The Monday Report

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By Greg Peel

Thursday night's trade in the US gave us indication that there were indeed sellers lined up to slap the rally, but the good news of the oil spill being plugged and Goldman Sachs settling its fraud case was enough to give the market a kick to the close. Volume on the downside has nevertheless exceeded volume on the upside, so one felt any piece of bad news might have a significant impact. Unfortunately, Friday brought five pieces of bad news.

It began with Thursday's after-market release of a Google result which missed earnings expectations for the first quarter in five. It got worse on Friday when all of Citigroup, Bank of America and General Electric beat earnings expectations but fell short on revenue forecasts.

While market-wide predictions tend to focus on earnings, confirmation of economic recovery can only be made through revenues. All of last year earnings were bolstered by cost cutting while revenue growth was unimpressive. On Friday, the banks were able to show solid earnings but only by bringing back provisions for bad debts to the bottom line. Trading profits and general banking revenues disappointed. For the multi-faceted GE, it was a simple case of cost cutting.

The reduction in bad debt provisions from the banks is a positive sign, but in contradiction, mortgage delinquencies continue to rise.

Making a bad day on the earnings front worse was the first Michigan Uni consumer confidence measure for July. The last survey in June showed a reading of 76, and economists had expected a slight drop to 74. But the result of 66.5 was the lowest since August last year. A reading of 90 is considered “confident”. Consumers clearly fear the double-dip.

The consumer price index result for June was mixed, with the headline rate falling 0.1% to again confirm a disinflationary environment but the core (ex-food and energy) rose 0.2%.

Put all that together and we had a Dow falling 261 points or 2.5% while the S&P lost 2.9% to 1064 and the Nasdaq was hammered by 3.1%.

Last week had seen evidence of investors moving out of Treasury bonds and into stocks, indicated by the ten-year yield pushing back above 3%. Last night that reversed again, and the tens fell to 2.93%. The US dollar index ticked up slightly to 82.57 after a few days of decline sending gold down US$15.50 to US$1192.90/oz. The Aussie risk indicator lost 1.5 cents to US$0.8690.

Base metals in London lost 1-2%, oil fell US61c to US$76.01/bbl and the SPI Overnight dropped 79 points or 1.8%.

We are now entering a five-week period of uncertainty for the Australian market given early election polling is inconsistent. A win to the coalition would be positive for stocks, particularly in the resource sector. But it is unlikely the market will take big bets either way at this stage.

One interesting element of Friday night's session in the US was the movement of the VIX volatility index. Having drifted down to 25 from 30 over the recent rally, one would have fully expected a pop straight back to 30 on a night when the S&P 500 falls 2.9%. But while the VIX did reach 28 mid-session, it actually fell away to 26 by the close.

What this implies is that traders were selling puts on the drop, not buying them as would be the case in panic. We could thus assume that for all the sellers supposedly lined up, there are still buyers looking to take advantage of dips (shorting puts is a way to “buy” stocks and receive premium).

As we move into the new week, movements in the US will again be dominated by earnings reports. But even good reports are battling against ongoing weak economic data. There is a round of housing data out in the US this week which could well spook the market further. Double-dip fears linger, but most economists are holding on to simply a slowdown in the recovery rather than a return to recession. The question remains as to whether the market has not already discounted such a slowdown.

Tonight sees the housing market sentiment index in the US. Tuesday it's housing starts and building permits, and Thursday existing home sales and the FHFA house price index. Thursday also sees the Conference Board leading economic index.

The UK is slated to provide its first estimate of second quarter GDP on Friday, but having only just released its final first quarter result after a delay one can't be sure the UK is ready yet. Friday will nevertheless be important in Europe given the ECB will release the results of its European bank stress tests.

Australia's economic week begins tomorrow with the release of the minutes of the July RBA meeting, and Governor Stevens will speak on effects of the GFC. On Wednesday NAB reports its net second quarter business confidence index while Westpac provides leading economic indicators as at May. Friday sees the second quarter index of import and export prices.

On the local stock front, Iluka will provide its quarterly production report on Tuesday, BHP Billiton ((BHP)) on Wednesday, Newcrest ((NCM)) and Santos ((STO)) on Thursday and Woodside ((WPL)) on Friday. Woolworths ((WOW)) will report its June quarter sales result on Wednesday.

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

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