The Monday Report

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

By Greg Peel

Socialist Francois Hollande has claimed victory as the new president of France, introducing a new phase of eurozone uncertainty. He has vowed to renegotiate the strict eurozone-wide austerity pact championed by German chancellor Angela Merkel and supported by former French president Nicholas Sarkozy. Hollande has already indicated his first foreign meeting will be with the chancellor. Hollande ran on a ticket of lifting the strict budget measures and encouraging economic growth.

The change of French presidency comes in the wake of the Dutch government's resignation last month after support collapsed for the latest budget proposal for cooperative austerity in the Netherlands. While elections are yet to be held, the leading opposition is also calling for a shift towards growth stimulus and away from recession-inducing cuts. Merkel is safe from the voters in Germany for the time being but recent provincial elections have indicated a tide of resistance to austerity measures in Germany and the use of ever increasing amounts of taxpayer funds to bail out Greece and support other struggling eurozone members.

Over in Greece, the result of yesterday's election remains unclear. What is clear is a huge swing away from the incumbent two-party coalition after decades of electoral domination. With counting still underway the coalition appears to have gained less than a third of the vote, suggesting any government able to be formed would be fragile and unstable at best.

While the swing away from the government is clear, the swing towards the minor parties is fragmented. Smaller parties from both the left and right are beneficiaries but the chances of foes from across the political divide uniting in coalition are minimal. All opposition parties nevertheless agree over one significant point – they do not want to continue under Greece's strict bail-out and austerity restrictions. Policy pledges range from renegotiating the budget measures and the new sovereign bond structure – which would very likely be met with a curt “no way” from the troika – to exiting the eurozone.

It may be weeks before a government emerges in Greece, or there may need to be another election. It is looking decreasingly likely, however, that the end result will be one of a policy status quo. As to what happens next is anyone's guess. The people of economically desperate southern Europe are revolting against the recessive measures imposed by AAA-rated northern Europe and the IMF. The people of northern Europe are revolting against being forced to capitulate for the sake of their profligate southern neighbours. Right now the eurozone is a house of cards.

Eurozone uncertainty helped US indices to their worst week in 2012 to date. Friday's action on Wall Street was nevertheless very much compounded by the April US job numbers, which came in at 115,000 jobs added when 168,000 had been expected. Following a soft jobs result in March, the suggestion that the mild winter drove the US economy to an unseasonably strong performance in January-February, thus providing false signals of recovery, seems a solid one.

What made the jobs result even worse is that it wasn't bad enough. A result in excess of expectation would have driven Wall Street higher on recovery relief. A result of perhaps sub-100k would have suggested to Wall Street that QE3 would be dusted off and polished in preparation. This was a mid-range, limbo-land result. Hence the Dow fell 168 points or 1.3% to sit tenuously above psychological resistance at 13,038. The S&P fell 1.6% to 1369 and the Nasdaq lost a full 2.3% (Apple down 2.9%) to settle below psychological resistance at 2956.

There was one silver lining for President Obama in the jobs numbers – the official unemployment rate fell to 8.1% from 8.3%. But as was the case in March, the apparent improvement is simply representative of hopeful workers giving up and exiting the jobs market.

There was also a silver lining for Australia on Friday, with the Aussie falling 0.9% to US$1.0174. The problem for the Aussie, nevertheless, is that the introduction of further monetary stimulus in Europe and/or the US will put a floor under the currency despite the RBA having moved into an easing phase.

Concerns on both sides of the Atlantic had the US dollar index rising 0.3% to 79.49, while macro uncertainty saw gold defy the dollar in rising US$6.40 to US$1642.30/oz. The yield on the US ten-year bond fell 4bps to 1.88%.

Base metal moves were mixed and insignificant but it would appear the dam has finally broken for oil. With no sign of further escalation of geopolitical tension, crude bowed to the pressures of a weaker global economy on Friday as Brent fell US$2.90 to US$113.18/bbl and West Texas plunged US$4.05 to US$98.49/bbl.

The SPI Overnight was down 51 points or 1.2%.

Given the European election results were unknown as the closing bells rang in New York on Friday, the question as we enter the new week is as to whether the highly anticipated results are reflected in pricing to date, or whether we will see a further leg down on “sell the fact”. Uncertainty is the market's greatest enemy, and uncertainty is back in charge in Europe.

It will be a big week in Australia. The rebuilding of euro-fear in recent weeks provided the RBA with sufficient excuse to deliver a domestically-driven 50bps rate cut last week, and the situation has only now deteriorated globally. With woeful manufacturing and service sector PMIs of 43 and 39 respectively being achieved in April, economists are expecting the next cut in rates to come as early as June. There is a lot of data due out this week to provide further indication of Australia's economic position, and tomorrow night the Federal government will bring down its own “austerity” budget in its relentless pursuit of a fiscal surplus.

Today sees the local construction PMI, retail sales, building approvals, ANZ job ads and the NAB business confidence survey. Tomorrow brings the March trade balance, as well as the budget. On Thursday China will reveal its trade balance for April after Australia sees the latest unemployment numbers, then on Friday the monthly Chinese data-dump will provide inflation, industrial production and retail sales numbers. When will Beijing take another step in policy easing? The odds must be firming.

This week also sees trade balance numbers from Germany, Japan, the UK and the US, and on Thursday night the Bank of England will hold a monetary policy meeting. The UK markets are closed tonight for a public holiday, which means no base metal trading in London.

It's a quieter week in the US, with consumer credit tonight, wholesale trade on Wednesday, the trade balance on Thursday, and the PPI and fortnightly consumer sentiment measure on Friday.

On the local stock front, Orica ((ORI)) will report its interim result today while National Bank ((NAB)) will follow suit on Thursday.

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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