The Monday Report

This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL

By Greg Peel

A quiet session on Bridge Street on Friday saw the Australian market settling itself ahead of the weekend and tomorrow night’s federal budget. The economic highlight of the day was a surprise drop in Chinese inflation. China’s CPI came in at 1.8% annualised in April, down from 2.4% in March and well below expectations of 2.1%. It’s the lowest CPI reading in eighteen months.

Worse still is China’s PPI, which posted its 26^th consecutive monthly drop in falling 2.0%, having fallen 2.3% in March. The long decline of wholesale prices is blamed on overcapacity in many industries, and particularly in steel and cement. While the bad news suggests Beijing needs to continue with its attempts to rationalise industry, the good news is weak inflation provides plenty of scope to step up stimulus injections.

This might have thus been a bad-news-is-good-news result for the Australian market on Friday, but activity has slowed to a crawl ahead of tomorrow night. The next two sessions will likely be similarly cautious, and Wall Street provided nothing alarming in either direction on Friday night.

With not much in the way of significant economic releases or corporate results, Wall Street meandered its way to a positive close on Friday having dropped from the bell. The Dow opened down around 40 points but recovered to post a 32 point gain, or 0.2%, to 16,583. This is new blue sky. The S&P rose 0.2% to 1878 while the volatile Nasdaq jumped 0.5% but still finished lower for the week.

While the large cap index is again at an all-time high, a lot of attention is now being directed to US small caps. The EFT on the Russell 2000 small cap index crossed its 200-day moving average to the positive in September 2012 and spent 2013 enjoying the momentum of market-wide PE re-rating. But as is the case now with momentum and internet/biotech high-PE plays, riskier small caps have been seen as overvalued. The Russell ETF began to turn this quarter, and just failed to reach a record run above its 200-day MA before it fell through to the negative on Friday night, providing a weak technical signal.

While the Russell might be offering some concern, the unanswered question on Wall Street remains how can the US stock index be at an all-time high when the US ten-year bond yield is stuck at 2.6%? As analysts forecast a big economic rebound from the weather-crippled first quarter, perhaps to the tune of 4% GDP growth, the bond market is refusing to agree.

The euro continued to fall on Friday night having dropped on Thursday night after ECB president Mario Draghi actually suggested a timetable for renewed monetary easing. Having offered nothing but vague commitments month in, month out up to this point, Draghi suddenly pencilled in June. On the euro’s fall on Friday, the US dollar index rose 0.5% to 79.89.

Unfortunately there was little flow through to the Aussie, which is little changed at US$0.9362. Forex traders will also be holding their breath for Joe’s big night. Gold is also steady, at US$1290.10/oz.

Nickel continued its relentless surge on Friday night, easing from its intraday high by the LME bell but still posting another 4% gain. Copper also eased to post a 0.6% gain, while the stronger greenback and Ukraine concerns for the weekend saw the other metals lower. Iron ore continued its slide, falling another US$1.00 to US$102.70/t.

The oils were steady, with Brent off a tad to US$107.95/bbl and West Texas down US21c to US$100.05/bbl.

The SPI Overnight closed unchanged on Saturday morning.

Over the weekend two eastern regions of the Ukraine ignored the Russian president’s call and went ahead with a referendum on seceding from Ukrainian government to form autonomous states linked to Moscow, a la Crimea. As to what happens next if the “yes” vote wins is anyone’s guess.

Enough has been said about the Australian federal budget to now, so bring it on.

Next week’s regular local data releases include the NAB monthly business sentiment survey today, housing finance and investment lending tomorrow, and vehicle sales on Thursday.

There are some significant numbers out in the US this week beginning with retail sales tomorrow night, housing market sentiment and the PPI on Wednesday, the Empire State and Philadelphia Fed manufacturing indices and the CPI on Thursday, and housing starts and fortnightly consumer sentiment on Friday.

Mario Draghi will have plenty to consider with the eurozone ZEW investment sentiment index tomorrow, industrial production on Wednesday, the CPI and first revision of March quarter GDP on Thursday and the trade balance on Friday.

Beijing will provide a data dump tomorrow of April Chinese industrial production, retail sales and fixed asset investment numbers.

Bridge Street thus has a couple of interesting sessions to get through before the big night, and there’s quite a bit of activity on the corporate front this week as well.

Incitec Pivot ((IPL)) will release its interim profit result today, Orica ((ORI)) will follow tomorrow and CSR ((CSR)) chimes in with its full-year on Wednesday. Wednesday also sees a quarterly update from Commonwealth Bank ((CBA)) to bring the bank earnings season to a close while Thursday sees a quarterly result from Paladin Energy ((PDN)), interim from Graincorp ((GNC)) and full-years from Singapore Telecom ((SGT)) and SP Ausnet ((SPN)).

This week’s AGM highlights include Coca-Cola Amatil ((CCL)) tomorrow, Sydney Airport ((SYD)) on Thursday and Oil Search ((OSH)) and Santos ((STO)) on Friday.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report.

It’s budget week in Australia, do you know where your wallet is?

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms