The Monday Report

This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL

By Greg Peel

The good news is that Prime Minister Papandreou was able the form a new cabinet on Friday after a significant reshuffle, which follows the defection to the opposition of several ministers. Papandreou appointed a long time rival and reputed head-kicker as finance minister and his job began with a rush this week as he flew to Luxembourg to join his eurozone peers at the scheduled meeting with the intent of securing the E12bn tranche of existing bail-out funds needed to prevent Greek default in the short term.

The bad news is that Papandreou still needs to secure parliamentary approval for the new round of austerity measures which are a requirement of the release of the bail-out tranche, and tomorrow night he will call for a confidence vote on his leadership. A “no” vote would make global financial markets very nervous if it implied a preference for default among members of parliament.

The good news is that after a meeting on Friday between the French president and the German chancellor, Germany has relented over its insistence that the private sector should share in the Greek bail-out cost through sovereign debt restructuring rather than German taxpayers being again hit with the bill. Merkel has agreed that work-out deals should be encouraged between bond holders and the Greek government, as they were in the nineties with regard to a wobbling Eastern Europe, but that such deals should be voluntary. This back-down opens the way for the next round of bail-out funds to be approved for Greece to get it through 2012. The expectation had been that the first bail-out fund would be enough to see Greece through 2011 after which it would be able to access the bond markets once more in 2012, but this expectation has proven to be overly ambitious.

The bad news is that the meeting in Luxembourg has just wrapped up with an announcement that a decision will not be made until tonight, when the UK and the other nine non-eurozone EU states join the discussion. While this move is likely necessary in order to bed down the 2012 bail-out, it also holds up a decision on the immediate bail-out tranche release which, one presumes, could be handed over whether or not the Greek parliament had reached a consensus if it were feared a default may occur.

Either way, a postponement implies a lack of agreement, a lack of agreement implies uncertainty, and uncertainty is the enemy of global financial markets. On Friday night the Dow closed up 42 points or 0.4% and the S&P 500 added 0.3% to 1271 as confidence built that positive news would be coming out of Europe as we speak. The Greek cabinet reshuffle and German back-down were clear positives, but this postponement is more likely to spook markets and spark another sell-off tonight if further uncertainty leads to panic.

On that basis Friday night's trade can be taken with somewhat of a grain of salt. The Dow managed to close just above 12,000 but “quadruple witching” – the expiry of stock and stock index options and stock index futures and options – clouded the issue and made for some choppy trading. Volume was not as heavy as quadruple witching would normally suggest, implying an ongoing lack of commitment at this critical time. 

Adding to the mix were conflicting US economic data. The fortnightly Michigan Uni consumer sentiment index fell to 71.8 from 74.3 when economists had expected 74.0. Lower gasoline prices provided economists with sufficient reason to think sentiment would have remained a little more resilient. But the Conference Board leading economic index for May came in at a surprisingly strong plus 0.8%. Economists had expected only plus 0.5% following the minus 0.4% result in a Japan-affected April.

The euro was stronger on Friday on what was then good news, and the US dollar index fell 0.5% to 75.03. Gold responded with a US$10.40/oz increase to US$1539.60/oz and silver rose 0.8%, but real commodities belied the dollar and continued to play the global economic slowdown theme. Base metals were all somewhat weaker as was oil, with Brent crude down US81c to US$113.21/bbl and West Texas down US$2.04 to US$92.91/bbl.

The Aussie still managed to rise 0.4% to US$1.0619 and the SPI Overnight added 3 points.

Wall Street managed to avoid a seventh week of decline by a slim margin on Friday – an event which has not occurred since the tech wreck of 2001. But we start again this week.

The US economic week begins on Tuesday with existing home sales, followed by the FHFA housing market sentiment index on Wednesday. Wednesday also sees a Fed monetary policy statement and press conference, albeit Bernanke's speech last week would have no doubt already summed up the central bank's current thinking.

Thursday brings new home sales and the Chicago Fed national activity index, while Friday wraps up with durable goods and the final revision of the March quarter GDP. Economists are expecting the final result to be 1.9% growth, up from the 1.8% result marked at the first estimate and first revision.

While the world is distracted by Greece, there is some concern Europe's economic recovery is also beginning to slow. The ECB has hinted at a rate rise in July but one presumes the Greek outcome will play some part in the decision. In the meantime the eurozone ZEW survey on Tuesday and the German IFO survey on Friday will provide some indication of what's going on in stronger parts of the economy.

Australia's week begins tomorrow with the release of the minutes of the RBA's June meeting. Glenn Stevens also spoke last week, so again there may be few surprises contained within. Tomorrow also sees the ABARE commodities report for the June quarter.

On Wednesday it's the Westpac leading economic index, held off from last week, and on Thursday the Conference Board's equivalent.

On the local stock front, Incitec Pivot ((IPL)) is holding an investor day today and Elders ((ELD)) will make a trading statement tomorrow.

It will be a nervous couple of days, one presumes.

Rudi will be appearing on Sky Business at noon on Thursday before flying to Hobart for a two-day series of presentations. On Friday, Rudi twittered investor sentiment readings in the US, as measured by AAII, appear to have sunk to new lows in the week to June 9. Historically this has proved to be a good contrarian indicator, meaning we may have seen the lows for equities, for now.

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

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