The Monday Report

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

By Greg Peel

Last week Goldman Sachs had set its expectation for US non-farm payrolls added in June to 75,000 until the ADP private sector number came out on Thursday at a surprisingly strong 176,000. This result prompted Goldman to lift its non-farm payroll forecast to 125,000, but then on Friday the result came out at 80,000.

In isolation, 80,000 is a tepid result and not enough to move the unemployment dial, which remains at 8.2%. Compared to revised expectations, the result was disappointing. But compared to previous forecasts, it was pretty much on the money. So where does that leave us?

Friday night's markets told the tale. The Dow fell 124 points or 1.0%, the S&P lost 0.9% to 1354 and the Nasdaq dropped 1.3%. The US dollar index jumped 0.6% to 83.27 and gold fell US$20.10 to US$1583.80/oz. This was not the response of a market anticipating a heightened chance of QE3. The jobs number, it would seem, is not good enough to be good but not bad enough to be good either. It is frustratingly fair to muddling.

Concerns over central bank response or lack thereof was a theme on Friday night. On Thursday night the ECB had disappointed by announcing a 25bpd rate cut and nothing else. The market wanted more, and on Friday it continued to show its frustration. The Spanish ten-year bond yield jumped a full 41bps to 6.87%, again closing in on the critical 7% mark. Italy's equivalent rose 10bps to 6.02%.

Whatever goodwill had been garnered by progress at the EU summit over week ago seems now to be waning. Investors are once again shying away from the dodgy eurozone sovereigns, preferring to park funds in safe havens. Germany's ten-year bond rate is back down to 1.32%. Consider that Spain, Italy and Germany are all using a central bank cash rate of 0.75%. UK bonds are at 1.59% against a 0.5% cash rate and US bonds at 1.55% (down 5bps on Friday) against a zero cash rate. On this basis, the Australian ten-year bond yield stands out. It is trading at 2.96% against a cash rate of 3.5%. The Aussie did fall on Friday, down 0.7% to US$1.0213, but we can see why the Aussie is struggling to drop below parity. In Australia you can still get around a one percent real interest rate on ten-year bonds even though investors have pushed the yield down to below cash. In every other haven real rates are zero to negative.

Then we move to China. The world had been expecting Beijing to cut its interest rate again in the second half but the second half is only a week old. Given the PBoC cut in June, the follow-up cut last week came as a bit of a shock. This week we'll see inflation, trade balance, retail sales and industrial production data out of China, and on Friday China's June quarter GDP result will be released. It would seem Beijing has moved swiftly ahead of these results, suggesting they're not going to be too flash.

So even China's rate cut has left the world more concerned than comforted.

Prompted by all of the above, Friday's session was decidedly “risk off”. Aside from falls in stocks and gold, the strong greenback helped base metals fall 2-3% and the oils to both fall around 3%. Indeed they were both down US$2.77, to US$97.93/bbl for Brent and US$84.45/bbl for West Texas.

The SPI Overnight fell 14 points or 0.3%.

The oil price was a lot weaker at the end of the June quarter than at the end of the March quarter on a combination of fears of a weakening global economy and strength in the US dollar, which shot up after the first Greek election (non-) result. A lower oil price and a stronger dollar will be important factors for the US June quarter corporate results season, which begins tonight with Alcoa's report. The lower energy input cost is a positive, but in past quarters the bulk of upside earnings surprise has come from those companies generating substantial revenues offshore. The stronger dollar will act as a dampener on offshore earnings this time around, and that's one reason earnings forecasts have been falling over the quarter.

The March quarter was the first to see forecasts of US earnings growth in single digits after a long run of double digit gains. Those forecasts were downgraded over the course of the quarter, allowing actual results to once again beat expectations, and forecasts have again been downgraded over the course of the June quarter. Indeed, some forecasts are now for negative earnings growth. Have analysts again become too pessimistic? Well over the course of the next month we'll find out.

After Alcoa tonight there's a bit of a lull until we see results from JP Morgan and Citigroup later in the week. It's otherwise quiet on the US economic data front this week, with Wednesday's trade data the only highlight ahead of Friday's PPI release. Trade balances are a feature this week, with all of Japan, Germany, China, the UK and US reporting.

The Fed will, nevertheless, release the minutes of its last meeting on Wednesday night which, as usual, will be scoured for any QE3 clues.

We can look forward to a more significant data flow this week in Australia, which begins today with the ANZ job ads series. Tomorrow sees NAB's business confidence survey and Westpac's consumer confidence survey along with housing finance and investment lending numbers. On Thursday we'll see our own jobs numbers.

Chinese data will flow in the order of inflation today, the trade balance tomorrow, and retail sales, industrial production and the GDP on Friday.

On the local stock front, this week sees production reports from ERA ((ERA)) on Wednesday and Iluka ((ILU)) on Thursday, heralding in the beginning of the resource sector's quarterly production report season that will run for the next month.

We should also be mindful that the northern summer break is now in full swing. In the US this has already meant trading volumes are falling from poor to minimal, which heightens the chance of volatility.

Rudi will be back on your screens this week on Thursday. Tune in to Sky Business at noon. Later on Thursday he will re-appear on Switzer TV between 7-8pm

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

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