Daily Market Reports | Jun 05 2014
By Greg Peel
The Dow closed up 15 points or 0.1% while the S&P gained 0.2% to 1927 and the Nasdaq added 0.4%.
It can’t be often that a country’s GDP result surprises to the upside and sends the local stock market fleeing. We can blame the Yanks – they started this whole notion of good news is bad news. Yesterday’s Australian GDP result came in at a slightly better than expected 1.1% growth quarter on quarter for 3.5% growth year on year. The RBA has been suggesting for some time the Australian economy would grow a little below trend in the near term, but “trend” is 3.25%.
The result represents another nail in the coffin for those hoping for another RBA rate cut. That’s why it was the consumer discretionary sector that lead the charge south yesterday, although no sector closed in the green in the 0.6% ASX 200 fall. What we have is fiscal tightening, in the form of the federal budget (at least as it is proposed) without any relief from monetary easing if the net economy does not allow. But the “net” economy is very heavily biased.
Of the 3.5% yoy, 2.6% represents net exports. Of the 1.1% qoq, 0.9% came out of the ground. The domestic economy, ex-international trade, grew by only 0.3% in the March quarter to be up only 1.6% year on year. What happens when mining revenues peak and fall? The iron ore price today, for example, is a lot lower than it was in the March quarter.
It was nevertheless encouraging that dwelling investment grew 4.7% qoq to be up 8.0% yoy. This result represents the transition we have to have. But way back in the March quarter, house prices were rising, consumer sentiment was positive and consumers were buying. Joe and Tony have since put paid to consumer sentiment and house prices, it appears, have peaked. The June quarter result might be a different story, and even by then we won’t have seen much budget fallout.
Australia’s service sector PMI for May did provide some comfort, but clearly not enough to change the mood. It rose to 49.9 from 48.6 in April and thankfully is not nearly as strangely volatile as the manufacturing equivalent.
For stock markets across the globe, this week is all about Europe. The eurozone service sector PMI came in last night at 53.5, a drop from 54.0, and the zone’s March quarter GDP was confirmed at 0.2% growth. It is the latter, along with apparent 0.5% CPI inflation versus the ECB’s 2% target, which should see Mario Draghi act tonight. At least tomorrow we can stop speculating. The UK service PMI fell to 58.6 from 58.7 and no one lost any sleep.
The US equivalent rose to 56.3 from 55.2, pleasing those on the “US is recovering nicely” side of the fence. The Fed’s conclusion in its anecdotal Beige Book survey, released last night, is that the US economy continues to plod along at a “modest to moderate” rate, as it has done for two years.
What Wall Street didn’t like last night was the May ADP private sector jobs growth number which came in at 179,000, well below expectations of 210,000. This was worth a 50 point drop in the Dow on the open. But shucks, no point in selling when the Fed’s got your back. The indices turned and the S&P 500 posted another record high by the close. The net flat session nevertheless reflects squaring up ahead of tonight’s ECB meeting.
European markets are backing action from the central bank tonight, selling the euro last night and sending the US dollar index up 0.2% to 80.66. The US ten-year yield is back at 2.60% after another tick up. Gold is steady at US$1243.70/oz and the Aussie rose slightly on the GDP result, to be up 0.1% to US$0.9277.
The LME is looking across the Channel as well but is presently concerned with the implications of allegations of the fraudulent use of warehouse receipts in the Chinese region of Qingdao, suggesting false inventory claims. All metals bar nickel fell last night, with copper down 1%.
The good news is the spot iron ore price jumped US$2.10 to US$94.60/t last night. We recall that in 2012, iron ore plunged through US100 to its low of US$86.70 in a heartbeat but in the next heartbeat was back above US$100 once more. Déjà vu?
The oils both fell US50c last night to leave Brent at US$108.31/bbl and West Texas at US$102.35/bbl. The oils are basically going a whole lotta nowhere as the Ukraine situation does the same.
The SPI Overnight rose 9 points, but then it did that yesterday too. Maybe the iron ore price will help this time.
Australia’s April trade balance is due today and HSBC will release its own Chinese service sector PMI. It’s US non-farm payrolls tomorrow night but before that it’s the big one – tonight’s ECB meeting.
Rudi will appear on Sky Business at noon.
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