The Monday Report

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This story features GRAINCORP LIMITED, and other companies.
For more info SHARE ANALYSIS: GNC
The company is included in ASX200, ASX300 and ALL-ORDS

 By Greg Peel

It is not often the Australian market has enough guts to stage its own spectacular intra-session recovery rally, particularly in defiance of a 370 point fall in the Dow. But that's what happened on Friday.

It is clear the greatest influence on the ASX 200 at present is US traders. Australia is seen as a safe place to invest on a sovereign basis and a good proxy for emerging market investment given its commodity production. And if US investors buy Aussie shares, they win twice if both share prices and the Aussie dollar rally. But it also means they lose twice the other way around.

Even before Friday's early plunge, the ASX 200 was down over 25% from its peak in USD terms compared to 12% in AUD terms. The panicked offshore exit from the Australian “risk” trade has meant the ASX 200 has underperformed (or outperformed on the downside if you like) the S&P 500 suggesting the Australian market was a lot more “oversold” than the US market. It was ripe for a bargain-hunters' bounce, if that's what Friday was.

The interesting question is: Who was buying on Friday? Was it just local, or were the Yanks back in as well? Notably, the Aussie staged a big recovery rally too, suggesting more of the latter, except that a rumour went around the RBA was is providing some stability, meaning selling US dollars for Aussie. It's an interesting question because it pertains to the US mindset. Were the Yanks bargain-hunting on a belief the market had become oversold? Or was it simply a pre-weekend short-covering rally at a time when no one wants to hold risk over the weekend? Europe tends to make important decisions on weekends at the moment.

The question carries over into Friday night's trade on Wall Street. The Dow opened 150 points lower, but immediately began a morning rally to be over 100 points up at noon. Specific impetus for the rally was the news the German parliament has passed the legislation required to allow Germany to make its important contribution to the new E760bn euro stabilisation fund. It was one big hurdle cleared.

But the rally lost steam in the afternoon and by 3.30pm the Dow was just below square again. Fear and uncertainty persist, both in regards to the US financial reform bill and to European stability. France still has to vote on its contribution this week, and others, such as Italy, haven't even set a date! Yet in the last half hour, the Dow jumped back to close up 125. Now that move definitely smacks of pre-weekend short-covering and not bargain-hunting.

So where does it leave us? Still nervous, is the obvious answer. It's too early to call Friday's trading here and in the US any more than a brief relief rally. Notably, Wall Street returned to following the euro on Friday night, which leapt on the German news, sold down again, and recovered toward the close. The world is short euros, so any “positive” news, including rumours of ECB intervention, means short-covering. But the euro's trajectory quite certainly remains down.

In the 24 hours from Friday morning to Saturday morning our time, the Aussie jumped back 2% to US$0.8328 having previously even stared US$0.8000 in the face. This was Aussie short-covering rather than any re-establishment of the yen carry trade. The euro-yen “risk indicator” was down yet another 2.7% on Friday night.

But what we did get was a net 0.7% fall in the US dollar index to 85.42, which along with positive sentiment surrounding the German parliamentary decision, allowed base metals to stage a bounce (no doubt more short-covering). Aluminium and copper were up 4%.

Oil was nevertheless down US76c to US$70.04/bbl. Traders have finally begun to focus on excessive US oil inventories over this past week or so. And gold is still betwixt and between, falling another US$6.00 to US$1177.00/oz.

The SPI Overnight put on a healthy 58 points or 1.4%. But as this was also a “pre-weekend” trade, it is not necessarily a good indicator for today's open.

From Australia's perspective, it's a quiet week on the economic data front – not that economic data releases are getting a lot of airplay at present. Today sees vehicle sales and then on Wednesday it's first quarter construction work done. Wednesday also brings Westpac's measure of leading economic indicators from March, while Thursday sees a similar report from the Conference Board.

Thursday wraps up with the important measure of first quarter private capital expenditure and capex intentions. Past spending and spending intentions by businesses provide a good proxy for the state of the economy and these data are closely watched by the RBA.

It's a busy week in the US nevertheless. Tonight sees the Chicago Fed national activity index and exiting homes sales, while Tuesday brings both the Case-Shiller and FHFA house price indices, the Richmond Fed manufacturing index and the Conference Board consumer confidence survey.

On Wednesday it's durable goods orders and new home sales, and then on Thursday we learn the first revision of first quarter GDP (previously 3.2%, market is expecting 3.5%), along with first quarter personal consumption and expenditure. Friday it's April spending and income, the Chicago PMI, along with the second Michigan Uni consumer confidence report for May.

This week sees another very big round of US Treasury auctions, with US$42bn of two-year notes offered on Tuesday, US$40bn of fives on Wednesday and US$31bn of sevens on Thursday. Now that ECB is in buying European bonds, will the flight to quality be as pronounced? The US is not without its own debt problems.

The UK will produce its first estimate of first quarter GDP on Tuesday, which will make for an interesting start for a new government which has been voted unlikely to see out a term.

On the local stock front, Campbell Bros ((CPB) delivers its full-year result on Tuesday, and Graincorp ((GNC)) its interim on Wednesday. AGMs being held this week include Rio Tinto ((RIO)) on Wednesday and Austar ((AUN)) and Westfield ((WDC)) on Thursday. Wesfarmers ((WES)) will hold a Strategy Day on Thursday.

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

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