The Monday Report

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By Greg Peel

It is typical in times of geopolitical shock, in this case the tragedy in Ukraine, for financial markets to switch into “risk off” mode first and ask questions later. This is what we saw on Thursday night in the US as stocks fell while bonds, gold, oil and the VIX volatility index all rose. In recent times, in but a couple of cases, 24 hours is enough to weigh up the situation against potential disruption to global growth and corporate earnings and decide neither is impacted in the wider scheme.

Thus as horrific as the Malaysian airlines disaster is, the “risk off” initial reaction has been seen as a buying opportunity across stocks markets. This was the case in Australia on Friday as the ASX 200 fell near 40 points from the open, only to close the session up 9 points. Indeed, talk is now of the tragedy potentially having a positive consequence, being that of Russia backing down from its imperialist stance and failure to quell the fighting in Ukraine.

Certainly there is also talk of sanctions against Russia, which coincidentally were ratcheted up on Thursday, being taken to a new, more decisive level. But this might be the catalyst for change. As to what transpires in the meantime, particularly in energy markets, is unclear.

As for the war in Gaza, the frequency of such hostilities is enough to inure markets to the point of dismissal.

Wall Street turned around on Friday from the bell and the indices climbed steadily during the session. The Dow regained most of its fall in rising 123 points or 0.7%, the S&P regained almost all of its fall in rising 1.0% to 1978, and the Nasdaq has actually finished higher than its Wednesday night close after a 1.6% rebound.

Little attention was paid to a fall in the fortnightly Michigan Uni consumer sentiment measure of 81.3, down from 82.5 at end-June, missing expectations of 83.0 and representing a four-month low. On the other hand, the Conference Board leading economic index rose 0.3% in June.

Earnings results were mixed on Friday. Economic bellwether General Electric (Dow) met expectations, and its shares suffered a 0.6% fall as a result. Microsoft beat revenue forecasts and it scored a 3.7% gain, while chip-maker Advanced Micro Devices plunged 16% on an earnings miss.

Beyond stock markets, risk reversals were slightly more muted. The US ten-year bond yield regained only one basis point to 2.48%, gold slipped back US$8.60 to US$1310.70/oz, and the VIX volatility index on the S&P 500 dropped 17% having leapt 32% on Thursday night. The US dollar index is steady at 80.53.

The Aussie had a relatively volatile week last week, but by Saturday morning had rallied 0.5% from Thursday’s weakness to be back where it started on Monday at US$0.9393.

Brent crude fell back US$1.11 to US$107.24/bbl and West Texas fell US67c to US$102.98/bbl.

The LME did not have a chance to respond to the news from Ukraine on Thursday night, hence uncertainty pervaded Friday’s trade. The session was nevertheless dominated by metal-specific factors.

Concerns over the latest bond payment default by a Chinese corporation engaged in copper-backed financing weighed on the red metal, sending it down 1%. Copper broke down through the US$7000/t mark and through its 200-day moving average, evoking talk of a bigger pullback to come. The most significant news nevertheless came out of Indonesia, where two nickel producers decided losses of revenues were sufficient enough to justify paying the 20% export tax imposed as a disincentive within the government’s ban on ore exports. Nickel has now moved out of Indonesia once more, and the nickel price fell over 3% on Friday night.

Iron ore fell US90c to US$96.60/t.

The SPI Overnight closed up 21 points or 0.4%, suggesting another push towards the previous post-GFC high set in April. On Thursday the ASX 200 hit an intraday high of 5561 before ending the session below the previous closing high of 5554.

News from over the weekend suggests international investigators will have difficulty in determining whether the Malaysian airliner was indeed shot down by mistakenly Russian separatists. Failure to secure all parts of the aircraft may make this task impossible, which opens up the possibility of an unresolved mutual blame-game between Russia and Ukraine, thus giving Putin some breathing space. However with the Brisbane G20 meeting approaching, the Russian president will not be getting off lightly, one presumes.

Assuming no further impact on financial market risk, attention will focus intently on the US corporate earnings season this week. It’s the busiest week of the season with 133 S&P 500 stocks due to report, including a dozen Dow stocks. Results to now have been mixed, but this week should provide a clearer trend.

The US economic week begins tonight with the Chicago Fed national activity index, followed by the CPI, existing home sales, FHFA house price index and Richmond Fed manufacturing index on Tuesday. Thursday sees a flash estimate of July manufacturing PMI and new home sales, while Friday brings durable goods orders.

Flash PMIs are also due on Thursday from China (HSBC) and the eurozone. The UK will release its first estimate of June quarter GDP on Friday and stir up the interest rate rise debate. Consensus is for 3.1% annual growth, up from March’s 3.0%.

Japan is closed today for Marine Boy Day. Or maybe that’s Marine Day. The Japanese CPI is due on Friday.

RBA governor will speak at a luncheon tomorrow before Wednesday’s release of June quarter CPI data, which is the highlight of Australia’s economic week. The RBNZ will hold a policy meeting on Thursday.

On the local stock front, we’ll have another round of resource sector quarterly production reports this week, with highlights including Arrium ((ARI)) today, Oil Search ((OSH)) tomorrow, BHP Billiton ((BHP)) on Wednesday and Newcrest Mining ((NCM)) on Thursday.

Macquarie Group ((MQG)) will hold its AGM on Thursday and update guidance, while a precursor to next month’s local earnings result season will be seen on Friday with the release of GUD Holdings ((GUD)) full-year result.

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.
 

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

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