The Monday Report

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: ERA

By Greg Peel

With two days to go there is as yet no resolution in Washington, however there is confidence in the Senate that a compromise is close to being reached. Nevertheless at this stage it is assumed any form of compromise will be voted down by the Tea Party in the House. The bill put to the House by Speaker Boehner on Friday was passed, but the Democrats had always declared it would be voted down in the Senate.

The real risk here is that the Tea Party takes the view, as has been suggested, that a default would reflect poorly on the incumbent Democrat administration ahead of next year's election, providing the Republicans with a boost. In other words, it's all about politics and nothing to do with responsible government. What the world will be hoping, therefore, is that it is the Tea Party which is beginning to look like the culprit and not the victim, will be pressured into backing down. That may require intelligent reflection, so a result before Tuesday is far from a given.

Friday night's trade on Wall Street provided a stark reminder that Rome has indeed been burning while Nero fiddles. It was bad enough that the first estimate of US June quarter GDP came in at only 1.3% growth, well below the 1.7% consensus expectation, but the real shock was a revision to the March quarter result. Having been established, on the third calculation, as 1.9% growth, the figure was revised down to a mere 0.4% growth.

On that news, the Dow plunged over 150 points on the open. But by 11 am, it was back to square. The simple explanation provided is that buyers have been waiting for an opportunity to attack given the recent debt-ceiling related devaluation of stocks, and that such a plunge was a worthy opportunity on the assumption a deal would be reached in Washington. Behind the buying was not simply an attitude of “there is no doubt a deal will ultimately be done,” but also a belief that any forthcoming credit rating downgrade, default-driven or not, is overdue anyway and “baked in” to prices. Notably, the broad market turned around at the point at which the S&P 500 hit its 200-day moving average at 1283.

One might also take a slightly twisted approach. To revise the March quarter GDP down to 0.4% from 1.9% is a shock, but it does mean, assuming 1.3% for June is accurate, that the US economy picked up pace from March to June rather than slowed further. Am I clutching at straws? We should also note the Japanese tsunami hit on March 11, so the impact on the US economy of unavailable parts for manufacture – an impact which proved greater than first assumed – was most felt in the June quarter.

This fact is supported by Friday's result for the July Chicago PMI. It came in at 58.8 – down from June's 61.1 but above consensus expectation of 58.0. The dip is attributed to slow auto orders which are still struggling to return to normal after the loss of parts from Japan most felt in May.

Consumer sentiment, as measured by Michigan Uni, fell to 63.7 from 63.8 a fortnight ago and from 71.5 a month ago. That's the lowest level since March 2009 – the point at which Wall Street hit its GFC bottom. One can hardly blame the US consumer for being nervous over the past two weeks as the debt ceiling farce has played out.

And it was such nervousness which eventually won out in Wall Street's Friday night session. After peaking at the flatline mid morning the Dow slowly lost ground throughout the rest of the day to finish down 96 points or 0.8%. The S&P lost 0.7% to 1292 and the Nasdaq lost 0.4%.

If ever there were an indication the world cannot believe the US will default, it came from Friday night's trade in US Treasuries. The benchmark 10-year yield fell a whopping 17 basis points to 2.78% on the GDP announcement. That in itself is not surprising, given a weak economy will indeed encourage a switch from stocks to bonds, but one may consider it surprising when the very debt being purchased is at risk of not being serviced.

It wasn't surprising that the US dollar index fell 0.5% to 73.74, and that gold rallied another US$10.00 to US$1627.20/oz. The other safe haven – the Swiss franc – is now in blue sky territory along with gold. The Aussie held steady at US$1.1000.

Base metals were once again in limbo, caught between a weaker US economy and a weaker US dollar, while West Texas crude (down US$1.58 to US$95.86/bbl) reacted more adversely to the GDP data than Brent crude (down US66c to US$116.70/bbl).

Last week was the worst week for Wall Street in over a year, with the S&P 500 falling 4%. Is Bridge Street more confident of a debt resolution than Wall Street? The SPI Overnight fell only 3 points on Friday.

It's the first week of the month this week and thus PMI week across the globe. Today sees the round of manufacturing PMIs from Australia, China, the eurozone, UK and US, and Wednesday sees the same for service sector PMIs. For the US, the manufacturing PMI is considered an important economic indicator, as is unemployment. This week sees the ADP private sector jobs report on Wednesday and the official non-farm payrolls number on Friday.

The US will also see construction spending tonight, personal income and expenditure and vehicle sales on Tuesday, factory orders on Wednesday and chain store sales on Thursday.

It is also a big week for central bank policy decisions. Tomorrow the RBA meets and the jury is out. ANZ, for example, believes a rate rise will be forthcoming while Westpac, as we know, thinks otherwise. Consensus does not expect a move while there are debt issues ongoing in both the US and Europe. If the debt ceiling debate does go right to the deadline, well that's on Tuesday night after the RBA meets. One presumes the board would elect prudence over pre-emption if a resolution is not yet clear, and may choose to do so anyway.

Both the ECB and Bank of England hold policy meetings on Thursday and the Bank of Japan on Friday. No changes are expected.

Australia's economic data week begins today with the TD Securities monthly inflation gauge. While this is not an official measure, the RBA does take note. But please be ready to ignore media hysteria if the annualised headline number is well over 3%. The RBA looks at the underlying (core) measure. Today also sees the HIA's new home sales data along with the manufacturing PMI.

Tuesday it's building approvals and the June quarter house price index, Wednesday brings the services PMI, retail sales and the trade balance, and on Friday it's the construction PMI.

This week things will begin to warm up for the August result season, which reaches its crescendo in the last two weeks of the month. The big day this week will be Thursday, which sees results from ERA ((ERA)), Rio Tinto ((RIO)), Seven West Media ((SWM)), Tabcorp ((TAH)) and Transurban ((TCL)). ResMed ((RMD)) chimes in on Friday.

And so it's over to Washington…

Rudi will appear on Sky Business on Thursday at noon. 

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

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