The Monday Report

This story features BEACH ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BPT

By Greg Peel

Friday night's release of the first estimate of US GDP showed 1.5% growth, ahead of 1.3% economist consensus. The fortnightly measure of consumer sentiment also came in a little better than expected.

As has been the case more than once recently, for some the GDP result could be construed as disappointing. Wall Street is looking to the Fed to introduce QE3 and hopefully to do so as early as this Wednesday following the FOMC meeting. A weak GDP result would have increased the odds of just that, possibly. This result now has most assuming nothing will happen before September.

Either way, Bernanke “has Wall Street's back”, and Wall Street knows that. The Fed has pledged to act if need be, so either it will, or the US economy will improve by itself. The greater danger at present in global markets is Europe. And in Europe, things are hotting up once again.

On Thursday night, ECB president Mario Draghi flagged the possibility of the central bank returning to the market to buy Spanish and Italian bonds. The ECB has not entered the market this year, bowing to accusations of eurozone illegality to do so and instead introducing Long Term Refinancing Operations (LTRO) of which there have been two rounds to date, starting late last year. On Friday night, it was reported another LTRO is being considered. It was also suggested the ECB and the European Stability Mechanism (ESM) could join forces to buy said bonds, with the ESM buying in the primary market and the ECB buying in the secondary market, in order to appease the concerns of the Bundesbank and others regarding constitutions. And on Friday, Chancellor Merkel and President Hollande issued a joint “we will do whatever it takes” statement.

Stop me if you've heard this story before, but as far as markets were concerned on Friday night it appeared Europe was readying itself to do something concrete while in the meantime, the US recovery is still stumbling along with the Fed keeping a close eye. Wall Street likes this idea, and so despite a big move up on Thursday night the Dow jumped another 187 points or 1.5% on Friday night to again break the 13,000 barrier. The S&P gained 1.9% to 1385 and the Nasdaq shot up a full 2.2%.

The rally was supported by some pleasing earnings results from the likes of Merck (Dow) and Amgen, which lifted the tone of the earnings season a little, and despite the 12% fall in Facebook. The latter is not yet in an index, but is representative of the difficulties facing social media and web-based services in trying to lure advertisers onto small-screen smart phone platforms, now that phones and tablets are replacing PCs and Macs.

The US earnings season will roll on this week, but with most of the big names now accounted for, the score card can be summed up as a poor one. Earnings have been flat at best on weak revenues, driven by the slowing global economy, the strong US dollar over the period, and domestic “fiscal cliff” uncertainty keeping a lid on spending. Wall Street nevertheless ended last week in strong rally mode, as all attention now has turned to central bank action. The Fed will most likely reiterate its “if needs be” stance on Wednesday night, which should not upset Wall Street too much. The focus then swings to Thursday night when the ECB is due to meet, and much is anticipated. The Bank of England will also meet on Thursday with the strains of Hey Jude still resounding, and after a weaker than anticipated UK GDP result there is also expectation of further BoE action.

Commodity markets appeared to be in the non-believer camp on Thursday night despite a weaker US dollar, but on Friday night they got in on the game. The US dollar index fell another 0.3% to 82.61 as the euro rose again, and base metals all jumped 1-3% in London. Brent crude gained US$1.36 to US$106.62/bbl and West Texas added US74c to US$90.13/bbl.

Gold remains relatively cautious, rising US$7.80 to US$1623.60/oz. Gold had a big move on Thursday night so now its up to the central banks to deliver. On the other hand, the Aussie is loving it from every angle. It has risen another 0.8% to US$1.0482.

The US bond market has a bit of a dilemma. Global central bank action reduces overall global risk which provides a reason to sell safe haven bonds and jump back into risk assets such as stocks. However were the Fed to roll out QE3, it would mean the central bank will be keeping a lid on bond yields. But with Europe the dominant factor at present, US bond traders were very “risk on” on Friday in selling their holdings and sending the ten-year yield up 12 basis points to 1.55%. The Spanish equivalent fell another 30-odd bips to around 6.7% and the Italian bond fell 24 bips to under 6%.

The SPI Overnight jumped 47 points, or 1.1%.

This week will see all attention focused on anticipation of central bank action, but there will also be a wealth of global economic data releases.

Wednesday is the first of the month and that means manufacturing PMI day, with results from Australia, China, the eurozone, UK and US. Friday sees a repeat performance, with service sector PMIs. It is also jobs week in the US, with the private sector number out on Wednesday ahead of the Fed statement and non-farm payrolls thereafter on the Friday.

The US will also see the Case-Shiller house price index, the Chicago PMI, consumer confidence and personal income and spending on Tuesday. Construction spending and vehicle sales are also out on Wednesday followed by chain store sales and factory orders on Thursday.

It's a big week for data in Australia, providing plenty of scope for RBA consideration in light of whatever the central bank's global counterparts might do. Tomorrow sees building approvals, new home sales and private sector credit. Wednesday it's the PMI and a June quarter house price index, while Thursday brings the RP Data-Rismark house price index for July along with retail sales and the June trade balance. On Friday it's the services PMI.

The US earnings season will now begin its long tail conclusion over the next couple of weeks as it overlaps with the build-up of the Australian six-monthly result season, which features both half and full-year results depending on company accounting periods. The resource sector quarterly reporting season will also wind up the month with a flourish today and tomorrow. On the block are the likes of Beach Energy ((BPT)) today and Origin Energy ((ORG)) and Paladin Energy ((PDN)) tomorrow. Navitas ((NVT)) will report earnings tomorrow along with Westfield Trust ((WRT)), and ResMed ((RMD)) provides the highlight for Friday.

Rudi will be back on Sky Business this week, on Thursday at noon. 

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

Click to view our Glossary of Financial Terms