The Monday Report

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

By Greg Peel

With Dow down 75 points on Thursday night and the SPI down 23 points, a weak session for the local market was always expected on Friday. I had suggested Friday becomes a day for selling if traders are worried about what may develop over the weekend, but what we saw on Friday was pretty much a market capitulating on the expectation that this time a more extensive correction was in play.

It didn’t help that Japan-watchers noticed the Nikkei falling 3%, but the data closer to home were also influential. China reported its biggest ever monthly trade surplus in July – news that might seem positive on face value until one looks at the breakdown of a 15% rise in exports, double expectation, against a 1.6% fall in imports, missing expectations of a 3% rise. For Australia, the import side of the China equation is all-important.

But it’s all about commodity prices. Iron ore volumes over the seven months to July rose 18%, but the iron ore price fell 15%. China is the greatest importer of iron ore but not so of coal, given domestic reserves, so coal imports fell 2.2% to July while the met coal price fell 15%.

Weaker commodity prices have been very much a focus for the RBA, which issued a revised forecast of 2.50% 2014 GDP growth in its quarterly Statement on Monetary Policy published Friday, down from 2.75% previously. The central bank’s inflation target has been lowered to 2.25% from 2.50%, with the removal of the carbon tax a major contributor.

The RBA is still crossing its fingers for a drop in the Aussie dollar, which continues to hijack hopes of a smooth economic transition away from mining. Other than in residential construction, this transition continues to struggle. Mining is also hampered by the stubborn Aussie, given falls in commodity prices are typically a catalyst for a fall in the currency, thus providing the dollar-value trade offset. But not so when a Fed-influenced US dollar refuses to rise.

And just to add insult to injury on Friday, the US was dragged back into Iraq and proceeded to conduct air strikes against ISIL. The precursor to Gulf War III? Not likely, but Friday was not a day to think too hard. It was a day to run away, and run away they did, to the tune of 1.3% down for the ASX200.

Overnight trade in the S&P500 futures suggested Wall Street was preparing to follow suit on Friday night, as the index breached 1900 amidst the global sell-off. However the lead was not ratified from the opening bell and the broad index held cautiously above the 1900 psychological level. June quarter productivity data were then released.

US productivity in the snowbound March quarter had fallen 4.5%, to mark the biggest fall since 1981, so economists were hoping for a 1.7% turnaround. The result of 2.5% was thus pleasing, encouraging some buying. But it was news from Russia around lunchtime that suddenly turned Wall Street’s fortunes. According to a tweet from a Russian newsagency, “military exercises” on the Ukraine border were now completed and Putin was pulling back the troops.

It was not exactly a conclusive signal of end to Russia-West tensions, sanctions and retaliation, but it was enough to spark a late scramble of buying and likely short-covering. The Dow closed up 185 points or 1.1%, the S&P rose 1.2% to 1931, and the Nasdaq gained 0.8%.

European stock markets had closed before the news came through from Russia, leaving the German DAX hanging perilously at 9009 after another 0.3% fall. It will be all eyes on the DAX tonight as Europe gets a chance to respond.

While there may have been some relief for the stock market, the bond market isn’t yet convinced. The US ten-year yield drifted another basis point down to 2.41% on Friday, while a US$2.50 fall in gold to US$1309.10/oz hardly signals the end of the safe haven trade either. The US dollar index fell 0.1% to 81.40 and the Aussie is steady at US$0.9275.

The oils have been long drifting back from their geopolitical premium highs despite the escalation of tensions, and on Friday were torn between news of air strikes in Iraq, which should be bullish for prices, and the news from Russia, which should be bearish. As it was, Brent crude fell US99c to US$104.76/bbl and West Texas was steady at US$97.54/bbl.

Lead and zinc had rallied 1% on Thursday night so they fell back by the same amount on Friday, as did nickel, while the other metals were steady. Iron ore fell US30c to US$95.70/t.

What a difference a day makes. The SPI Overnight closed up 37 points or 0.7%.

So whereto from here? That’s a tough one. We’ve heard no more out of Russia over the weekend that might confirm a change of heart from Putin, while air strikes in Iraq have taken the spotlight and spawned many questions as to just how far the US may have to go. We thus have a rather uncertain geopolitical backdrop hanging over this week’s trading – a week which sees the Australian earnings season step up a gear.

There is also plenty to consider on the global economic front.

Japan will report its June quarter GDP on Wednesday and the eurozone will follow suit on Thursday, with the UK providing a revision on Friday. With Europe hanging in the balance, we’ll also see eurozone investor sentiment, industrial production and inflation data out this week.

China will provide a data dump on Wednesday of July industrial production, retail sales and fixed asset investment numbers.

The US will release retail sales and business inventory data on Wednesday. The latter is currently in focus given the June quarter GDP rebound from the March quarter contraction was a lot to do with rebuilding inventories. If restocking turns to destocking, the September quarter GDP may well disappoint.

On Friday the US sees industrial production, the PPI, fortnightly consumer sentiment and the Empire State manufacturing index.

In Australia, a June quarter house price index is out tomorrow along with the NAB business confidence survey, and Wednesday brings the June quarter wage cost  index and the Westpac consumer confidence survey. Attention will be more firmly focused on corporate earnings results.

Releases are becoming too  numerous to list but highlights this week include JB Hi-Fi ((JBH)) today, GPT ((GPT)) and UGL ((UGL)) tomorrow, Commonwealth Bank ((CBA)), CSL ((CSL)), OZ Minerals ((OZL)) and Suncorp ((SUN)) on Wednesday, Crown Resorts ((CWN)), Fairfax Media ((FXJ)) and Telstra ((TLS)) on Thursday, and ANZ Bank’s quarterly update on Friday.

Rudi will appear on Sky Business today at 11.20am, on Wednesday at 5.30pm, on Thursday at noon and on Friday on Your Money, Your Call – Bonds vs Equities, from 7-8pm.
 

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

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