The Monday Report

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By Greg Peel

China's CPI inflation reading came in on Friday at 6.1% for September, down from 6.3% in August and 6.5% in July. While food prices remain stubbornly high, markets are pleased to note the declining overall trend and the result was in line with expectations.

The conclusion is that monetary policy tightening from Beijing over the course of the year is working, albeit the European situation is now putting China's export market under pressure. That pressure has led other emerging markets such as Brazil to loosen policy but expectations are Beijing will now simply remain on hold for the time being. There is little argument to tighten further.

No tightening in China is good news for markets still nervous about the outlook for developed market economies, but last week's rally is indicative of building optimism that by the end of this week we will have a grand solution for Europe. Resistance is never far away nevertheless, and already Deutsche Bank has voiced its concerns over recapitalisation the bank does not want nor need, according to management. Deutsche does not wish to take a full 50% haircut on its Greek debt and does not believe such a plan is a silver bullet. Speaking on CNBC on Friday night, Deutsche's CEO suggested that until the problems of the larger economies of Spain and Italy are “ring-fenced” then the crisis will not yet be over.

As to how that would be achieved, Josef Ackerman made no explicit suggestions.

There remains a school of opinion that believes the world has suddenly become way too optimistic these past two weeks and that problems will continue for Europe into 2012 even if the banks are recapitalised and an orderly default is organised for Greece. Clearly the sharp bounce off the bottom began with short-covering but short stock positions on Wall Street have now reached a new high at over 4% of capital on the back of this rally – a rally which has occurred mostly on minimal volume. Either the shorts will be right, and the market will see a pullback from here, or those short positions will again have to be covered.

The Dow shot up once again from the opening bell on Friday, buoyed by a combination of the surprisingly good Google result posted last on Thursday and a solid result for September retail sales. Google shares finished up 6% on the session and encouraged buying in other tech stocks to drive the Nasdaq up 1.8%. US retail sales jumped 1.1% in September to mark the biggest rise in seven months and doubled economist expectations.

Recent data have suggested the US economy is not looking at recession again at all, and Google's result now has Wall Street a little more optimistic for a generally positive results season. This is coming on top of the potential Final Solution for Europe, as well as the relief of lower Chinese inflation. Late on Thursday night Standard & Poor's downgraded Spain but on Friday Wall Street just shrugged. Had this been August and not October the response would have been quite different.

The Dow finished up 166 points or 1.5% while the S&P gained 1.7% to close at 1224, finally suggesting a break-out above the limits of the August-September trading range.

Oil stocks were prevalent amongst the leaders on Friday as oil prices surged on the Chinese inflation and US retail sales news. Brent rose US$3.57 to US$114.68/bbl and West Texas jumped US$3.05 to US$87.28/bbl.

Base metals also took heart in London, and copper led the way with a 3% gain. Commodity prices were assisted by the ongoing slide in the US dollar. The index fell 0.4% to 76.61 despite the euro being slightly weaker on the Spanish downgrade news, while the Aussie can't believe what it was doing below parity last month and was up over a cent again to US$1.0332.

Gold continued its range-trading in rising US$12.50 to US$1679.80/oz while the US ten-year bond yield added another 6bps to 2.23%.

The SPI Overnight was up 46 points or 1.1%.

Perhaps the most notable price move on Friday was the fall in the VIX volatility index to 28, which marked the first fall below 30 since early August and a big drop from the recent peak of 48. If we consider that numbers above 30 indicate fear, numbers above 40 indicate sheer panic, and numbers below 20 indicate complacency then we are now back in the middle ground of cautious comfort. Short sellers will take heart if the VIX continues to fall further, suggesting protection against any further falls is being unwound.

One assumes that as we move into this week it will be one of waiting and listening out for any indicative tidbits of information ahead of the EU summit in the coming weekend. The G20 finance ministers met in Paris over the weekend and decided to ask the IMF to play a bigger role in the upcoming Grand Plan. The IMF has already provided around a third of the bail-out funds for Greece, Portugal and Ireland but the G20 is still looking with trepidation at the much larger economies of Spain and Italy. Hence the ministers would like the IMF to play an expanded role, which would no doubt imply more funding.

The suggestion puts US “finance minister” Timothy Geithner in a difficult position because while he can only agree that Europe's problems must be sorted once and for all he is also cognisant that the US is the biggest contributor to the IMF, and thus any increased contribution from members would impact most on a totally cash-strapped America. Geithner's response was that with US$390bn still in the can, the IMF should be big enough already. He insisted that Europe must do its bit first, with which the other ministers agreed.

Which again brings us to the coming weekend. The EU finance ministers will meet on Friday ahead of the EU leaders summit on Sunday, and then we have to wait until November 3 for the meeting of G20 leaders.

Ahead of these highly anticipated meetings, it will be a very big week for the US economy in terms of both data and corporate earnings.

US earnings highlights this week will include Apple, Yahoo, Freeport-McMoran, Goldman Sachs and Morgan Stanley, and Dow components Bank of America, Coca-Cola, Intel, Johnson & Johnson, American Express, Travelers, United Technologies, AT&T, Microsoft, General Electric, McDonalds and Verizon.

On the US economic front, tonight sees industrial production and the Empire State manufacturing index, and Tuesday the housing sentiment index and the PPI. Wednesday it's the CPI, housing starts, and the Fed's Beige Book, and Thursday sees the leading economic index, existing home sales and the Philadelphia manufacturing index.

It's a little quieter economically in Australia, with vehicle sales kicking off the week today. The RBA will release the minutes of its October meeting on Thursday and economists will scour the detail, but last week's strong employment number now seems to have most commentators back in the “no change” school for Cup Day.

We'll see Westpac's measure of inflation expectations on Wednesday, NAB's summarised business confidence report for the September quarter on Thursday, and import/export prices on Friday.

China will report its September quarter GDP on Tuesday and expectations are for growth of 9.3%, down from 9.5% in June. Monthly industrial production and retail sales data will also be released.

On the local stock front, BHP Billiton ((BHP)) and OZ Minerals ((OZL)) will report September quarter production on Wednesday, Newcrest ((NCM)) and Santos ((STO)) will follow suit on Thursday and Woodside ((WPL)) on Friday. Wesfarmers ((WES)) will report quarterly retail sales on Thursday and Ten Network ((TEN)) will release its full-year result on Friday.

The AGM season really begins to hot up next week with too many meetings to highlight.

Rudi will appear on Sky Business on Thursday at noon and I'll be on at 2pm on Friday. 

Vive la France.

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

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