The Monday Report: China On Investors’ Mind

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By Rudi Filapek-Vandyck

FNArena's sympathy goes out to the many who have been affected, directly and/or indirectly, by adverse weather and floodings in Queensland and elsewhere.

It wouldn't take too much a stretch of the imagination were the opening three weeks of January to prove characteristic for the new calendar year overall. After all, the beginnings and ends of calendar years are rather arbitrary -the Chinese have their celebrations in two weeks- and none of the main themes that dominated global finance and equity markets in 2009 and 2010 have disappeared during the Christmas Holiday Break.

Europe remains in deep trouble. The Chinese are hellbent on keeping property speculation (and domestic growth and domestic inflation) in check while US economic data are far from fantastic, but they seem good enough to feed the general expectation that 2011 will prove better than last year and the year prior, from an economic point of view.

Expectations that the new year will continue to keep global investors "on edge", virtually assuring "volatility", but also supporting a general sense that "better times are ahead" are thus hardly surprising. 2011 should be the year that sees the return of crude oil prices to levels above US$100 per barrel and economists are already looking into what price levels should be considered "dangerous" for the ever so fragile economic path in developed economies.

Talk to chartists and they'll tell you price action since the start of the year has not been good for risk assets, including the Aussie dollar and Australian equities.

Let's not forget that while global equities had a positive year in 2010, all gains were booked in the second half (since Fed started flagging QE2), but markets such as in China were still deeply negative while the story in Australia was all about resources and high dividends. Projected earnings growth for Australian companies ex-resources remain well below peers internationally and the natural disaster in Queensland has only further reinforced this underlying theme. It would seem that, for the short to medium term outlook at least, the Australian share market remains poised for further underperformance.

No wonder overall interest for small to medium resources companies has seldom been as high – it's where most of the trading and investment returns have been booked over the past six months. Mind you: various stockbrokers have also started to point into the direction of Australian retailers while using the label "oversold". When it comes to identifying which companies are poised to actually benefit from the Queensland tragedy, it would seem that Tox Free Solutions ((TOX)) is number one on many a stockbroker's short list.

No guessing as to why the Tox Free share price has been on the run these past few days – the share price surpassed the consensus target during today's session (for those who know what I am talking about^*).

As far as the immediate calendar is concerned, there's not much on offer in Australia, with a consumer confidence gauge scheduled for Wednesday and import/export prices on Friday. Retreating water levels in Queensland will remain of general interest, the Aussie dollar finds it impossible to remain above parity levels with the USD and today's release of the TD Securities local inflation gauge proved pretty much a non-event. But the local calendar also sees an increasing number of resources companies releasing quarterly production reports as a warm-up to the February reporting season and Rio Tinto ((RIO)), BHP Billiton ((BHP)), Santos ((STO)) and Woodside ((WPL)) are all on this week's calendar.

US markets are closed today so the reporting season post-JP Morgan and Alcoa will resume on Wednesday (Sydney time). As far as economic data releases are concerned, the so-called Philly Fed Report on Thursday, preceded by various indicators on the US housing markets will be closely watched.

China will remain firmly on global investors' radar this week. Not only did the People’s Bank of China raise the reserve requirement ratio for Chinese banks by 50bps to 19%, effective Jan 20. The move announced on Friday marks the fourth increase in just over two months, and the seventh rise since early 2010.

In addition, China’s December property price inflation fell to 6.4% (y/y) from 7.7% in November, marking the smallest gain in 13 months for the 70 city index, but also for the 19th straight month of house price increases, despite the authorities’ tightening measures.

On Tuesday, the Chinese President's visit to the US commences. On Thursday, a whole slew of key economic data ("for reference only") are scheduled for release, including GDP growth and consumer inflation for the final quarter/month of 2010. This week China seems truly poised to dominate headlines and share market action.

This week's calendar also brings us unemployment in the UK and retail sales in New Zealand. I omitted some data releases in Japan because, let's be honest, who cares these days?

For more details, including which companies are meeting with shareholders this week/month, see the full FNArena calendar on the website.

Greg Peel is still on holidays and won't return until after Australia Day. The Overnight Report will return tomorrow, written by myself. I have skipped the weekly invitation for Sky Business this week (should be back on screen on Thursday next week).

I hope you all had a Great Break and you are ready for another year filled with intrigue and a plethora of possible scenarios.

* All paying subscribers to FNArena (6 month and 12) have exclusive access to my e-booklet "Five Observations (That Matter)" – if you have not yet taken up the opportunity to download the document, or you failed to receive the emails about it, send us a request at info@fnarena.com and we'll send it to you. General feedback from fellow-subscribers is that it is a "must-read", so you better make sure you don't miss it.

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

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