The Monday Report

This story features RIO TINTO LIMITED. For more info SHARE ANALYSIS: RIO

By Greg Peel

China's June quarter GDP growth fell to 7.6% year-on-year from 8.1% in March, in line with expectations. Retail sales for the month of June grew 13.7% (yoy), down from 13.8%, and industrial production grew 9.5% (yoy), down from 9.6%. Both numbers were close enough to expectations.

Chinese growth has now fallen to its lowest level since the GFC nadir, but in line with Beijing's earlier policy tightening measures and in line with China's biggest export customer – Europe – sliding into recession. Beijing had declared a target rate of 7.5% growth at the start of 2012, but is now quickly spun into easing mode with two recent rate cuts. More policy easing measures are expected to follow to prevent the Chinese economy slowing below target and economists continue to expect a rebound in the second half as easing to date, and easing to come, have their impact.

Data that meets with expectation is always welcome news, and news that China is not slowing faster than feared is good news globally. Of course there are always questions surrounding Beijing's rapidly produced figures but there's not a lot we can do about it. The Australian market was happy with the result on Friday, and Wall Street took the baton on Friday night. However for Wall Street the session was all about America's biggest bank.

JP Morgan (Dow) shares have taken a hammering these past couple of weeks on news of a major trading loss which built up unnoticed by senior management. Management calls the trade a “hedge” position, which is rubbish; it was a trading position that went wrong and was doubled up to prove ultimately even more wrong. A true hedge position may stop you making money, but by definition would not lose you money net of that which it is hedging.

JP Morgan reported a US$5bn profit for the June quarter, down 8.7% from March but well above analyst expectations. The US$4.4bn trading loss within that result was smaller than feared, with losses from the rogue “hedge” trade now totalling US$5.8bn instead of the US$7bn figured previously suggested. The bottom line is the news was good as far as Wall Street was concerned – very good.

JP Morgan led the financials up and the financials led the market up to see the Dow up 200 points on the open. Traders should have chosen to hit the beach at that point, because nothing much changed for the rest of the day. The Dow closed up 203 points or 1.6% while the S&P gained 1.7% to 1356 and the Nasdaq added 1.5%.

Friday's moves on Wall Street corrected all of the down-moves of last week – a week that saw a good deal of disappointment from early-season earnings results. History would suggests the first week's results are no particular lead indicator, but forecasts have been substantially downgraded and still the misses added up as the results rolled in from last Monday. Banks are a direct indicator of an economy's performance, and on that basis JP Morgan has reestablished hope on Wall Street. However JPM's situation involves the very individual matter of one particular trading loss, so we'll need to see some results from peers before getting too excited. Wells Fargo also reported on Friday and also posted a more general “beat”, while Citigroup reports tonight and Bank of America (Dow) and Goldman Sachs follow shortly after.

All last week the US dollar index ticked higher in its safe haven role as earnings and data underwhelmed. On Friday it dropped 0.3% to 83.29 and allowed everything else to reverse as well. Most notably, the Aussie completely recovered the cent it lost post the local jobs numbers and it is now back at US$1.0239.

Commodities all bounced back on the dollar weakness, which saw base metals all up 1-2%, Brent up US$1.33 to US$102.40/bbl and West Texas up US$1.02 to US$87.10/oz. Gold was also stronger, jumping US$17.20 to US$1589.40/oz.

The SPI Overnight rose 33 points or 0.8%.

We can call the US earnings season square on the first week, at least in terms of index response. Things begin to hot us this week, however. Amongst the hundreds of reports, we'll see results from Dow components American Express, Bank of America, Intel, IBM, Microsoft, Travelers, Verizon and General Electric, and also results from Goldman Sachs, eBay and Yahoo, to name but a few.

It will also be a very big week for US economic data. Tonight we begin with retail sales, business inventories and the Empire State manufacturing index, and on Tuesday its CPI, industrial production and housing sentiment. Wednesday brings housing starts along with the Fed Beige Book of anecdotal economic performance, and on Thursday we'll wrap with the Conference Board leading index, existing home sales and the Philadelphia Fed manufacturing index.

In Europe tonight we'll see the eurozone's monthly trade balance, on Tuesday the ZEW survey of investor confidence, and on Wednesday construction output. Chinese property data is due on Wednesday.

It's a quieter economic week in Australia, beginning tomorrow with the release of the minutes of the last RBA meeting. The market was not surprised the central bank remained on hold this month but debate continues as to whether or not another cut can be expected shortly. We'll also see vehicle sales tomorrow, and on Wednesday it's Westpac's leading economic index. On Thursday NAB will summarise its business confidence surveys for the June quarter.

Data might be thin this week in Australia, but its a big week for resource sector June quarter production reports. Tomorrow we'll hear from Rio Tinto ((RIO)) and Fortescue Metals ((FMG)), on Wednesday it's BHP Billiton ((BHP)), and on Thursday it's Woodside Petroleum ((WPL)), Santos ((STO)) and PanAust ((PNA)).

Pharmaxis ((PXS)) will provide something for the biotech followers when it reports full-year results on Wednesday.

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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