The Monday Report: Plenty To Get Excited About

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

By Rudi Filapek-Vandyck

US equities survived quadruple witching hour on Friday which brings together the expiration of four kinds of options and futures on one single day. US commentators have been quick in pointing out history shows equities are likely to weaken post the June expiration day. The next few sessions will bring confirmation – or not.

However, the Chinese are likely to have stolen the show over the weekend as the central bank decided it was time to loosen its grip on the yuan, which is now allowed to gradually appreciate more against the US dollar. The knee-jerk response from investors will probably to buy up on industrial commodities on the general expectation that a stronger Chinese currency improves local purchasing power and thus demand should rise.

Chinese central bankers have done the extra effort in emphasising there won't be any fireworks coming from their decision and the yuan-USD trading band is to remain unchanged, for now. It remains to be seen whether this will keep a lid on investor enthusiasm though. AUD/USD has already jumped to 0.88 this morning, right through key technical resistance.

Note: the Chinese announcement comes one week prior to the G-20 leaders meeting.

On the local front, Telstra ((TLS)) and the Rudd government announced -finally- a deal in the NBN Co saga worth some $11bn. The deal still requires shareholder approval and does not allow Telstra to become an equity partner in the project; it will become the biggest customer instead.

Enough to get the sell-side stockbrokers and momentum traders excited before the opening bell on Monday morning in Sydney. Should make for a positive extension of the past two weeks into the new week.

Adding to the ongoing positive sentiment is, of course, the fact that US equities have now managed to stay above their 200 day moving averages for three consecutive sessions. This is fueling hopes equities in Australia remain on their way of following the set example.

Note also that all three major indices in the US are now in positive territory for the calendar year, albeit only slightly so.

On Friday, the Dow Jones Industrial Average rose 16.47 points, or 0.16%, to 10450.64, marking its fourth-straight gain and longest winning streak since late April. The measure climbed 2.35% last week, marking its second-straight week in the black and its best two-week performance on a percentage basis since November. The DJIA is now up 0.22% for the year.

The Standard & Poor's 500 index advanced 1.47, or 0.13%, to 1117.51. This far more representative index of US equities rose 2.37% last week, its second-straight weekly gain and best two-week percentage performance since November. The measure is up 0.22% for the year to date.

The Nasdaq Composite rose 2.64, or 0.11%, to 2309.80, its seventh-straight positive close. That marks the measure's longest winning streak since a 12-day run last July. The technology bellwether jumped 2.95% over the past week, the measure's second-straight positive week. The Nasdaq is up 1.79% for the year.

European equities equally closed slightly higher on Friday, with banking stocks leading markets over there.

Commodities had a rather lacklustre session on Friday, opening up divergence with equity markets. This divergence was even more highlighted by the fact spot gold managed to surge through key technical resistance of US$1250.

Gold bulls are now expecting a swift rally to US$1300/oz and beyond.

On Friday, US bonds declined after Europe's efforts to curtail the debt crisis offset weakening US employment and low inflation, decreasing the safe haven appeal of government debt. The yield on 2-year notes increased 1bps to 0.709% and the 10-year yield increased 3bps to 3.220%.

Australian bond futures outperformed US Treasuries. The implied yield on 3-year bond futures remained unchanged at 4.91% (price at 95.090) and the implied yield on the 10-year bond futures gained 1bps to 5.390% (price down 1bps to 94.610).

The SPI futures hardly moved since Friday, but that's likely a reflection of the fact that investors still have to digest the unusually large amount of events that will dominate trading on the Australian Stock Exchange today.

Note that overall volumes in the US remain on the thin side.

Later this week the focus will shift to the FOMC meeting. There won't be any change to the Fed Funds rate, but investors will be closely watching any possible signs and extra-insights. If my personal observations are correct, the majority of market views is now that official interest rates in the US will remain lower for longer, with only a small minority sticking to higher interest rates at some point this year.

CommSec is one of them, with economists over there anticipating a Fed interest rate hike at the November meeting. The market will be closely watching the Fed statement on Wednesday. Is there any change in wording?

Other US events that will be on investors' radar this week include, on Tuesday, data on existing home sales plus the Richmond Fed manufacturing survey. New home sales data are issued on Wednesday, the same day as the latest interest rate decision (no change) will be made public by the Federal Reserve. Data on durable goods orders are scheduled for release on Thursday with GDP (economic growth) and consumer sentiment on Friday.

Also, the freshly elected conservative government in the UK is expected to announce the most austere government budget for decades this week. On top of this, there are various interesting data in the UK as well as in New Zealand, where the recent decision by the central bank to raise official interest rates will be closely scrutinised by the market in the light of further data about the apparent strength of the NZ economy.

In Australia, the calendar for this week is rather light, with data on imports and new car sales due for release on Monday together with the Commonwealth Bank business sales index. On Tuesday ABARE issues its latest commodity forecasts and then there is the release of Q2 WBC–ACCI Survey of Industrial Trends on Thursday, followed by the financial accounts on Friday.

As far as specific company news goes, Suncorp-Metway ((SUN)) is organising an investor presentation and various smaller companies have either EGMs or AGMs, including Quest Petroleum ((QPN)) and Sigma Pharma ((SIP)) on Monday.

For all economic data release dates, AGM dates and times and other relevant information, please refer to the FNArena Calendar.

Click to view our Glossary of Financial Terms