The Monday Report

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By Greg Peel

Plunging oil prices were responsible for the ASX200 closing up only tepidly the finish out the week on Friday. A 1.6% fall in the energy sector dominated the market, offsetting a 0.5% gain in the banks. Oil remains the hot topic across the financial world as we move into this week, with Friday night seeing a notable bounce in prices.

Market watchers had almost become resigned to the assumption OPEC would not cut production at their meeting next week, preferring to weather lower prices while attempting to squeeze out marginal US shale oil production – the source of global oversupply. Talk of the West Texas price falling to US$60 or even lower became rife. But while it might be all well and good for the Saudis to perpetrate such a squeeze, countries like Iran and Venezuela are feeling the pinch.

Oil ministers from both countries have been embarking on a tour of fellow OPEC members in an attempt to garner consensus for production cuts, it was revealed on Friday night. Squeeze aside, OPEC’s preferred price level has long been US$85.

On Friday night the market also learned the Republicans have wasted no time in attempting to exploit their newly won majority, passing a bill in the lower house to force the immediate approval of the controversial Keystone pipeline. The bill will now pass to the Republican-majority Senate for approval, before the president decides whether to sign it into law.

The Keystone pipeline would provide the final connection to allow oil to flow directly from Canada to the West Texas Intermediate storage hub at Cushing, Oklahoma. The pipeline which connects Cushing with Gulf coast refineries has recently been reversed, such that oil now flows to the Gulf rather than the other way. Thus Keystone would complete a vast trans-North American oil link to refineries and export facilities at the Gulf.

But the pipeline needs to be built through environmentally sensitive areas, assessment of which has long stalled the project under the Obama Administration. The president has the power to veto the bill, but has indicated at this stage he will at least try and speed up the environmental report. The other stumbling block lies at the Gulf itself, where the Democrats have restricted oil export in a policy of retaining America’s newfound energy advantage for America. The Republicans are capitalists, and want to be free to sell the oil to the highest bidder.

Between OPEC and Keystone, oil prices were subject to a sharp short-covering rally on Friday night. West Texas jumped US$1.29 to US$75.63/bbl and Brent surged US$2.16 to US$79.65/bbl.

The subsequent bounce in energy stocks was nevertheless not enough to break Wall Street out of its week-long fog of indecision at new all-time highs. The indices posted yet another timid close, with the Dow falling 18 points or 0.1%, the S&P flat at 2039, and the Nasdaq up 0.2%.

Nor did Europe’s growth data provide any great impetus. Eurozone September quarter GDP growth came in at 0.2%, up from 0.1% in the June quarter and a tick better than 0.1% expectations. There was relief as it was revealed Germany managed to avoid official recession with 0.1% growth, while France surprised with 0.3%, albeit mostly due to increased government spending. The winner among the majors was Spain, with 0.5% growth, while Greece surprised in the minor leagues with 0.7%, bringing the country out of recession after six years. Italy, on the other hand, fell into its third recession since 2008 with 0.1% contraction.

Positive US data releases were unable to stir up the buyers on Friday night either. Retail sales bounced back in October with a better than expected 0.3% gain, reversing the 0.3% fall in September which marked the first fall in eight months. Lower oil prices, and thus more money in consumer pockets, were cited as the driver. The fortnightly Michigan Uni consumer sentiment measure echoed this assumption, rising to 89.4 to mark its highest level since July 2007, just before the words Credit Crunch began to be bandied about.

US consumers also voiced their easing of fear over rising US inflation (and thus a Fed rate rise) within the breakdown of the Michigan Uni survey. Again, lower oil prices are key.

It was this reduction in consumer inflation expectations that was blamed for a 3 basis point fall in the US ten-year bond yield to 2.32%, and a fall in the US dollar index of 0.2% to 87.54. Yet if markets are now thinking lower US inflation, what on earth happened in gold on Friday night?

Gold jumped US$32.20 to US$1189.90/oz. In gold’s case, traders cited the bounce in oil prices as the incentive, and we know the gold market is set very short so any little spark can set off a short-covering fire. But what we saw on Friday night, basically, is US bond yields down on lower inflation expectations (oil down generally) and gold up on higher expectations (oil up on Friday night).

LME traders preferred to point to the slightly better than expected eurozone GDP numbers and the strong US retail sale and sentiment numbers in deciding to square to the upside ahead of the weekend (and the G20, featuring a brief cameo from one Mr Putin). Aluminium bucked the trend with a 0.5% fall, but copper jumped 1.5% and nickel 2%.

Iron ore was unchanged at US$75.50/t on Friday, meaning it was unchanged for the week.

The Aussie is up 0.4% to US$0.8755.

The SPI Overnight closed up 6 points on Saturday morning.

The problem with stock markets that stall at their highs and fail to push on is that they then tend to fall as their only other alternative. We saw this in the ASX200 last week, and the way things are going we could be seeing it in the S&P500 shortly as well, barring anything out of left field. It is interesting to note that November has proven a reliable trough month for Wall Street in recent years, after typical falls in September-October. Last year it was the “taper tantrum”, the year before saw the US government shutdown, and previously seasonal falls have been met by fresh QE from the Fed. Not this time.

This time QE is ending, and Wall Street has already bounced back to its highs. How can we have a Santa Rally this year if there’s no trough to rally out of? Perhaps this conundrum is why Wall Street has hit a period of indecision.

Japan will post its September quarter GDP today, to provide another point of global growth assessment. Expectations are for a turnaround to 0.5% quarterly growth from the spectacular, tax-driven contraction of 1.8% in the June quarter. The Bank of Japan will meet on Wednesday but has already upped the ante with regard Japanese QE, so no change is expected.

The eurozone will report its trade balance tonight and the influential ZEW investor survey is due on Tuesday. The flash estimate of the eurozone’s November manufacturing PMI is due on Thursday, along with equivalents from Japan, China (HSBC) and the US.

It’s a busy data week in the US, beginning with industrial production and the Empire State manufacturing index tonight. Tuesday sees the PPI and housing sentiment, Wednesday housing starts and the minutes of the last Fed meeting, and Thursday the CPI, existing home sales, leading economic indicators and the Philadelphia Fed manufacturing index.

Australia’s only economic report of note will be the minutes of the November RBA meeting, due tomorrow. It’s nevertheless another big week for company AGMs across the week, with highlights including BHP Billiton ((BHP)) and Wesfarmers ((WES)) on Thursday.

James Hardie ((JHX)) will publish its interim profit result on Wednesday and Orica ((ORI)) will publish its full-year.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. Tonight, he presents in front of ATAA members and non-members ($30) in Sydney, 6-9pm http://www.ataa.com.au/meetings

(Which is why this week's Weekly Insights email will be mailed out on Tuesday instead of on Monday as is usually the case)
 

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

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