The Monday Report

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED. For more info SHARE ANALYSIS: ERA

By Greg Peel

The world was watching on Friday to see just how Wall Street might react to the June jobs numbers in the US. Would good be good or bad, and vice versa? As it was, there was a little bit of everything.

Wall Street had opened higher ahead of the non-farm payrolls release, catching up after the holiday to Thursday’s positive global reaction to talk from both the ECB and Bank of England that more QE, or equivalent, is on the cards. It was then revealed 195,000 new jobs were added in June, well exceeding a consensus forecast of 165,000. The unemployment rate was expected to fall to 7.5% from 7.6% in May, but remained steady, albeit due to increased participation from job seekers, which is a positive.

The number of jobs added in May was also revised up to 195,000 from an original 175,000.

On the release of the data, US bond prices crashed. The 21 basis point rise in the ten-year yield to 2.71% was the biggest single-day move since 2010. It is clear the US bond market is now moving to price in a commencement to Fed tapering as early as September, or at the very least no one wants to be caught if that’s the case. Consensus has the Fed stepping down to US$65bn per month in bond purchases from the current US$85bn.

US stock prices also dropped sharply on the jobs release, by about 100 Dow points, wiping out the opening gains. The indices then chopped around the flatline for an hour and a half before beginning to recover. By session-end, the Dow was up 147 points, or 1.0%, the S&P was up 1.0% to 1631, and the Nasdaq was also 1.0% higher. Technical analysts had earlier declared a close above 1626 in the broad market would be a bullish signal. Wall Street appears to have decided a stronger economy wins out over lower QE.

The US dollar followed a more straightforward path, jumping up on the jobs numbers and staying up. The dollar index is up is up 0.9% to 84.45. It was thus goodnight for gold again, with the metal falling US$25.30 to US$1223.00/oz.

Price movements in all markets are somewhat clouded by the fact most US participants will have chosen to turn the Thursday holiday into a long weekend. Volatility reigned in thin trading, including on the LME where in the absence of US influence base metals prices tanked on the stronger dollar. Zinc fell 1%, aluminium, copper and lead fell 2%, nickel fell 4% and tin fell 5%.

It may have been the same story for oil but for Egypt. After the brief easing of tensions on the ousting of Morsi, Egypt has since descended into deadly street-fighting between opposing political camps and attacks in the Sinai region have forced authorities to declare a state of emergency in the Suez. The bulk of Brent crude global exports pass through the Egyptian-managed Suez Canal. Brent jumped US$2.49 to US$107.72/bbl on Friday and West Texas rose US$2.39 to US$103.63/bbl.

Spot iron ore rose by US60c to US$122.60/t.

The strength of the US dollar was too much for the Aussie, which fell 0.8% to US$0.9067. The Australian stock market enjoyed a two-day respite from US selling at the end of last week with the holiday break a likely influence. Indeed, despite all the volatility the ASX 200 closed higher for the week. The question now is whether US investors, if there are any left, will return guns a-blazing today or tomorrow on the lower Aussie.

The SPI Overnight clearly had one eye on the currency and metal prices as well as Wall Street in falling 13 points or 0.3%. As to whether this implies a weak start today is not a given. In last week’s volatility, overnight futures movements proved of little indicative value.

On Wednesday night the minutes of the last Fed meeting will be released and Ben Bernanke will also be making a speech. Wall Street will pore over the minutes for any further hints on taper-timing, but we recall that the timetable suggested at the last meeting did not appear in the FOMC statement, which was little changed from previous, but in a prepared statement from the chairman at the subsequent press conference. Further clarity was added by Bernanke in the Q&A session.

Irrespective of the minutes, if we can now assume an easing back in QE is likely to happen sooner rather than later, attention can now turn to the real world of actual US corporate performance. On Monday night after the closing bell, Alcoa (Dow) will report its June quarter earnings and signal the start of the earnings season. JP Morgan (Dow) and Wells Fargo will report later in the week, and thereafter the floodgates will open for a season that will run over a month and straight into the Australian full-year (for most) earnings season in August.

It will otherwise be a relatively quiet week this week for US data. The minutes are a highlight on Wednesday along with wholesale trade, with chain store sales and the Treasury budget on Thursday and the PPI and fortnightly consumer sentiment on Friday.

China will report its inflation numbers on Tuesday and June trade balance on Wednesday. Japans’ trade balance is due today and CPI tomorrow, ahead of a Bank of Japan policy meeting on Wednesday. German trade and industrial production numbers are out tonight.

The week kicks off in Australia with today’s ANZ job ads series, followed by NAB’s business conditions and confidence survey on Tuesday and Westpac’s consumer confidence survey on Wednesday. On Thursday it’s the local jobs numbers, with economists still wondering just when the anecdotal evidence of steady job losses will show up in the data. Housing finance and investment lending numbers are due on Friday.

Energy Resources of Australia ((ERA)) will release its June quarter production report on Wednesday, signalling the beginning of the resource sector quarterly reporting season ahead of the earnings result season in August.

Rudi will appear on Sky Business today at 11.15am, Wednesday at 5.30pm and Thursday at noon.

The first Ashes test begins on Wednesday night. After Saturday night’s debacle I might just hide under the bed for the duration.

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

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