The Monday Report

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By Greg Peel

After bouncing off a 5160 intraday low on Thursday and posting a strong recovery rally, the ASX200 continued on its merry way on Friday morning to touch the 5300 level on an initial 50 point move. That was enough for traders after the wildest week in 2014, and the index settled back through the afternoon as the weekend beckoned.

Thursday night had marked the second session in a row Wall Street had recovered from steep early losses, including Wednesday’s Dow fall of 460 points intraday, and the stage appeared set for a rally on Friday night as long as nothing came out of left field.

It didn’t.

On Thursday night, St Louis Fed president and non-voting member James Bullard had frustrated the purists but comforted the masses when he suggested that were the global economic picture to further deteriorate, the Fed could actually step up its bond purchases once more rather than ending them as planned this month. On Friday night those sentiments were echoed by Boston Fed president and non-voting member Eric Rosengren, who suggested that while he did not expect it would be necessary there’s no reason why the Fed could not reintroduce purchases, ie QE4, if required.

It’s not the first time the Fed has brought out the motherhood statements in order to settle a market at risk of seriously tanking on sheer nervousness. Heads would have been spinning among the Fedheads, along with the rest of the world, after Wednesday night’s extraordinary bond market capitulation. But the point is simply to assure that the central bank has no set schedule for raising rates, and while bond purchase are due to end this month, that timetable is not set in concrete either.

Central banks were in the spotlight across the globe on Friday. The PBoC made another of its targeted liquidity injections, providing 200bn renminbi to twenty select Chinese banks as a response to the recent downturn in Chinese data. After much talk of the first rate rise in the UK earlier in the year, the Bank of England chief economist indicated on Friday that rates could stay lower for longer. And in Europe, the apparent inevitability of a triple-dip eurozone recession in the face of all the ECB has thrown at the economy to date has intensified expectations of a type of “basket QE” being implemented, in which the central bank will purchase bonds in all the member economies.

Bond rates in the peripheral eurozone economies surged all week on fear but on Friday night fell back notably on the assumption such purchases may well be nigh. The stumbling block is Germany, nonetheless, who understandably is against seeing the money generated by its pragmatic taxpayers being funnelled off to save those indulgent Club Med types. Europe’s stock markets weren’t going to quibble, however, after their wild week, hence on Friday the London market rose 1.9%, France rose 2.9% and Germany rose 3.1%.

The US ten-year bond yield, which on Wednesday had bottomed, very briefly at 1.89%, rose again on Friday by 5 basis points to 2.20%. It has become typical these past few months for the mood on European bourses to set the scene for Wall Street’s open, and Friday was no different. Wall Street opened strongly to the upside and pushed higher through the session to a 263 point or 1.6% gain for the Dow, a 1.3% gain for the S&P to 1886, and a 1.3% rise in the Nasdaq.

With all the volatility of last week it is easy to forget it was also a big week for US September quarter earnings reports, given the “micro” was forced to take a back seat to the “macro”. But Friday morning saw solid earnings beats from all of General Electric (Dow), Morgan Stanley and Honeywell, adding further fuel to the rebound fire.

Economic data releases also played their part. US housing starts recovered from a surprise fall in August to rise 6.3% in September, while Michigan Uni’s fortnightly consumer sentiment index showed a rise to 86.4 from 84.6 at end-September. The compilers have warned, nevertheless, that the survey was taken before it was revealed another US citizen had contracted Ebola, so the end-October reading may not be quite so enthusiastic.

Wall Street’s most recent all-time stock market highs were underpinned by recovering economic data and bullish expectations for third quarter earnings results, to be backed up by a forecast round of strong fourth quarter earnings. But the spike up in the US dollar this past week, driven by faltering economies elsewhere, has undermined that story, leading to fears of weaker export earnings if not in the December quarter, probably in the March quarter. The US dollar index rose 0.3% to 85.20 on Friday.

The Aussie is steady at US$87.60 and gold is also holding its ground at US$1238.00/oz. The economic indicator du jour is nevertheless oil. Oil prices took the lead from global stock markets on Friday night and rebounded strongly from the open of Nymex, only to fade away as the session progressed. Brent finished up US40c to US$86.22/bbl and West Texas finished up US49c to US$83.04/bbl.

There was greater enthusiasm on the LME, with the Chinese stimulus news the primary driver. Aluminium and lead both responded with 2% rallies while nickel and zinc rose around 1% and copper managed a 0.6% gain.

Iron ore rose US10c to US$80.60/t.

The SPI Overnight closed up 68 points or 1.3%, suggesting the 5300 level which provided initial support on the way down, and thus resistance on the rebound, should be comfortably conquered this morning.

At least for the time being.

It is interesting that the PBoC should choose Friday to make one of its targeted liquidity injections given this week is a biggie for Chinese data. Specifically, China’s September quarter GDP result is out tomorrow, with economists pencilling in an easing to 7.2% growth from the June quarter’s 7.5%. A monthly data dump of industrial production, retail sales and fixed asset investment is also due tomorrow, followed by HSBC’s flash estimate of October’s manufacturing PMI on Thursday and property prices on Friday.

All eyes will be on Europe as well on Thursday for its monthly PMI estimates, while Japan and the US will also chime in with their data. The UK will release its first estimate of September quarter GDP on Friday and an easing to 3.0% from 3.2% is anticipated.

The US economic week will include existing home sales tomorrow night, the CPI on Wednesday, the Chicago Fed national activity index, FHFA house prices and leading economic indicators on Thursday, and new home sales on Friday.

Australia’s week begins with the minutes of the October RBA meeting tomorrow, followed by the September quarter CPI result on Wednesday. Here the forecast is for a plunge in the headline number to 2.3% from June’s 3.0%, with an easing in the RBA’s core number to 2.7% from 2.9%. Glenn Stevens is also due to speak on Thursday and NAB will provide a summary of September quarter business confidence.

The local resource sector production reports flow thick and fast this week, with highlights including Newcrest Mining ((NCM)) and Oil Search ((OSH)) tomorrow, BHP Billiton ((BHP)) on Wednesday and Atlas Iron ((AGO)) on Thursday. The AGM season also marches on with Origin Energy ((ORG)), Amcor ((AMC)), Suncorp ((SUN)), Carsales.com ((CRZ)) and Qantas ((QAN)) among those handing out the tea and bikkies this week.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon.
 

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

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