Daily Market Reports | Jul 08 2014
By Greg Peel
The Dow closed down 44 points or 0.3% while the S&P lost 0.4% to 1977 and the Nasdaq fell 0.8%.
The local market decided to take a break yesterday amidst school holidays and in the wake of the US holiday weekend and lack of lead from Wall Street. The major data releases of the day failed to grab much attention. The ASX 200 is sitting just above the familiar 5500 level and is looking for direction, with the US quarterly earnings season kicking off tonight ahead of the local six-month season next month.
ANZ’s job ad series bounced back from a weak May result with a gain of 4.3% in June. The year on year trend is at 6% growth suggesting a gradual improvement in the labour market. However ANZ chief economist Warren Hogan is concerned for the overall Australian economy, noting the recent drop off in consumer confidence combined with a fall in commodity prices coinciding with the wind-back in mining investment. Hogan is in concert with the RBA in suggesting economic momentum has softened in recent months.
Australia’s construction PMI leapt to 51.8 in June from 46.7 in May nevertheless, to mark the first month of expansion in six and to reaffirm my ongoing observation that Australia’s PMIs are far more volatile than those of any other major economy. This result will likely prove to be a blip anyway, given the gradual wind-down of mining construction which will weigh on any growth in infrastructure or other construction.
Wall Street traders had three days to think about Thursday night’s strong US jobs number and appear to have concluded the implication is for a Fed rate rise potentially sooner than currently assumed. The blue chips were soggy but not at all volatile but the Nasdaq fell 0.8% and the Russell small cap index fell 1.8%. Here we go again?
The issue here is that were funding costs to rise, on the back of a Fed rate rise, those companies hardest hit would be the smaller and more flighty (eg tech) names. The Nasdaq/Russell combo suffered a big correction back in March when suddenly the “momentum” trade was deemed to have run too far, before bouncing back hard from April to ultimately exceed pre-correction levels. With US economic data improving, it may be a case of those names having to suffer another pullback.
The question remains as to whether the wider market would also suffer a pullback on any hint of the rate rise being brought forward. In theory a rate rise should imply an improving US economy, which should be good for the stock market. However there is growing concern the Fed will be forced to move early not because of strong economic data, but because of rising inflation. This would be a negative, given inflation is a return-killer for equities.
Janet Yellen has called recent inflation numbers “noise” and two fundamental elements back her up. Firstly, US wage growth is minimal. While the official unemployment rate might be falling, presumably there is still slack to be removed from the labour market before wage growth is re-established. Secondly, consumer spending has not been strong, and the US is a consumer economy. If wages and spending are not firing, inflation should remain contained.
Attention will now turn from this week to the US earnings season, which unofficially kicks off tonight as Alcoa delivers its numbers. Alcoa is no longer even in the Dow, let alone seen as a bellwether anymore, so the real fun begins later in the week when the big banks start to report.
Wall Street stock analysts have typically, in recent years, become overexcited about corporate earnings prospects only to have to rein in their expectations as the season approaches. This June quarter has seen the lowest level of forecast reductions in the run-in since June 2011. Hope is for a strong bounce out of the difficult March quarter, which in earnings terms was a “beat” on expectations anyway. Consensus is for 5-6% growth, depending on which survey you source.
While US analysts are quietly confident, over in Europe they’re beginning to despair. Economists had expected Germany’s May industrial production number, released last night, to show flat growth but instead it fell 1.8%. This follows on from Friday’s report showing German manufacturing orders fell 1.7%. Draghi is prepared to do what it takes, he says, but last night the DAX fell 1%. Germany’s trade balance is due tonight.
The US dollar index is steady at 80.25, the Aussie is as good as steady at US$0.9370 and gold has slipped only a tad to US$1319.30/oz. The slight pullback in US stocks was matched by a slight rise in bond prices, with the US ten-year yield falling 3 basis points to 2.62%.
Base metals were mixed on small moves last night except for zinc, which rose 1%, while iron ore fell US60c to US$95.90/t.
The oils continue to drift lower as the threat posed by ISIL appears to wane, at least in terms of the insurgents reaching the southern Iraqi oil fields. As for the wider implications of the whole mess, that’s another story. Brent is down US66c to US$110.03/bbl and West Texas is down US30c to US$103.70/bbl.
The SPI Overnight fell 4 points.
NAB will release its local monthly business confidence survey today ahead of tonight’s Alcoa result, and a month of evaluating US beats and misses.
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