The Overnight Report: Confidence Shot In Europe

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By Greg Peel

The Dow closed down 9 points while the S&P lost 0.2% to 1933 and the Nasdaq fell 0.3%.

After a day of caution, yesterday on Bridge Street saw a reversal of Friday’s capitulation as the ASX200 screamed back through 5500 in a big way. Stability on Wall Street helped the cause, as did an early result from Domino’s Pizza ((DMP)) that blew the anchovies off analyst forecasts, and the real shock of the session – an inexplicable surge in business confidence.

The NAB business survey for July showed a rise to plus 8 from plus 2 in June for current conditions and to plus 11 from plus 8 for confidence going forward. Not only do these numbers suggest a bounce out of earlier budget blues, and let’s face it, the budget is beginning to look a mere shadow of its former self, the conditions number is the best since 2010. The confidence number exceeded the high posted last year during election euphoria.

So we’re on 8 for conditions against a long-run average of zero and 11 for confidence against 5. Only last week we were talking rate cut again, courtesy of the misleadingly weak unemployment rate. Anyone would think the Australian economy was a on a tear. Mining? Who needs it? Clearly the shorts had a tough day of it yesterday.

The picture is a little different over in Germany. Analysts had expected the monthly ZEW survey of investor sentiment to drop to 17.0 from July’s 27.1 due to the Ukraine issue and related sanctions but instead if fell to 8.6. The German DAX dropped 1.2% to 9069 last night as a result, bringing that fundamental 9000 level back into view, and the French CAC fell 0.9% in sympathy.

European trading has become increasingly more important for Wall Street these past weeks. The European market overlaps the US market up to 11.30am New York time, and it has become common during the Ukraine crisis for the low of the Wall Street session to occur around 11.30. It occurred again last night as the Dow hit a nadir of down 50 before US indices stumbled and stuttered their way back towards the flatline.

Concerns over a premature Fed rate rise are largely taking a back seat now. Israel-Gaza and Iraq are not market movers but Russia-West is a clear swing factor. Uncertainty continues to prevail as last night a convoy of unmarked Russian trucks rolled into Ukraine on a flagged humanitarian campaign with no hint of what might be stored therein. Food and water or Greeks?

Yet the conundrum remains that of oil prices. In any other universe, such geopolitical tensions with a major global energy exporter would send energy prices rocketing on supply-shock fear but traders already tried this, without success, when the Ukraine crisis first flared. Two factors have continued to drive oil prices ever lower since: the assumption that no one, not even Putin, is silly enough to deprive themselves of vital energy export revenues; and the fact the global demand-supply balance suggests prices are still too high.

Last night the International Energy Agency cut its forecast for global oil demand and at the same time the US Energy Information Administration announced July saw the highest level of domestic oil production in thirty years. No surprise, thus, that West Texas fell US67c to US$97.21/bbl and Brent fell US$1.50 to US$103.02/bbl. The Brent price marks not only a new low for 2014, it represents a break-down from a two-year range.

The price of oil is forever a yin-yang factor for the US stock market. Lower energy costs should imply greater consumer spending power, but the US energy sector is a large chunk of the index and Exxon is America’s biggest company by market cap (occasionally challenged by Apple).

The fall in the euro as a result of the weak German survey saw the US dollar index creep up again last night, to 81.52, while gold was again largely steady at US$1308.90/oz. The Aussie is also steady at US$0.9268.

Tensions eased a little for the US bond market, with the ten-year yield rising 2 basis points to 2.44%.

Base metal markets continue to be summer-thin but aluminium resumed its run last night, rising 1%, while copper continues to struggle just below the US$7000/t mark and fell 0.6%. All other metals were slightly positive. Iron ore took a hit, falling US$1.30 to US$94.00/t.

The SPI Overnight closed up 4 points.

It’s going to be a big 24 hours for global economic data. We begin today with Australia’s June quarter wage cost index and Westpac’s consumer confidence survey for August. Japan follows with its June quarter GDP result, which has the potential to be a post sales tax shocker.

China then chimes in with a data dump of July industrial production, retail sales and fixed asset investment numbers.

There follows the eurozone’s industrial production data for June and later, US July retail sales.

It’s also a busy day for local corporate earnings results. Highlights include numbers from Commonwealth Bank ((CBA)), Carsales ((CRZ)), Computershare ((CPU)), CSL ((CSL)), Echo Entertainment ((EGP)), OZ Minerals ((OZL)), Primary Health Care ((PRY)) and Suncorp ((SUN)).

Rudi will not make his usual appearance on Sky Business today due to other commitment.
 

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