The Monday Report

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By Greg Peel

Day 13: The first glimmer of hope had come last Thursday night when it appeared the Republicans might be ready to agree to a debt ceiling deal. The initial plan was rejected by President Obama because it did not include a reopening of the government. Yet Wall Street remained confident on Friday night, believing a breakthrough to be close given Obama and House Speaker John Boehner had at least agreed to meet again on Saturday.

Hence after Thursday night’s big rebound, Wall Street kicked again on Friday night. The Dow rose 111 points or 0.7%, the S&P gained 0.6% to 1703 and the Nasdaq added 0.7%.

No resolution was reached on Saturday. The stumbling block has not changed, being the fervent desire among some, and clearly a sufficient number of, Republicans determined to shoot down Obamacare. The Republicans are attempting to make concessions but the president stands resolute. It is now the turn of the Democrat majority and Republican minority leaders in the Senate to see if they can come up with a deal between them, but as yet nothing has transpired.

The question is as to whether the 400-plus Dow point rally on Wall Street over the last two sessions is compromised by the fact no deal has been reached, or whether Wall Street can hold onto a belief a deal can’t be far off. Many commentators suggested from the first day of the US government shutdown that the stand-off would play out right up to the eleventh hour and only then would a compromise be reached or an extension of some description would be forthcoming. Such is recent history. The eleventh hour, in theory, is this Thursday’s debt ceiling deadline. However  it does not follow that a breach of the deadline would trigger an immediate US debt default. It will take a few days before the Treasury finds itself unable to honour the first of its interest payment obligations.

Somewhat lost in the Washington farce so far is the US quarterly result season. On Friday JP Morgan (Dow) reported its first ever loss under CEO Jamie Dimon but this was not unexpected and the shares held steady. Wells Fargo reported a jump in profit but a decline in mortgage income and was also little changed on the day. The season will shift up a gear this week with reports from more banks and several large tech companies with many Dow stocks represented.

Adding to the disappointment over the weekend was China’s September trade data, released on Saturday. Economists had expected a trade surplus of US$27bn for the month but the result fell well short at US$15.2bn. Imports rose by 7.4% year on year but exports unexpectedly fell 0.3%.

The result is a setback for those who had assumed China’s economy was finally accelerating once more. Economists have nevertheless pointed to the week-long National Day holiday break as the likely source of the disappointment. Given China’s calendar follows a lunar cycle, last year’s holiday break crossed over from end-September into early October whereas this year the break fell fully in September. This has acted to distort the year on year comparison, economists suggest.

Whatever the root cause, a general weekend of disappointment has clouded the positive mood which had emerged around the globe late last week. It has also rendered Friday night’s movements in other markets possibly redundant. The Aussie dollar, for example, ended trade on Saturday morning at US$0.9465, little changed from Friday morning, but it is trading lower this morning.

The US dollar index was similarly little changed on Friday at 80.43 and the ten-year bond yield was steady at 2.68%. On growing confidence of a breakthrough in Washington, gold fell another US$14.90 to US$1271.90/oz. Base metals were all moderately stronger in London, with copper up 0.8%, while an International Energy Agency Report forecasting a jump in non-OPEC global oil production next year helped Brent crude down US89c to US$111.01/bbl and West Texas down US$1.27 to US$101.74/bbl.

Spot iron ore rose US10c to US$133.10/t.

On Saturday morning the SPI Overnight closed up 33 points or 0.6%, ahead of the breakdown of talks in Washington and ahead of the weak Chinese trade data.

Tonight’s response on Wall Street will be compromised by the Columbus Day holiday, which sees US stock markets open but bond markets and banks closed. Many in the market typically take a long weekend, resulting in thin trade on stock markets. The ongoing shutdown will also mean some of the scheduled US data releases due this week will not be seen.

On Tuesday we will see the Empire State manufacturing index while Wednesday brings the NAHB’s measure of housing market sentiment and the Fed Beige Book. The Philadelphia Fed manufacturing index will come out on Thursday but housing start and industrial production numbers are up in the air on the day that is the official deadline for the debt ceiling increase. The Conference Board will release its leading economic index on Friday.

China is back in the frame today with September inflation data. Economists are expecting a year on year CPI growth rate of 2.8%, up from August’s 2.6%. China will again be in focus on Friday with a monthly data dump of retail sales, industrial production and fixed asset investment numbers. The major release will nevertheless be China’s September quarter GDP. Economists are hoping for a year on year increase of 7.8%, up from June’s 7.5%.

Australia will see housing finance and lending data today and vehicle sales tomorrow, along with the minutes of the October RBA meeting. NAB will provide a quarterly summary of business confidence on Thursday while on Friday RBA governor Glenn Stevens will make a speech at a business lunch.

The action hots up in the Australian corporate calendar this week. The AGM season is now truly upon us and highlights this week include meetings for Cochlear ((COH)) and Telstra ((TLS)) tomorrow, CSL ((CSL)) on Wednesday and Qantas ((QAN)) on Friday.

The AGM season coincides with the quarterly round of resource sector production reports. Among the big names, Rio Tinto ((RIO)) will report tomorrow, BHP Billiton ((BHP)) on Wednesday, Fortescue Metals ((FMG)), Newcrest Mining ((NCM)) and Woodside Petroleum ((WPL)) on Thursday and Santos ((STO)) on Friday.

Ten Network ((TEN)) will report its full-year result on Thursday.

Rudi will appear on Sky Business today at 11.15am, Wednesday at 5.30pm and Thursday at noon and on Friday between 7-8pm on Your Money, Your Call – Bonds versus Equities.
 

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

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