The Monday Report

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By Greg Peel

The Australian market was always going to cop a shellacking on Friday and the ASX200 failed to disappoint with a 1.4% fall. The sell-off was evenly spread across sectors, albeit healthcare (down 2.6%) was particularly trashed while utilities (down 0.7%) held a bit of ground. It was a healthy shake-out following a kick up above the 5600 just prior, and has achieved nothing more dramatic than to take us back into the middle of the familiar 5500-5600 range.

Data releases on the day were never going to make a difference. Australia’s manufacturing sector surprised with a rise in the July PMI to 50.7 from 49.0 in June, marking the first expansion in eight months. China’s official manufacturing PMI came in at 51.7, up from 51.0, and HSBC matched with a rise to 51.7 from 50.7. China’s service sector PMI was released yesterday, and showed a fall to 54.2 from 55.0, but still indicating reasonable expansion.

Sticking with the manufacturing PMI theme, the eurozone was steady at 51.8, the UK has begun to slow from its frenetic pace in the first half and marked 55.4, down from 57.2, while US showed growth to a rapid-paced 57.1 from 55.3.

The eurozone was very much in the frame on Friday night. The PMI was flat, Thursday night’s flash CPI estimate suggested a four-year low 0.4% annual rate of inflation when 0.5% was expected, increased sanctions against Russia are impacting directly on European companies, particularly German companies, and Portugal’s Banco Espirito Santo, which made news a couple of weeks ago when it defaulted on a debt payment, is hanging in the balance after its shares fell 40% and over 70% for the week.

The pending demise of BES gives rise to several questions. The bank is big in Portugal but not large by general Western standards, but does the ECB let it go to the wall or bail it out using eurozone taxpayer money? Is BES indicative of poor asset quality across other eurozone banks, and are the regular ECB stress tests inadequate? We seem to have gone back in time about four years.

The BES and Russian sanctions in particular have been hitting the German stock market, which fell another 2% on Friday to be down 4.5% for the week. Wall Street also copped the back-end of European weakness as the indices tumbled from the opening bell, sending the Dow down 125 points by mid-morning, before regaining ground after the European close.

Aside from the better than expected PMI release in the morning, the US non-farm payrolls report showed 209,000 jobs added in July. While this was shy of 230,000 expectation, it was still the sixth consecutive month of plus 200k hiring and implies an average of 230k jobs per month for the seven months to July, which is the fastest rate since the US economy initially bounced out of the GFC depths in 2009, powered by QE1. The unemployment rate ticked up to 6.2% from 6.1% but that was because the participation rate increased, which is a positive sign.

JP Morgan called it a “Goldilocks” result, given it was not as low as to undermine hope in the US recovery and not as strong as to spark further sudden rate rise fears.

In other data releases, Michigan Uni’s fortnightly gauge of consumer sentiment fell to 81.8 from 82.5 two weeks prior but was in line with estimates. Personal spending rose 0.4% in June, as it did in May, and personal income also rose 0.4% as it did in May. Earlier in the year income growth continued to lag spending growth.

On the corporate earnings front, it was a better night on Friday and featured strong results from LinkedIn, which jumped 12%, and old stager Proctor & Gamble (Dow), which rose 3%. Janet Yellen’s short social media trade continues to take a beating.

The Dow managed to recover most of the ground it lost earlier by 2pm, but the rebound began to fail as the selling returned towards the weekend close. The Dow closed down 69 points or 0.4%, the S&P lost 0.3% to 1925, and the Nasdaq fell 0.4%. It was the worst week for US stocks since April.

US earnings have become somewhat of a background note to Fed policy speculation on Wall Street. Running at around 10% June quarter growth, earnings have presented a positive theme. But nervousness with regard the possibility of an extended sell-off in stocks is keeping a lid on US bond yields, which might otherwise be rising as rate rise expectations build. The US ten-year yield rose from the open on Friday but when stocks started to be sold again, it fell back 5 basis points to a familiar 2.51%.

Having fallen on Thursday night, gold recovered that ground on Friday night with an US$11.60 rise to US$1293.50/oz. While the US jobs number was not weak enough to ease rate rise expectations, developments in Europe potentially provided enough impetus to retreat to gold or perhaps even stock market correction fears have sent some punters to safety. The VIX volatility index, having wallowed as low as 10 not too long ago, is now up at 17.

The US dollar index fell back 0.2% on Friday to 81.31, hence the Aussie is back up 0.2% to US$0.9312.

Base metals were mostly a little weaker on Friday albeit nickel fell 1.5%. Iron ore fell US40c to US$95.20/t.

All the talk of Russian sanctions and a possible impact on Europe’s energy supply has focused attention on supplies of Brent crude, which turn out to be quite ample. Brent fell US95c to US$104.63//bbl on Friday while West Texas held steady at US$97.62/bbl. Brent was down 3.3% for the week and 5.6% for the month of July.

The SPI Overnight fell 26 points or 0.5%.

We move into this week with Europe now causing concern, US rate rise speculation remaining rife and earnings continuing to dominate. The US quarterly season marches on this week and the Australian six-month season begins to build.

US data is a little thin this week with the service sector PMI tomorrow, the trade balance on Wednesday and chain stores sales on Thursday being the highlights. On Friday June quarter productivity is released, which the Fed will watch very closely.

Service sector PMIs are also due out tomorrow in Australia, China (HSBC), the eurozone and UK.

Central banks will be in the frame this week. The RBA meets tomorrow, the Bank of England and ECB on Thursday and the Bank of Japan on Friday. The RBA will do nothing and the BoE will probably do nothing, while the BoJ might have something to say but that remains to be seen. The real focus will be on the ECB and Mario Draghi’s press conference, at which implications of low inflation and weak GDP growth meeting extra pressure from Russian sanctions and a potential Banco Espirito Santo failure will all be hot topics.

China will report inflation and trade data on Friday.

It’s a busy week economically in Australia, beginning today with retail sales, ANZ job ads and the TD Securities inflation gauge. Tomorrow it’s the services PMI and trade balance, and the RBA meeting. On Thursday we see the construction PMI and the July jobs numbers and Friday brings housing finance and investment lending, and the RBA’s September quarter Statement on Monetary Policy.

On the local stock front, earnings result highlights this week include those from Cochlear ((COH)), Downer EDI ((DOW)) and Transurban ((TCL)) tomorrow, Rio Tinto ((RIO)) and Tabcorp ((TAH)) on Thursday and Newscorp ((NCM)) and REA Group ((REA)) 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.
 

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

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