The Monday Report

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

By Greg Peel

The Dow opened above 13,000 on Friday, then fell back, then had another go and fell back, and on a third attempt managed to spend a good couple of hours above the psychological level. But it seems that up there, where the air is rarefied, there are just too many sellers. Volumes remain light on Wall Street but brokers report plenty of buying interest on the dips – a claim supported by recent index strength – yet Dow 13,000 remains unconquered after many intraday attempts over the week.

This is usually not a good sign. While often an index has to “do some work” around a significant chart point, the more often a breach fails the more likely the next move is a pullback to a lower point of consolidation before another assault is considered. The bottom line at present is that the oil price is rising as the stock market is rising, driven mostly by smouldering tensions with Iran.

US economic data remain, nevertheless, more positive than negative. On Friday the new home sales number came in at 321,000 for January which despite representing a 0.9% fall was better than the 315,000 expected. The fortnightly Michigan Uni consumer sentiment measure hit a one-year high at 75.3, better than the 73.0 expected. However economists expect the next survey to show a retreat now that gasoline prices have begun to exceed the psychological US$4/gal in some parts.

As it was the Dow fell back in afternoon trade on Friday, found a bit of late buying, and then closed a mere point down. What is a bit lost in all the current Dow attention is that the “real” index – the broad market S&P 500 – has hit its highest level since June 2008. It was up 0.2% to 1365 on Friday, and the Nasdaq also gained 0.2%.

There are also developments to consider from across the pond, now that Greece has been supposedly “ring-fenced”. In December last year, the ECB conducted its first three-year Long Term Refinancing Operation and on Wednesday it will conducted another round. In December, 500 European banks lined up for a total of E489bn in cheap finance. This is the ECB's equivalent to quantitative easing, using direct loans to banks as a substitute for the lack of a euro-bond to buy with printed money, a la the Fed.

The LTRO has eased fears of a fatal credit crunch in Europe, has helped bring down the yields on troubled eurozone sovereign bonds, and despite implicit monetary inflation has served to provide strength to the euro. Meanwhile the Fed is guaranteeing cheap money out to 2014 and has not ruled out QE3, the Bank of England has recently expanded its QE program, and QE continues in Japan and elsewhere. Not in Australia of course, where our punishment for not needing further monetary stimulus is a crippling Aussie dollar level and foreign investors banging on the door desperate to lend us money at world-beating AAA yields. One wonders what will happen if the government (whichever that might be and whoever might be in charge) actually does manage to get the budget back to surplus and as a result stops issuing bonds. Grab those yields while you can.

All of this funny money across the globe is supportive of stronger stock prices. Yet aside from the oil price, nervousness remains over Europe and what may still transpire. Over the weekend, the G20 finance ministers met in Mexico City. High on the agenda was Europe, a push for even greater contributions to the EFSF, and a call from the IMF for greater international contributions for the same reason.

The upshot was that yesterday the G20 ministers formulated a proposal that would see a second global rescue fund established in the same vein as the US$1 trillion fund thrown together by the G20 in early 2009. Then it was US and other banks in the frame, this time it's European sovereigns, and this time the fund would total US$2 trillion. The money would come from combining the current EFSF (European Financial Stability Facility) with the ESM (European Stability Mechanism), previously approved to succeed the EFSF in 2013, and from additional contributions from eurozone countries. Once this fund was established then more contributions would be made globally to the IMF for its role in global rescues. Countries like Japan and China, whose contributions to the IMF to date have been comparatively small, would be hit up big time.

Germany was said to have been in tacit agreement within the meeting, but has not been quite so amenable on emergence. Germany will of course have to be the biggest European contributor by default, and another appeal to the German people to hand over more of their income to help out those poor, struggling Greeks and others will pretty much mean political suicide for Merkel.

So guess what? The games will continue.

Brent oil was up another US$1.80 to US$125.47/bbl on Friday, while West Texas rose US$1.79 to US$109.62/bbl. Base metals were also relatively strong in London, posting gains of 1-2%.

Euro strength is acting as in indirect influence on commodity prices given offset weakness in the US dollar index, which was down 0.4% to 78.33. Gold has stalled again nevertheless, falling US$7.90 to US$1772.40/oz, while the Aussie just seems to be hanging about at current levels, finishing at US$1.0701 on Friday night.

The SPI Overnight fell 7 points or 0.2%.

The Aussie's current tight range possibly reflects a reluctance to shift ahead of the next RBA meeting, which is due tomorrow week. The December quarter GDP is due out the day after, and before then we will continue to see the quarterly economic data roll in. Arguably the most important of these is Thursday's private sector capital expenditure and expenditure intentions report, from which the RBA gauges its economic growth assumptions with the dominant resources sector calling the shots. Wednesday sees December quarter construction work done, and an unofficial tidbit is added today with CBA's quarterly housing affordability gauge.

We'll also see January new homes sales, retail sales and private sector credit on Wednesday, and building approvals and the RP-Rismark house price index on Thursday.

Thursday is also global manufacturing PMI day, and Australia leads the charge ahead of China, the eurozone, UK and US.

There are some telling US economic data out this week, beginning with pending home sales tonight. Tuesday sees durable goods, the Richmond Fed manufacturing index, the Case-Shiller house price index and the monthly consumer confidence measure from the Conference Board. Wednesday it's the Chicago PMI, the Fed's Beige Book, and another revision of the December quarter GDP. That's expected to remain steady at 2.8%.

Thursday it's the aforementioned PMI, along with chain store sales, vehicle sales, personal income and spending and construction spending. If we don't know what shape the US economy is in by Friday we're not trying.

On the local stock front, this week brings a blessed end to the Australian results season. It should end with the month on Wednesday but Woolies ((WOW)) had to buck the trend and release its result on Thursday. Biggies before that include Caltex ((CTX)), James Hardie ((JHX)), Boral ((BLD)), Harvey Norman ((HVN)), QBE ((QBE)) and WorleyParsons ((WOR)).

The US quarterly result season is all but completed now as well, with 63% of results beating expectations. So it's back to watching economic data, the oil price and, though it pains me to say, Europe, for the time being.

Rudi will appear on Sky Business on Thursday at noon.
 

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

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