Daily Market Reports | Nov 22 2010
By Greg Peel
There are three concerns affecting the mood across global stock financial markets at present. One is the parlous state of Ireland's banking system and government debt, another is the fear China will tighten monetary policy and slow the world's boom economy, and the other regards an increasingly heated debate over whether QE2 is constructive, destructive, or simply a waste of money.
As I have alluded to often enough in Overnight reports and elsewhere, concern over China to me seems misplaced. Beijing indicated at the beginning of 2010 that 12% GDP growth was too strong and threatened a bust to follow the boom particularly as real estate prices ran out of control. A more stable growth rate of 8% was targeted, and all through 2010 Beijing has been quietly tightening monetary policy by various means in order to gradually lower GDP growth towards the target figure. The September quarter GDP came in at 9.6% and economists are forecasting 8.7% for the December quarter.
In other words, things are playing out just as Beijing has intended. There are no surprises here. During the depths of the European crisis earlier in the year, Beijing sat tight. Fears that Beijing would continue to slow its economy just as Europe's economy was crumbling were also misplaced. And better a long period of stable growth in China than a volatile boom-bust cycle as far as all the world is concerned.
The major European economies have actually been performing much better than expected, despite a contradictorily strong euro which has been simply an offset to an artificially weaker US dollar. The PIIGS have nevertheless continued to hang by gossamer threads, as evidenced by Ireland's now rapid descent. Earlier this year, after much political brouhaha, an EU-IMF emergency fund was put in place for exactly this purpose.
And so it is that the Irish finance minister has now informed the world that his government would indeed be seeking “assistance” (don't call it a “bail out”, that's bad spin) from the emergency fund to at least shore up the tiltering banks, which have suffered from the burst bubble of Irish real estate, and perhaps to help reduce the budget deficit as well. Numbers between US$60-120bn have been touted but the figure is yet to be settled. The point, however, is the world has been assuming at least one European implosion all year, and here it is – covered.
As for QE2, well that's the stuff of more lengthy stories.
Late last week Beijing moved to yet again increase the reserve ratio for banks – the second such move in as many weeks – in order to further stem the flow of funds into the economy and particularly into real estate speculation. The move provided relief on Wall Street where a second 2010 interest rate hike had been feared. Why Wall Street fears such a hike, which is looking increasingly inevitable sooner rather than later, is unclear. It is also likely Beijing will move to incrementally revalue its currency off the back of rate rises, perhaps before the year is out, which should appease the Americans.
All of the above was in focus on Friday night on Wall Street when the stock markets opened weaker from the bell but recovered during the session to a relatively flat close. The Dow closed up 22 points or 0.2% while the S&P added 0.3% to 1199.
The US dollar slipped back slightly to 78.40 and the Aussie ticked up to US$0.9861. Gold held steady at US$1353.50/oz and commodities were marginally weaker. The US ten-year bond rate was steady at 2.87%.
The SPI Overnight rose one point.
US bonds will be very much in focus this week as the Treasury auctions US$99bn of two, five and seven-year notes into a market that no longer appears to fear the Fed. The Fed began buying bonds for QE2 in the open market last week, and the pattern was that the market stood aside, allowed the Fed to get the day's worst rate (highest price), and then promptly sold again to push yields higher. This is a new game, so it will be interesting to see how the rest of the world reacts to this week's auctions.
Thursday in the US is Thanksgiving for which the country shuts down and the Friday is an early close on the markets for what is an otherwise nothing day given 99% of Wall Street will take a four-day weekend. Friday is, however, known as “Black Friday” as it is the first day in the year in which retailers who have been stocking up all year for Christmas actually see their books return to the black as the shoppers hit the stores in earnest. At least they hope they hit the black.
The abbreviated week means a lot of economic releases have been squashed into three days.
Tonight sees the Chicago national activity index, and then Tuesday will bring existing home sales, the Richmond Fed manufacturing index, and the final revision of US third quarter GDP – the one which includes data from all of July, August and September. The previous revision came in at 2.0% growth and economists are expecting at least 2.2% to be reached in the final spin of the wheel.
Then on Wednesday it's all of personal income and expenditure, durable goods orders, the FHFA house price index, and the final UMich consumer sentiment survey for November. And the Fed will release the minutes of the meeting which finally brought us QE2.
Elsewhere, the UK will also make a revision to GDP on Wednesday and on the same day the increasingly important German IFO business sentiment survey will be released.
In Australia it's a relatively quiet week for data, with third quarter construction work done and the CBA-HIA housing affordability gauge due out on Wednesday. Thursday is third quarter private sector capex, which is one of the most important data points followed by the RBA in its monetary policy decisions.
It's the busiest week in the year for AGMs this week, although only a handful of larger-cap companies feature. The highlight on the local market will occur today with the listing of QR National ((QRN)), which is set to list at $2.55 at the very bottom end of the original $2.50-3.00 range. Even at that level, analysts suggest the issue is probably overpriced, so will QR National be another Myer?
Two points to note are that QRN is the biggest listing since Telstra so index funds will need to carry stock regardless (although the stock is not immediately included in indices), and that the Queensland government is retaining a large minority holding and intends to play market-maker to ensure it doesn't lose the next election based simply on a weak QRN share price. There may be a limit to the downside.
FNArena editor Rudi Filapek-Vandyck will be appearing on Lunch Money on the Sky Business channel on Wednesday at noon.
For further global economic release dates and local company events please refer to the FNArena Calendar.
