The Monday Report

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By Greg Peel

Wall Street is currently undergoing a period of volatility driven by two separate factors which are unrelated but inexorably linked. One is the bursting of the speculative commodity bubble, which first meant big price falls but now has become rock and roll as different prices try to settle down and find a level of fundamental value. The other is the ongoing European debt crisis, which currently sees Greece back in the spotlight.

A German newspaper reported on Friday that the players in the euro crisis are, as usual, split – this time over the “soft” restructuring of Greek sovereign debt. Germany and the IMF want to go down that route, which means maturity extensions and interest rate relief as opposed to the “hard” restructuring of principal write-downs, while France and the ECB don't. Since the crisis began early last year such disagreement has been a feature, and it is uncertainty which has driven weakness in the euro more than the ramifications of actual decisions. While Europe bickers, the euro falls. Once Europe finds common ground, the euro rebounds again. In this case, Greek restructuring has long been assumed inevitable by the market.

It was uncertainty which drove the euro to its lowest level in six weeks on Friday night, to just above US$1.41. Consequently, the US dollar index jumped 0.7% to 75.71. The speculative issue here is that the world is short US dollars, so again speculation plays a part.

Uncertainty is not good for stock markets either, so the Dow finished down 100 points or 0.8% and the S&P fell 0.8% to 1337. In technical terms, the S&P keeps being pulled back toward its 100% rally-from-the-GFC-bottom level, either from above or below.

Commodities, however, were mixed. Copper and zinc were stable while the other base metals fell, with the 2% drop in aluminium the standout. Gold fell US$11.90/oz to US$1494.70/oz as a reaction to the US dollar but beaten-down silver actually rallied 2% to US$35.31.

For oil, the focus is not just on speculation and currency but also on the mass of water still slowly moving down the Mississippi and the impact that has on US supply. West Texas was up US37c on Friday to US$99.34/bbl and Brent was up US85c to US$113.83/bbl.

The Aussie thankfully dropped a cent to US$1.0576.

The Greek situation overshadowed the release of the eurozone first quarter GDP result (first estimate) on Friday, which at 0.8% growth was better than expected. But it was also a polarised result, given a surge in growth in Germany and France, which contribute together about half of all eurozone growth, dwarfed the results among the troubled members. Greece, nevertheless, posted its first positive result since 2008, albeit climbing back from a much reduced base.

The US CPI number for April came in much as expected, showing a 0.4% increase driven mostly by fuel costs. The core result (ex food & energy) was a 0.2% rise as expected. Year-on-year the core CPI is up only 1.3%, but 2011-to-date that figure is 2.1%. The Fed's core target is a pace below 2%.

The SPI Overnight fell 35 points or 0.7%.

The US housing market is the area of the US economy Wall Street would rather not think about, and tonight sees the monthly NAHB housing market index along with the Empire State manufacturing index. Tuesday it's housing starts along with industrial production, and Thursday it's existing home sales with the Philly Fed manufacturing index.

On Wednesday the Fed will release the minutes of the last FOMC meeting, in which economists will be looking for further clarification of the Fed's intentions over QE2 and ongoing monetary policy. Bernanke did spell the details out in his press conference but that won't stop the magnifying glasses coming out.

More hotly anticipated downunder will be the release of the RBA minutes tomorrow, after we see housing finance and investment lending data today. Economists are now split between those who see a June rate rise as inevitable and those who believe there won't be a move until perhaps August. A possible swing factor coming up will be the release of various March quarter data in the lead up to the GDP result on June first. It's expected to be a disaster-affected negative result, but by how much?

(Incidentally, June first is a Wednesday, so the GDP result will be out before the RBA's June meeting on the first Tuesday of the month.)

Tuesday also brings lending finance data, and then on Wednesday it's the first of the quarterly numbers with the wage cost index. On Wednesday Westpac will release its monthly survey of consumer confidence.

Japan will release its first quarter GDP on Thursday, which will include a half-month of tsunami impact. It will be the next result which really tells the tale.

There are a large number of Australian company AGMs this week, mostly for smaller caps. Some exceptions are OZ Minerals ((OZL)) and Adelaide Brighton ((ABC)) on Wednesday and MAp Group ((MAP)) on Thursday. 

Rudi will appear on Lunch Money on Sky Business on Thursday at noon. He will give a presentation to ASX Investment Hour in Sydney on Tuesday.

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

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