The Monday Report

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By Greg Peel

Uncertainty

Up 50 points one day, down 30 the next, as was the case with the ASX200 on Friday. The banks looked good on Thursday but not so much the next day. Friday’s selling was evenly spread across sectors nonetheless, and the session very much had a “Friday” feel about it, but it’s not often Wall Street rallies 1.5% and we respond with a 0.6% fall.

The bounce in the Aussie back over 77 may have had something to do with it, but if we weigh up the week the only conclusion one can draw is one of uncertainty. Will the Fed raise its interest rate this year, and soon? Or not? Will the RBA cut its interest rate next month, or in May, or not? In a market totally dominated by yield investment, with the resource sectors quietly fading into the sunset, these are important questions.

To which no one knows the answer, least of all the central banks themselves at this point.

Storage Wars

The news is not getting any better for the resource sectors either.

When the West Texas crude price bounced back out of the forties and into the fifties, there were plenty of traders prepared to call the bottom. But experienced commentators wouldn’t have it, warning that it mattered not how fast US oil companies could shut down rigs, an actual reduction in supply would take months to achieve. It is more likely, they said, that the oil price will go lower still before a bottom could be called.

Which is exactly what the International Energy Agency was pointing out on Friday night. “Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly,” an IEA report suggested.

The oversupply issue in North America has reached the point where storage has all but run out. If there’s nowhere to store the stuff, there is no option but to sell straight away. At whatever price. This reality saw the WTI price falling US$2.05 to US$45.00/bbl on Friday night, and Brent chimed in with a US$2.67 fall to US$54.55/bbl. Both falls represented around 4.5%.

Experienced commentators are now reiterating their calls that the oil price will probably fall into the thirties before a bottom is seen.

Wall Street had begun to become a little complacent this past month as the US oil price seemed to at least stabilise around 50. Attention focused on monetary policy instead, hence the big rally on Thursday night driven by the weak retail sales data. But oil companies represent a sizeable market cap of the S&P500, and the expected offset of increased consumer spending, thanks to lower fuel costs, has failed to materialise. US retail sales have declined three months in a row and Michigan Uni’s latest fortnightly consumer sentiment index, released on Friday, showed a fall to 91.2, down from 95.4 at the end of February, in contrast to consensus forecasts of a tick up to 95.5.

Currency Crisis

The US producer price index fell 0.5% in February on the headline rate, and on the core rate, ex food & energy. Economists had expected a 0.3% rise on the headline and a 0.1% rise on the core. The surprise drop has been blamed on the surging US dollar, which is pushing down import prices. While that might be beneficial, the opposite is being suffered by US exporters.

The Yanks are beginning to understand why Australia was frustrated by Fed QE for all those years. On Friday night the US dollar index hit the ton for the first time since 2003. The 0.9% rise to 100.18 was effectively the “wrong way”, based on weak US inflation and consumer sentiment data, but the euro’s fall into the 1.04s was the driving factor.

So having rallied strongly on Thursday night, on Friday night the Dow fell 145 points or 0.8%, the S&P500 fell 0.6% to 2053 and the Nasdaq lost 0.4%. The Nasdaq’s don’t-blink-or-you’ll-miss-it return to 5000 seems but a dream at 4871.

What does the Fed think about it all? We’ll find out on Wednesday night when the latest FOMC statement is released and Janet Yellen holds a press conference.

Metals Steady

The latest jump in the greenback would have done little to help oil’s cause, but the aforementioned Fed meeting kept base metal traders mostly on the sidelines on Friday night. A surprise jump in inventories saw lead fall 2.4%, but all other metals were a little stronger.

Iron ore rose US20c to US$58.10/t.

Gold rose US$5.60 to US$1158.60/oz.

The century mark for the dollar index killed off the brief short covering rally in the Aussie. It’s down 0.9% to US$0.7638.

The SPI Overnight fell 11 points or 0.2%.

The Week Ahead

There is a Fed statement due on Wednesday night. That’s pretty much all that matters this week.

There is, however, a raft of monthly US data due. Monday sees industrial production, housing sentiment and the Empire State manufacturing index. Tuesday it’s housing starts, and Thursday sees the Philadelphia Fed manufacturing index and the Conference Board leading economic indicators. Friday brings the quadruple witching derivatives expiry for US stock markets.

The Bank of Japan will meet on Tuesday and discuss what to do about the fact the ECB has upped the QE ante. The eurozone will see pre-QE unemployment, trade and inflation data next week but also the first ZEW investor sentiment index result since ECB bond purchases began and the euro collapsed.

New Zealand’s December quarter GDP result is due on Thursday.

Aside from vehicle sales data today, Australia’s economic week is all about the RBA. The minutes of the March policy meeting are due tomorrow, an RBA bulletin will be released on Thursday and Glenn Stevens will make a speech on Friday.

This week sees fewer stocks going ex-dividend than we saw last week but still quite a few, particularly today. Today’s exes include CSL ((CSL)) and Leighton Holdings ((LEI)), while Woolworths ((WOW)) is the biggie on Wednesday. Sigma Pharmaceutical ((SIP)) will release its full-year result on Thursday and Myer ))MYR)) will release its interim.

Thursday will also see the expiry of March SPI futures and index options.

Rudi will appear on Sky Business on Wednesday at 5.30pm and later that night, from 8-9pm, he will host another edition of Your Money, Your Call. He will re-appear on Thursday at noon.
 

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

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