The Monday Report

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

By Greg Peel

It was a rare quiet session in terms of volatility on Friday with the Dow closing 22 points higher after having fluctuated around the flat line all day. The S&P gained half a point to 1285. It is of no surprise Wall Street needed a bit of a breather after a week of exuberance, a month of gains, and three months of absolute turmoil.

Dow components Chevron and Merck were the result highlights of the session, and both satisfied enough to see mild gains. On the economic data front we had personal income and spending and consumer sentiment.

After falling 0.1% in August, US incomes rose 0.1% in September. Spending jumped 0.6% in September following only a 0.2% gain the month before. Michigan Uni's fortnightly consumer sentiment gauge showed an increase to 60.9 from a previous 57.5. The gain is nice heading into Christmas but the earlier reading matched the March 2009 low.

Currency markets settled down on Friday, leading to a slight increase in the US dollar index to 75.05. The Aussie slipped 0.1% to US$1.0701 and gold is barely changed at US$1743.70/oz.

Base metals have been surging backwards and forwards en masse these past few sessions but even they had a quieter night, finishing mixed on small moves. Brent oil fell US$2.17 to US$109.91/bbl and West Texas lost US38c to US$93.32/bbl.

The SPI Overnight rose 13 points or 0.3%.

So Friday was somewhat of a picnic day after a week of well received news and ahead of the next round of announcements out of Europe. The G20 leaders will gather in Cannes on Thursday and on Sunday the eurozone finance ministers will hold their meeting which was postponed last week. While G20 meetings are usually just a photo-op and a chance to make inconsequential motherhood statements, it is assumed the finance ministers' meeting will fill in the missing detail on the resolution plan outlined last week. That being, how will the EFSF be leveraged to E1trn, how will the 50% haircut on Greek debt be managed, and how will the distribution of E106bn for European bank recapitalisation be sorted out?

Today is the last day of the month meaning the possibility of last minute portfolio adjustments. After such a solid rebound, those fund managers underweight equities – and that's most of them – are going to start to have to make serious decisions about whether it is prudent to remain so cashed up at the risk of “missing the boat” in the eyes of potential investors. That is not to say, of course, that what came out of Europe last week means the risk is now fully negated. We could still see disagreements and delays, and potentially more market volatility.

Speaking of volatility, the VIX volatility index in the US absolutely plunged in Thursday night's session and finished Friday night at 24. That's a big drop given the index has traded in a range of 30-48 since August, and suggests a rather comfortable market. Aside from those who would have sold out of put option protection last week, others would have tried to snaffle the last of the high premiums in using short puts to go long the market.

If we assume nothing new out of Europe until at least the end of the week, we can presume that US earnings and data and Australian data releases this week will provide with what we might call a “normal” period of trade. 

There are an enormous amount of US earnings releases this week but we're now through most of the big names. Tonight sees the Chicago PMI, and then tomorrow it's manufacturing PMIs across the globe from Australia, China, the eurozone, UK and US. The US also sees vehicle sales and construction spending on Tuesday. Wednesday brings the October private sector jobs report from ADP and, importantly, a Fed monetary policy meeting with scheduled press conference.

There remains a school which believes the Fed will end up having to implement QE3 at some point from a domestic perspective even if Europe is now contained. However, with recent data looking better, if not fabulous, and the earnings season leaning to the positive surprise side, there's very little chance Ben Bernanke will be touting any new monetary policy initiatives this week.

The US sees factory orders on Thursday along with chain store sales, and all of Australia, China and the UK will provide service sector PMIs with the Europeans following up on Friday. And on Friday it's the all important US non-farm payrolls report for October.

I have said enough about the RBA's pending decision in reports up to now. There is every reason why the RBA could cut on Thursday, with the weak September inflation report being front and foremost, but as to whether right now is a good time ahead of more ratification from Europe is another matter. Things should be a lot clearer in December. It's still 50/50 in my mind.

Today all of Australia will be watching just what sort of damage will be inflicted on Qantas ((QAN)) shares following the extraordinary events of the weekend. Investors will need to weigh up loss of income and loss of reputation against the “victory” won over the unions and implications for resolution of a dispute which might otherwise have had the airline slowly bleeding all the way to Christmas.

Today we also see the local construction PMI, the TD Securities inflation gauge, the RP Data-Rismark house price index and private sector credit. Tomorrow it's a quarterly house price measure, the manufacturing PMI and the RBA meeting. Victoria will be on holiday tomorrow for the Cup and most of the rest of Australia will be out of action for the afternoon, except of course the interest rate trading desks.

Wednesday sees building approvals and new home sales and Thursday the services PMI along with both monthly and quarterly retail sales.

Today sees production reports from AWE ((AWE)), Murchison ((MMX)) and Minara ((MRE)). Westpac ((WBC)) will report its full-year result on Wednesday and ANZ ((ANZ)) will follow suit on Thursday. Woolworths ((WOW)) will hold a strategy day on Wednesday, and there is another big round of AGMs in store this week.

Good luck tomorrow.

Rudi will appear on Sky Business twice this week. First on Switzer TV on Tuesday late (7-8pm), then on Lunch Money on Thursday at noon.
 

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

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