The Monday Report

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By Greg Peel

Yo-Yo Market

Everything that was sought after on the ASX on Thursday, despite the strong jobs numbers putting a May RBA cut in doubt, was suddenly poison on Friday. Aside from energy, which snuck into the green on ongoing relief in the oil price, every sector was sold down uniformly (not including info technology, which is only tiny cap-wise).

This general get-out-of-stocks trade can only be attributed to heightened fear that Greece is about to exit the eurozone, or at least be forced out were it to default on its IMF repayment obligations. The IMF-ECB-EC troika appears to have lost patience, and perhaps decided that propping up Greece is self-perpetuating burden with no foreseeable end in sight. Germany, which ultimately provides the bulk of funds on the EU side, has had enough.

If the troika were to cave into to Greece’s demands for a lifting of austerity restrictions and an extension of repayment schedules, the risk is other struggling members of the eurozone would follow Greece’s lead. Popular opposition to austerity would ensure more parties are elected to government on anti-austerity platforms. Better to nip it in the bud right now and cut Greece loose. It must be remembered that Greece differs from other “peripheral” eurozone members in having been brought to its knees not by a GFC-driven property and credit collapse but by government corruption and the failure of Greeks to pay tax. Greece is an EU pariah.

China Crunch

There is much debate about what the fallout from a Grexit might be, and much nervousness in markets due to a strong sense of “vu deja” – the unsettling feeling of never having been here before. But if Greece was enough to spook markets in the Asian session on Friday, Beijing certainly did its bit after the close of trade.

The Shanghai stock market has more than doubled in a year, despite China’s economy notably slowing. The Shanghai index of shares only local Chinese can trade is up 33% year-to-date, while the Hong Kong index, containing overlapping stocks and which foreigners can trade is only up 17%.

A couple of years ago, the Chinese were piling into property speculation. Beijing took steps to cool the property market and restrict lending and the property bubble has now deflated. So the Chinese have piled into stocks instead. Recently Beijing opened up access to domestic investors to the Hong Kong exchange in the hope arbitrage opportunities would cool the Shanghai market, but this clearly has not worked. So on Friday night, Beijing took further steps.

Step one was to tighten access to leveraged stock investment by banning the use of so-called “umbrella trusts”, which exploit loopholes to provide for greater leverage within the trust than is otherwise permitted. The implication here is that stock positions within those trusts will now have to be liquidated.

Step two was to ease regulations with regard stock lending, which means investors will now have a greater capacity to sell short. The ability to sell short reduces volatility by specifically heading off bubbles, such as the one the Chinese government fears the Shanghai stock market is in right now. The implication here is that an index valued at 21x earnings is an index ripe for shorting.

Global Exit

So between fears of a Grexit and fears of a big sell-off in China this week, Germany’s stock market sold down 2.6% on Friday night, France’s 1.6% and Britain’s 0.9%. The negative sentiment roiled across the Atlantic, assuring the Dow was down over 350 points around 2pm New York time. There are enough investors on Wall Street who see any pullback in the US indices as a chance to buy, so a late rally trimmed the losses.

The Dow closed down 279 points or 1.5% while the S&P lost 1.1% to 2081 and the Nasdaq fell 1.5%.

The impact of the Greek issue was felt on global bond markets, in which the bonds of large, safe economies were bought and those of tenuous peripheral economies were sold. The German ten-year ticked down another few hundredths to 0.08%. The Netherlands ten-year fell 0.7 basis points to 0.152%. Spain saw a 7.5bps increase to 1.32% and Italy saw a 13bps increase to 1.35%. The US ten-year yield fell 3bps to 1.85%.

In closing beneath the “flash crash” low earlier this year of 1.86%, the US ten-year yield may be set for a technical tumble.

The impact in exchange rates was less apparent, given no clear desire to pile into the US dollar at a time it's already run a long way and US data are looking decidedly soggy. The US dollar index is down 0.2% to 97.45 and the Aussie is off 0.2% at US$0.7784.

Quiet Commodities

The action on Friday night was all in the financial markets, while commodities traders watched from the sidelines. Despite the arguable value of gold at such a time, it was only up US$5.70 to US$1203.70/oz.

On the LME, tin volatility continues to run rampant and this time it was a 3% rebound, while otherwise nickel’s 1.5% fall was a stand-out amongst little movement in the other base metals.

Iron ore rose US70c to US$50.70/t.

The oils had a quiet night, with West Texas easing US54c to US$56.03/bbl and Brent little changed at US$63.68/bbl.

Counter Punch

Last night Beijing announced a full percentage point reduction in China’s reserve requirement ratio, being the level of reserves Chinese banks must hold against their lending books. It’s the second cut this year and the biggest since November 2008, taking the RRR down to 18.5%. Cuts in the RRR have often been used by Beijing, alongside interest rates cuts and fiscal measures, to provide stimulus for the economy.

Interesting timing?

The cut comes as no surprise, given further stimulus had already been flagged by the PBoC ahead of last week’s 7.0% GDP growth result. The market assumed such an announcement would come any time soon. As to whether there’s a match-up in timing as a trade-off against Friday night’s stock market regulation changes is by the by. As to the net result, well, the Shanghai market will still be worth keeping an eye on today.

The Week Ahead

In Friday’s trade, ahead of the announced regulatory changes, the Shanghai index ran up another lazy 2.2%. Chinese index futures had fallen 6% on Friday night by the time Wall Street opened.

The local SPI Overnight closed down 49 points or 0.8% on Saturday morning, ahead of the subsequent Chinese stimulus announcement.

China will be in focus again on Thursday when HSBC provides a flash estimate of its April manufacturing PMI. Similar flashes will also come from Japan, the eurozone and the US.

European sentiment will be gauged this week from tonight’s ZEW investor survey and Friday night’s IFO business survey, although any further Greek developments may cloud those results.

In the US, tonight sees the Chicago Fed national activity index and Wednesday existing home sales and the FHFA house price index. Thursday it’s new home sales and the flash PMI, and Friday it’s new durable goods orders.

The focus in Australia this week will be squarely on RBA policy.

Tomorrow sees the release of the minutes of the RBA’s April meeting, in which the central bank confounded around half the economist fraternity by leaving its cash rate on hold.  But the minutes will underscore the RBA’s expectation Australia’s unemployment rate has further to rise, and since the meeting we’ve had last week’s shock jobs numbers, which saw the unemployment rate falling to 6.1%.

On Tuesday night RBA governor Glenn Stevens will deliver a speech in New York.

On Wednesday, the March quarter CPI data are due. The other half of economists who did not expect an April cut were assuming the RBA would like to get a look at the inflation picture before making a decision in May.

On Thursday, NAB will provide a March quarter summary of business confidence.

On the local stock front, the resource sector quarterly reports continue to roll in as the AGM season steps up a gear for calendar year reporters.

Among the highlights, Oil Search ((OSH)) and Rio Tinto ((RIO)) release production reports tomorrow, BHP Billiton ((BHP)) on Wednesday and BC Iron ((BCI)) on Thursday. Leighton Holdings ((LEI)) will hold its AGM tomorrow.

Beyond that, Transfield Services ((TSE)) will hold an investor day tomorrow and Telstra ((TLS)) on Thursday, while Thursday also sees Australian Pharmaceutical Industries’ ((API)) interim profit result.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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

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