The Monday Report

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By Greg Peel

A weakening Chinese economy became the theme of last week – a week that brought no new news on the European stimulus front. Following on from low inflation and poor industrial production numbers earlier in the week, on Friday China posted trade data that fell well short of expectations.

Chinese exports rose only 1% year on year in July, down from 11.5% in June and below a 5% expectation. Imports fell to 4.7% growth from 6.3% to also miss expectations.

These results prompted a predictable response from commodities markets. Base metals all fell around one percent in London and Brent crude fell US52c to US$122.95/bbl, although West Texas was as good as steady at US$93.39/bbl. The WTI result was indicative of responses in other markets – those that have become very upside-down of late on stimulus anticipation. Further monetary measures have been expected from Beijing long before the world began to believe the ECB would act, and Beijing has a propensity to make policy announcements over the weekend. After cutting rates in both June and July, perhaps another rate cut might be on the cards? Chinese inflation is certainly no impediment. At least a cut to the bank reserve ratio requirement could be expected?

It was with stimulus in mind – this time Chinese – that Wall Street decided to again push higher on Friday night. A triple whammy of action from the Fed, ECB and PBoC – the stuff of dreams. The Dow closed up 42 points or 0.3%, the S&P gained 0.2% to 1405 and the Nasdaq ticked up 0.1%.

By rights the Aussie should have tanked on the Chinese data, but it's only off 0.1% to US$1.0570. The US dollar index was all but steady at 82.55. Gold rose US$3.30 to US$1620.50/oz. It was left to the US bond market to follow a normal path in the face of weak global economic data. The ten-year yield fell 4bps to 1.65%, no doubt aided by a creep-back in distressed European sovereign debt yields. The Spanish ten-year rose 11bps on Friday to 6.85% and the Italian 9bps to 5.89%.

There is a level of anticipation the bond markets will try to “test the resolve” of Mario Draghi in this limbo period between the August and September ECB meetings. Markets are none to patient, and are not pleased with all European officials being on summer holiday at this critical time. Meanwhile, it remains to be seen whether stock markets can continue to rally, or at least hold fast, while nothing happens.

We note that the SPI Overnight was up 17 points or 0.4% on Friday.

Unfortunately, nothing did happen. There was nothing but silence from Beijing over the weekend, which thus puts all of Friday night's market movements in doubt. This doesn't mean Beijing is not going to act, indeed it likely reinforces the fact Beijing only acts on its own terms and not when everybody else wants it to. The July rate cut, for example, came completely out of the blue, and ahead of the June data dump. The tables have turned this month, with Beijing doing nothing – yet.

Perhaps Beijing is sulking. After a strong start, the US has managed to comfortably secure the top of the medal count. Australia has just managed to sneak into the top ten. Avoid all Poms.

As we start the new week we can therefore dismiss the 17 point gain in the SPI on Friday as old news. If there is no new news on the global stimulus front this week we shan't be bored, given plenty of global economic data, particularly in the US, and a big dose of earnings reports locally.

Japan will report its June quarter GDP result today, and the eurozone will back up with its first estimate tomorrow. In Europe this week we'll also see industrial production data and the ZEW survey tomorrow, inflation on Thursday and trade balance on Friday.

The US will see business inventories, retail sales and the PPI tomorrow, and the CPI, industrial production, housing sentiment, and the Empire State manufacturing index on Wednesday. Thursday brings housing starts and the Philadelphia Fed manufacturing index, and Friday wraps with the Conference Board leading economic index and the fortnightly consumer sentiment survey.

There is plenty there for those on either side of the QE3 debate to draw upon.

The economic highlights for Australia this week will be the monthly NAB business confidence survey tomorrow, along with vehicle sales, and the Westpac consumer confidence survey on Wednesday. We'll also see the first of the June quarter data releases in the lead up to next month's GDP result, with the wage cost index out on Wednesday.

For Australia, nevertheless, the focus is on earnings results. Among the highlights today will be results from Downer-EDI ((DOW)), JB Hi-Fi ((JBH)), Newcrest ((NCM)) and UGL ((UGL)). There are too many through the rest of the week to list but among the biggies will be Commonwealth ((CBA)) and Westfield ((WDC)) on Wednesday, AMP ((AMP)) and Wesfarmers ((WES)) on Thursday, and QBE ((QBE)) and Santos ((STO)) on Friday. National ((NAB)) will provide a quarterly update tomorrow and ANZ ((ANZ)) will follow suit on Friday.

Meanwhile, markets will no doubt be hanging out for any little word, any offhand remark, from officials in Europe or the US.

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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