The Monday Report

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By Greg Peel

Friday night's trade across the waters is best described as a mixed bag. European stock indices all rose around 0.6% having been afforded only a brief window of response on the Thursday night following the announcement of the new package of measures to deal with Greek and general eurozone sovereign debt. Wall Street had already posted its strong response, so on Friday it was back to domestic issues.

Aside from the resolution in Europe, Wall Street had also made some solid gains previously based on the latest news that a resolution of the US debt ceiling problem might be at hand. But just when it seems we might be close, suddenly we once again seem very far away. Indeed, on Friday the Republican leader among the Gang of Six bipartisan senators suggested that an agreement was no closer now than it ever was.

With the clock ticking, and the August 2 deadline looming, the world is starting to think the unthinkable – that maybe these pigheaded fools (on both sides) actually won't be able to reach an agreement and for the first time in history, America will default. Indeed, there are murmurs amongst the even more pigheaded Republicans outside the discussion group that maybe a default might be beneficial. That's to the GOP of course, not to the country. And even if the Gang of Six did manage to find common ground, any subsequent bill still has to make it through the House where Tea Party members lie in wait.

Perhaps the most likely outcome, at this stage, is an interim and partial raising of the ceiling so that the debate may go on but the bills are paid, as has been suggested. No doubt the Republicans would like to string out the debate through to November 2012. Either way, Wall Street is being hampered in its appreciation or otherwise of the June quarter results season while the Sword of Damocles hangs on its gossamer thread.

Friday was nevertheless a tale of two contrasting results, being those of Caterpillar (Dow) and Advanced Micro Devices. Citing a drop-off in sales of heavy equipment to China, Cat missed with its result, while chip maker AMD beat in a big way. The subsequent 6% drop in Cat shares was worth 50 Dow points, leading the industrial average down 43 points or 0.3% in the session. AMD's result, however, spurred the Nasdaq on to a 0.9% gain. The S&P 500 split the difference, rising 0.1% to 1345.

It is worth noting, nevertheless, that up to Friday Caterpillar had been the Dow's best performer over twelve months, driven mostly by sales to China, while just before the result season began the chip makers came in for a battering.

The yo-yo of debt ceiling news has been having a clear impact on the direction of gold each session lately, and Friday was another up-day with gold finishing US$9.20 higher at US$1600.30/oz. Having had a good couple of sessions, the euro found some sellers on Friday allowing the US dollar index to rise 0.3% to 74.25. The Aussie was relatively steady at US$1.0852.

Base metals were mostly higher in London, with aluminium the star. Falling inventories have been putting arguably the market's least favourite metal in the spotlight recently, and on Friday aluminium gained another 2%.

The oil market is becoming increasingly more territorial. It is well known that North Sea supplies of Brent are dwindling and, as per usual, Nigerian supplies, which are the clear substitute for Brent, are being disrupted. On Friday it was also noted Norway is a major North Sea player, with traders not discounting more than just a one-off tragedy in Oslo. Brent crude rose another US$1.16 to US$118.67/bbl.

West Texas crude is abundant, albeit weekly inventories continue to fall short of market expectations. WTI was up US68c to US$99.81/bbl.

The SPI Overnight was up 3 points.

The debt ceiling debate will inevitably dominate this week's trade, while US corporate results roll on. The US Treasury's auctions of US$99bn of two, five and seven-year notes on Tuesday to Thursday might be interesting if buyers are unsure whether or not the interest will be paid.

On the economic data front, tonight sees the Chicago national activity index and Tuesday brings the Richmond Fed manufacturing index, along with new home sales. Wednesday it's durable goods orders and the Fed Beige Book and Thursday it's pending home sales.

Friday will be important this week, given the release of the first estimate of US June quarter GDP. At 1.7%, the consensus forecast is down from March's 1.9% but has also been pulled back a long way from earlier assumptions in the 2-3% range. Friday also sees the Chicago PMI along with fortnightly consumer sentiment.

The number to keep in mind in Australia this week is 0.7%, being the expected increase in June quarter CPI (quarter on quarter) which would take the annualised CPI to 3.4% – up from March's 3.3%. Economists also expect the trimmed mean – one of the RBA's core CPI measures – to rise 0.7%. The RBA has signalled that the CPI result will determine monetary policy from here, implying that an upside surprise could trigger a rate hike. Both Westpac's economists, and the futures market, are at odds with the RBA, expecting the next move in rates to be down. Were the CPI to come in much lower than expected, perhaps this view will be granted more currency.

The CPI is out on Wednesday, with the PPI out today. One assumes little can be determined from this quarter's PPI result given few Australian sectors are in a position to pass on price rises at present. RBA chairman Glenn Stevens will make a speech in Sydney tomorrow but it won't be of much consequence ahead of the CPI result.

The Conference Board provides its leading economic index on Tuesday before Friday brings private sector credit and the RP Data-Rismark monthly house price index.

The UK will also make its first estimate of June quarter GDP this week, on the Tuesday, while Friday will be a big day in Japan where inflation, industrial production, manufacturing and unemployment data are all released.

On the local stock front, this week brings the last of the resource sector quarterly production reports as we now transition into full-year earnings mode. This week sees the first trickle but it is the last two weeks of August in which all hell breaks loose.

Production reports this week will come from Oil Search ((OSH)) tomorrow, Macarthur Coal ((MCC)), Whitehaven Coal ((WHC)), Aston Resources ((AZT)) and ROC Oil ((ROC)) on Wednesday, Beach Energy ((BPT)) on Thursday and AWE ((AWE)), Murchison Metals ((MMX)) and Minara Resources ((MRE)) on Friday.

Full-year results will be posted by Alesco ((ALS)) on Tuesday and GUD Holdings ((GUD)) on Thursday while interim results will come from Australand ((ALZ)) on Wednesday, OceanaGold ((OGC)) on Thursday and Coal & Allied ((CNA)), ERA ((ERA)) and Austar ((AUN)) on Friday.

On Thursday, Macquarie Group ((MQG)) will hold its always significant AGM and on Friday Coles ((WES)) will report June quarter sales.

In a big week for FNArena media appearances, Rudi will be on Sky Business on Thursday at noon, Rudi and I will present the second outing of our new blockbuster program Market Insight on www.brr.com.au on Thursday at 4pm, and I will appear on Sky Business on Friday at 2pm.

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

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