The Monday Report

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By Greg Peel

There was a certain predictability about Friday night's weak session on Wall Street given the various drivers of Thursday night's rally, which saw the Dow up 181 points. The Dow fell 136 points on Friday, or 1.1%, while the Nasdaq lost 1.4% and the S&P split the difference with a 1.3% drop to 1370.

One of the reasons for Thursday's strength was a sudden positive feeling about China, following the release of solid loan growth numbers. This had Wall Street pondering whether consensus forecasts for China's March GDP might be too low, and some…ahem…Chinese whispers also appeared to misconstrue the meaning a 9% (quarter on quarter seasonally adjusted) from DBS which was an apple to the consensus forecast orange. Consensus was sitting somewhere between 8.3% and 8.5% depending on which survey you cited, so the 8.1% result came as a disappointment and predictably had traders running scared once more.

Thursday session was also boosted by a successful Italian bond auction that allayed earlier fears no one would turn up. It was successful at least to the point the auction was well bid, but the settlement yield was still a lot higher than the month before. Earlier in the week the ECB had also calmed the waters by suggesting more sovereign bonds purchases could be forthcoming, but it all came to little on Friday night when the Spanish ten-year yield again rose, pushing close to the 6% mark, and thus ensuring another night of euro-fear.

Moody's is known to be currently assessing the credit ratings of many European banks so is there is also a fear downgrades are in the offing.

It was reported on Friday that the US CPI rose again in March, despite gasoline prices not changing by much. March saw a 0.3% increase to February's 0.4% gain, and in theory Wall Street does not want inflation because it puts pressure on the Fed to start looking at rate rises. The annualised headline rate fell to 2.7% in March from 2.9% in February and the Fed's core rate rose by 0.2% as economists had forecast.

JP Morgan Chase (Dow) and Wells Fargo both released earnings reports ahead of the opening bell and both were considered positive. A return to profitability in mortgage lending was a highlight. However, the whole financial sector was trampled on given the pervasive mood of the evening. And Google shares dropped 4% despite the company having posted a reasonable result, largely due to announcement of a new share issue.

So all up, Friday reversed most of Thursday and Wall Street closed its worst week of the year to date. Healthy correction or a renewal of reasons to be scared? We can only wait and see, while in the meantime taking note of a whole month of US earnings reports.

Everything that went up on Thursday went down on Friday and vice versa, led by a 0.7% gain in the US dollar index to 79.87. Gold fell back US$17.50 to US$1657.90/oz and the Aussie lost 0.6% to US$1.0374. Base metals were all sold down in London by around 2% thanks to the China impact. West Texas crude lost US80c to US$102.84/bbl, although Brent held up to be little changed at US$121.83/bbl. The US ten-year bond yield is again back at 2.0%.

The Australian market at least took the China factor with a grain of salt on Friday, most likely deciding 8.1% probably fits in nicely with the soft landing thesis. But the SPI Overnight fell 20 points or 0.5% on Friday night.

US earnings season gets into full swing this week with reports from more of the big banks and a number of big Dow names, including General Electric. Wall Street was hanging on to a hope last week that earnings forecasts may have been lowered too much, but either way we just can't shake off the global risk effect from other quarters.

On the economic front it's housing market week in the US this week, beginning tonight with the housing market sentiment index. Tuesday sees housing starts, Wednesday existing home sales, and Thursday the FHFA house price index. Thursday also brings the Conference Board leading economic index and Friday sees new home sales.

A G20 finance ministers and central bank chiefs meeting will begin in Washington on Friday, and before that we'll see the eurozone's trade balance and CPI, which will be important considerations for the ECB policy moves, along with the influential ZEW and IFO business surveys.

An index of Chinese property prices is due on Wednesday.

In Australia it's a quiet week economically, with vehicle sales tomorrow and Westpac's leading economic index on Wednesday. The highlight of the week will be the release tomorrow of the minutes of the RBA's April meeting. Economists will be looking for the board to expand on what appeared to be a pretty clear indication from the April statement that May will see a rate cut except in the unlikely event the March quarter inflation numbers show a sudden jump. Last week's surprise jobs number was more a reflection of volatility than of trend.

One point to make here, however, is that many were expecting the unemployment rate to rise due to a number of well publicised staff retrenchments lately, from the manufacturing sector and the banks. Remembering that the unemployment rate measures those on the dole and not those out of a job, it is reasonable to assume factory workers might go straight on the dole but it is not to assume bank staff would do the same, particularly if they were of the higher salaried variety. Those bank losses may not show up in the dole numbers for months, if ever.

Another point to note is with regards to ANZ's seven basis point rate rise announced on Friday. ANZ has decided to reset rates every month if needed and is trying to break Australia's fixation with the RBA cash rate, which does not reflect bank funding cost. If the other banks follow suit and this becomes more of the norm, then eventually the emphasis on the RBA cash rate will ease and politicians will stop playing populist bank-bashers for the sake of it. Let us never forget that lower rates reduce the income of Australia's growing cohort of self-funded retirees. It's not just about mortgages.

It's a busy week on the Australian stock front. Today sees quarterly production reports from Alacer ((AQG)), Gindalbie ((GBG)) and Paladin ((PDN)), on Tuesday it's Perseus ((PRU)) and Rio Tinto ((RIO)), and Wednesday it's BHP Billiton ((BHP)). Thursday brings Fortescue ((FMG)), Santos ((STO)) and Woodside ((WPL)).

Bank of Queensland ((BOQ)) will report its interim result on Wednesday, Commonwealth Bank ((CBA)) will hold a strategy update and Telstra ((TLS)) an investor briefing on Thursday. Woolworths ((WOW)) will release its March quarter sales figures on Friday.

Rudi will appear on Sky Business on Thursday at noon and on Switzer TV that same day between 7-8pm.

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

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