The Monday Report

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By Greg Peel

Cracks in China

The big fall away from the 5700 mark the ASX200 experienced last Wednesday appears to have taken the wind out of the sails of any post-Greece revival for the Australian stock market as we approach the local reporting season. Friday saw another soggy session, weighed down by commodity prices and another weak lead from Wall Street.

The index showed some attempt to rally in the morning on Friday but if ever it were going to stage a comeback, that thought was killed off by the release of the (former HSBC’s) flash estimate of China manufacturing PMI for July. It came in at 48.2, missing forecasts of 49.8.

This is a big “miss” in Chinese data terms and again brings into question the efficacy of Beijing’s 7.0% June quarter GDP result. At the time, economists argued that constituent data did not appear to add up to such result and weakness in July manufacturing implies the China’s manufacturing sector was contracting as the quarter came to a close.

By Friday’s closing bell, Bridge Street booked a mixed bag of data movements and typical end of week lack of conviction. The consumer sectors were the hardest hit, the banks continue to be impacted by capital raising scares, and weak metals prices continue to weigh on materials. Meanwhile the two main defensives – utilities and the telco – managed small gains alongside energy, which is surprising given the fresh slide for oil prices.

Gloom

The shock earnings result from Amazon might have been expected to raise some hopes at the end of a generally sour week for US quarterly earnings reports but it wasn’t to be. Amazon shares rose as much as 19%  intraday but settled back to close 10% higher as weak sentiment weighed on Wall Street.

Still, Amazon is now a bigger company in capitalisation terms than Wal-Mart, which is extraordinary given the company never has booked, and at this stage has no intention of ever booking, a profit. Wal-Mart is America’s biggest employer, Amazon is purely an online business. Old world versus new.

The weak Chinese data provided by Caixin/Markit helped Wall Street lower on Friday, with resource sector stocks continuing their slide on lower commodity prices. The US does not export raw materials in any meaningful way to China, but it does need a strong Chinese economy to support exports of capital goods and consumer products. Poor June quarter results posted by everyone from Caterpillar to Apple last week carried overtones of weaker than expected Chinese demand.

And data from home didn’t help on Friday night. Sales of new single family homes fell 6.8% in June to the slowest pace in seven months, although economists warn this is a volatile estimate subject to significant revision.

With the technicals signalling a warning ahead of Friday’s session, the Dow subsequently fell 163 points or 0.9%. The S&P lost 1.1% to 2079 and the Nasdaq dropped 1.1%. On Thursday night the S&P500 was sitting right on the psychological and well-worn 2100 level, so once it broke there was little to stem the tide.

The S&P closed down 2.2% for the week – the biggest weekly fall since March.

Commodities

Oil is now “officially” in bear market territory. Friday’s night’s US76c drop for West Texas crude to US$48.09/bbl took its fall from the US$61 high seen in June to 22%. The turn in the oil price is yet to elicit a response from US producers, given the rig count rose again last week according to data released on Friday.

Meanwhile, Saudi monthly supply levels continue to grow. No doubt the next bottom for the oil price will come when that rig count turns down once more. Brent fell US87c on Friday night to US$54.64/bbl.

The weak China data caused further groans on the LME last night but after a weak of falls, base metal prices consolidated somewhat. Lead, nickel and zinc were weaker but aluminium and copper posted modest gains, and the wild ride for tin continued with a 3% jump.

Iron ore is managing to hold up above the US$50 level, and on Friday rose US10c to US$50.70/t.

The US dollar index was steady at 97.21 but gold found some sub-1100 buyers on Friday, to drive a US$10.10 gain to US$1100.30/oz.

The Aussie dollar otherwise reflected China concerns, and it is down 0.9% to US$0.7284.

With a trickle of local earnings reports due this week as precursors to the results season proper, the Australian market looks set for a weak start. The SPI Overnight closed down 49 points or 0.9% on Saturday morning.

The Week Ahead

US earnings reports will continue to flow in this week but the focus will also be on monetary policy as the FOMC delivers a policy statement on Wednesday and the first estimate of US June quarter GDP comes out on Thursday. It is the last Fed meeting before September, when many expect the first rate rise. The forecast for the GDP stands at 2.5%.

The US will also see durable goods tonight, monthly consumer confidence, Case-Shiller house prices and the Richmond Fed activity index on Tuesday, and pending home sales on Wednesday. Friday brings the Chicago PMI and Michigan Uni’s fortnightly consumer sentiment gauge.

Germany’s IFO sentiment survey, due tonight, may provide some insight into how the whole Greek drama has impacted while at week’s end, a flash estimate of July eurozone CPI will indicate how the ECB’s money printing is going.

Japan will release retail sales, industrial production, unemployment and inflation data over the course of the week.

The economic focus in Australia comes later in the week when building approvals are released on Thursday and Glenn Stevens makes another speech. Friday sees private sector credit and the June quarter PPI.

But increasingly the focus in Australia will be on the micro as we approach August. There will be a late scramble of resource sector production reports this week, coinciding with a trickle of earnings season curtain-raisers.

Navitas ((NVT)) will report today, while GUD Holdings ((GUD)), Energy Resources of Australia ((ERA)) and ResMed ((RMD)) will report on Thursday.

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. Also on Wednesday, Rudi will host Your Money, Your Call Equities.
 

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

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