The Monday Report

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By Greg Peel

With no economic data releases to ponder on Friday, Wall Street’s attention turned solely to quarterly earnings results. It was a mixed bag, with tech stocks in particular taking somewhat of a hammering after failing to meet already lowered expectations.

Having reported after the close on Thursday, Google and chipmaker Advanced Microsystems posted earnings misses that saw their shares down 1.6% and 13% respectively. Microsoft (Dow) took a US$900m write-down on its unsuccessful tablet computer, and its shares dropped 11%. The bad news proved contagious for other tech stock majors, which also dropped in the session, leading the Nasdaq to a 0.7% fall.

General Electric (Dow) on the other hand posted a strong result that saw its shares up 4.6%. This allowed the Dow to close relatively flat, down 4 points, while the S&P managed a 0.2% gain to 1692.

The results will continue to flow next week in a season so far considered “okay”, but only with a backdrop of weak expectations. With the Fed now making it as clear as it possibly can that a QE tapering timetable will be completely dependent on the data, the focus this week will also be on data due for housing, manufacturing and durable goods in particular.

The US dollar index fell back 0.2% on Friday to 82.65 and gold jumped US$12.60 to US$1296.30/oz, looking increasingly like it wants to break back over 1300. The Aussie pushed 0.3% higher to US$0.9193, buoyed by news from China.

The world has been desperate for Beijing to ease monetary policy in the face of a slowing economy which to a great extent is being brought about by a stubborn reform agenda being adhered to by the government. On Friday the PBoC announced there would no longer be a minimum floor placed under bank lending rates, allowing banks to compete for loans and providing a potential boost for the economy.

This particular move also forms part of the reform package. The PBoC has previously controlled interest rates not by setting a target cash rate and allowing banks to make their own competitive loan/deposit rate decisions around it, a la the West, but by applying a range to rates at which banks can lend and another range for which they can attract deposits. By sticking to these ranges Beijing has underpinned the power of the big state-owned banks, but at the same time encouraged the growth of China’s shadow banking system.

Beijing is intent on smashing shadow banking, but at the same time is wary that if done so too hastily the Chinese economy could very well fall in a hole. The removal of the lending rate floor was welcomed by global markets, but at the same time there was disappointment a similar move was not made for deposits, on the topside, allowing banks to compete for funds and undermining the wealth management industry, which has built up on the shadow banking system. Beijing indicated such a move was indeed on the agenda, but will prove one of the most difficult elements to implement. The slow removal of rate-ranges is all part of Beijing’s reform agenda, which includes shifting money controls towards the market-based systems of the West.

One might have expected a positive response from the LME on the Chinese news but as the metals trade winds down for the northern summer, volumes have begun to wane. The weaker US dollar allowed aluminium and nickel to rise 1% but the other metals were little moved.

Spot iron ore finally had a down-day on Friday after the strong rally, falling US20c to US$131.70/t.

The oil markets did pay some attention to the news from China, but continued to focus on developments in volatile Egypt. West Texas rose US43c to US$108.05/bbl to mark a 15% rise over four weeks. If it pushes above 110, Wall Street will begin to worry about an energy cost drag on the US economy. Brent rose US60c to US$109.36/bbl.

The SPI Overnight rose 21 points, or 0.4%.

Europe was back in the news on the weekend. With the Portuguese coalition government having recently fractured on disagreements over austerity the parties met to nut out a balance between meeting the troika’s strict requirements for its bail-out package and addressing the country’s sinking economy and 17% unemployment rate. Unsurprisingly this proved an impossible task, forcing the president to step in a Sunday and insist the parties lock themselves in a room and not come until some agreement is reached.

The president’s move has affected a sigh of relief across global markets as is staves off the need for a national election, which may have seen Portugal shift away from austerity and risk its bail-out funds at a time it appears the country may need a second package after the first expires at the end of this year. The situation nevertheless remains volatile, just as it has in Italy and Greece. The real test will come in September when Germany goes to the polls.

On the other hand, the Japanese upper house election held on Sunday saw Shinzo Abe’s party win in a landslide that provides a majority in both Japanese houses for the first time since 2007. This will provide the government with the firepower it needs to push through further fiscal reforms, although observers are now worried the size of the mandate might mean Abe sees no need to rush through reforms and instead his nationalist, militarist agenda may enjoy greater attention.

Japanese markets in be closely watched today.

The US earnings season will step up a gear this week with highlights including Dow components AT&T, DuPont, Travelers, United Technologies, Boeing, Caterpillar, Ford and 3M along with Apple, UPS, Facebook, Visa Colgate-Palmolive, General Motors and Starbucks among many others.

On the economic front, tonight sees existing home sales and the Chicago Fed national activity index and tomorrow the FHFA house price index and the Richmond Fed manufacturing index. Wednesday it’s new home sales and a flash estimate of the July manufacturing PMI, Thursday durable goods, and Friday consumer sentiment.

The eurozone will also see a flash PMI on Wednesday, while Thursday brings the German IFO business sentiment survey and the first estimate of the UK June quarter GDP.

On Wednesday HSBC will release its flash estimate of China’s July manufacturing PMI. Beijing has now suspended the publication of its own PMI measures so for better or worse, HSBC’s figures now become the sole benchmark.

Australia’s economic week is dominated by one major release only, the June quarter CPI. The market is looking for headline growth of 0.5% for the quarter and 2.5% annual.

The resource sector production reports continue this week with BC Iron ((BCI)) today, Fortescue ((FMG)), Mirabela Nickel ((MBN)) and Oil Search ((OSH)) tomorrow, Drillsearch ((DLS)), Newcrest ((NCM)), OceanaGold ((OGC)) and OZ Minerals ((OZL)) on Thursday and PanAust ((PNA)) on Friday.

The Australian result season begins in earnest next month but there are always a few early birds. This week sees result from Australand Property ((ALZ)) on Wednesday and GUD Holdings ((GUD)) on Friday.

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

 

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

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