign debt. In Europe's case this means further budget cuts and higher taxes.
Gold may thus respond negatively to the news in Asian trade today. The SPI Overnight fell 3 points on Friday night.
Dominating the Australian press this morning is news the new prime minister is likely not only to make concessions on the proposed mining tax, but perhaps even delay a decision until after the election. This should give the resources sector a bit of a boost.
Thereafter, it's a big week ahead for economic data, highlighted by the world manufacturing indices on Thursday and the US unemployment numbers on Friday.
Japan releases its PMI on Wednesday but all of Australia, China, the UK, eurozone and the US follow suit on Thursday. Despite signs of weakness elsewhere in the global economy, manufacturing numbers have been holding up pretty well. But with China now forcing a slowdown, and Europe forced to slow down, this month's data may tell a different story.
Ahead of US payrolls on Friday we will learn May personal income and spending data tonight along with the Chicago national activity index. Housing will be back in the frame this week beginning with the Case-Shiller house price index on Tuesday, which is joined by the Conference Board consumer confidence measure. Wednesday its the ADP private sector unemployment reading, and then Thursday brings pending home sales, vehicle sales and construction spending along with the PMI.
In Australia, the action begins on Wednesday with private sector credit and new home sales, followed by the PMI on Thursday along with building approvals and retail sales.
Elsewhere, the eurozone releases a batch of confidence indicators this week, along with inflation data, while the UK will make its final revision to first quarter GDP.
It's a quiet week on the local stock front with only a handful of smaller company AGMs scheduled.
For further global economic release dates and local company events please refer to the FNArena Calendar.
