The Monday Report

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By Greg Peel

Poised

The Australian market fell heavily last Monday and Tuesday in what was largely a technical sell-off, before finding support on Wednesday after a breach of the 5600 support level. Thursday saw a strong rebound and Friday looked set for more of same when the index rose 30 points from the bell, but as the day wore on it became very much a “Friday” session.

The market ran out of puff and closed mixed across sectors, with energy (+1.9%) enjoying a boost from stronger oil prices but feeling lonely among a spread of smaller moves up and down.

At 5664, the ASX200 is sitting roughly in the middle of a range of 5600 support and 5750 resistance, waiting for a signal of what to do next. It should be a quiet start to the week with both the US and UK enjoying long weekends.

This Year

Wall Street was also very Friday-ish on Friday night ahead of that break, as bond markets had a half-day and stock markets quickly emptied in the afternoon. The Dow closed down 53 points or 0.3%, the S&P lost 0.2% to 2126 and the Nasdaq was flat.

The focus of the session was, you guessed it, interest rates.

The Fed expects the US economy to recover momentum in the June and September quarters, following a slow start to the year impacted by weather, post strikes and other issues. Fed chair Janet Yellen confirmed in a speech on Friday that if the Fed’s expectations prove accurate, the first rate rise will come this year.

While this appears to be a tightening of guidance on the Fed’s part, it’s only what Wall Street has been assuming for a while. Most commentators favour a September rate rise, or at least by December, on the assumption the US economy will indeed rebound. Those not expecting a rate rise until 2016 do not see the economy being as strong as hoped. So we still don’t know exactly when the rise will come, but we can assume the US June quarter GDP result will bring the timing more clearly into focus.

To that end, Wall Street was rather surprised on Friday by the April inflation numbers.

The headline CPI rose only 0.1% to be down 0.2% year on year, but that’s all about the oil price. The core rate, ex food and energy, surprised with a 0.3% jump in April to an annual rate of 1.8%. If that can increase to 2% plus in coming months, a 2015 rate rise will be pretty much locked in.

And then what happens?

Well, Wall Street has now tired of endlessly debating exactly when the Fed will raise, happy to assume this year, and has moved on to endlessly debating just how markets will react. In one camp, commentators suggest that the markets will have had so long to be ready for a rise there will be no major panic, while in the other camp, commentators suggest markets are never that smart and there will indeed be a period of volatility. Perhaps even a long awaited sell-off for stocks.

Many point to the “taper tantrum” of 2013, which saw Wall Street panicking mid-year when the Fed began to signal it was preparing to wind back the pace of QE. But in December when the Fed finally announced it was beginning the taper, the US stock markets took off. Sell the rumour, buy the fact.

By October last year, when QE finally ceased, markets shrugged.

Anyway, we’ve probably got another four months or more to discuss the subject.

Broke

The other great debate raging across the globe at present is, of course, what will happen if Greece leaves the eurozone. We know that Greece is determined not to leave, so it would have to be kicked out. Over the weekend, the Greek finance minister informed that the country did not have the money to make good on E1.6bn of repayments due to the IMF next month while also covering wages and pensions.

It is up to the creditors to make concessions, he said, given Greece has done everything it can to make improvements. The European Commission will no doubt disagree, but the question remains as to whether it is worth the billions of taxpayer funds that will be required to keep Greece on life support for several more years just to hold together what has been a flawed experiment in creating a monetary union.

We may soon find out, and again, commentators disagree on what the result would be were Greece to be shown the door. Opinions range from nothing much, given Greece is small and everyone’s had a few years to reduce their exposure, to catastrophe, given there remains a web of debt that entangles the eurozone.

Greenbacked

The strong US inflation number and Janet Yellen’s “this year” guidance drove the US dollar higher on Friday night, up another 0.8% on its index to 96.14. It was not good news for commodity markets.

The LME is closed tonight to no doubt traders were looking to square up on Friday night, and on the back of the dollar sent aluminium down 0.5%, copper, lead and zinc down over 1% and nickel down 2%.

The oils were also impacted, with West Texas falling US59c to US$59.99/bbl and Brent falling US89c to US$65.56/bbl.

But just when you thought iron ore prices might be slinking back to their lows, spot iron ore shot up US$2.30 on Friday to US$59.90/t just to confuse the issue. Iron ore miners will likely receive a boost on the local bourse today.

Gold ignored the stronger greenback and closed as good as steady at US$1205.90/oz.

Forex traders did not ignore the US dollar nonetheless, nor Yellen’s commentary, and sent the Aussie down another 0.9% to US$0.7823.

The SPI Overnight closed down 9 points.

The Week Ahead

The Memorial Day weekend effectively signals the beginning of summer in the US, yet this year has not seen any signs of “Sell in May” ahead of the summer wind-down. US markets are closed tonight but there is plenty of data due throughout the week for the Fed to get its teeth into.

Tomorrow night sees durable goods, new home sales, the Case-Shiller and FHFA house price indices, Conference Board monthly consumer confidence and the Richmond Fed manufacturing index. Wednesday brings a flash estimate of the service sector PMI, Thursday pending home sales, and Friday the Chicago PMI and Michigan Uni fortnightly consumer sentiment.

Friday also brings the first revision of March quarter GDP. Wall Street was somewhat shocked when the first estimate came in at a lowly 0.2% growth, but weakness in the relevant monthly data at the time has economists predicting another slide into contraction on revision, a la 2014, with a fall of 0.9%.

The Japanese economy will be in focus this week with a raft of data due, including trade today, retail sales on Thursday and industrial production, inflation and unemployment on Friday.

The countdown begins this week for Australia’s own March quarter GDP result, due next Wednesday. This Wednesday we’ll see March quarter construction work done and on Thursday, private sector capex. April private sector credit numbers are due on Friday.

RBA deputy governor Philip Lowe clearly enjoys the sound of his own voice, as he’ll be making another speech on Wednesday.

On the local stock front, OZ Minerals ((OZL)) will today lead off another group of AGMs this week while Ozforex ((OFX)) and Technology One ((TNE)) post earnings results tomorrow, Thorn Group ((TGA)) and Aristocrat Leisure ((ALL)) on Wednesday, ALS Ltd ((ALQ)) and Programmed Maintenance ((PRG)) on Thursday, and Fisher & Paykel Health ((FPH)) on Friday.

Ever popular investor days will be hosted by Suncorp ((SUN)) and Nine Entertainment ((NEC)) on Wednesday.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. On Friday he's the guest speaker at an exclusive CEOs lunch in Sydney.
 

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

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