Daily Market Reports | Oct 15 2012
By Greg Peel
Talk on the Street on Friday was that Spain would finally be forced to request a bail-out over the weekend.
It didn't happen. More on that after we look at Friday.
Trading on Wall Street last week followed a similar pattern day by day, with buyers trying to spark some life early in the session and sellers coming in to douse the flames through the afternoon. Friday was no exception, with the Dow up 75 points in the first half hour and in the red by midday before recovering slightly to a flat close. The Dow closed up two points, the S&P lost 0.3% to 1428 and the Nasdaq finished down 0.2%. Note that the 50-day moving average on the S&P 500 is currently at 1427.
Early strength was provided by earnings reports from two of the big mortgage banks, JP Morgan and Wells Fargo.
Major commercial/investment house JP Morgan managed to shake off the impact of poor risk management, evidenced by a US$6bn write-down from derivative trades gone wrong, in posting a 34% increase in profit in the September quarter year-on-year. Earnings per share of US$1.40 beat the Street's US$1.21 estimate and CEO Jamie Dimon was positive on the mortgage business and suggested the US housing market had turned around. However, he did see margins coming under pressure going forward. Wells Fargo also highlighted an improving mortgage market in posting a 22% profit increase, with earnings per share just a tick above forecasts. However, Wells' revenue growth fell short of expectation.
The results looked good from the outset, but faded under closer scrutiny. The opening bell also saw the fortnightly Michigan Uni consumer sentiment index, which jumped to 83.1 for the mid-month reading from 78.3 end-September to post its highest level since September 2007. Any optimism was short-lived, with the indices quickly heading south from early highs and the banks closing lower. JPM was down 1.1% and Wells down 2.6%.
Gold saw a solid jump last month on the QE3 announcement and ECB commitment, but with stock and commodity markets failing to follow through as might have been expected (but for the fact so much anticipation was already built in) gold has since stalled, just as an aerobatic plane might stall. We know what comes next for the plane, and on Friday gold dropped US$13.20/oz to US$1654.50/oz as traders lost their confidence.
The drop came despite the US dollar index falling 0.1% to 79.68for the session. If traders were jumping out of gold positions to square up ahead of what they don't know might come next, base metal traders were playing an even more cautious game.
The yes/no factor over the weekend with Spain was one thing for London Metals Exchange traders, but a raft of Chinese data is also due out in the days ahead, culminating with the September quarter GDP result on Thursday. Most importantly though, this week is LME week in which the metal market and commodity fund managers gather in London for presentations, networking, and solving the world's problems after the third bottle. Trading desks around the globe are shut down and LME trading all but ceases. It's best to square up one's positions in that case, and on Friday night all the base metals fell 1-3%.
The spot iron ore price fell by US$1.30 on Friday to US$114.50/t but rose US$10.30 over the week.
The oil market is currently not sure whether to worry most about downgraded global demand forecasts on the one hand or Syria-Turkey-Iran-Israel tensions on the other. On Friday Brent fell US$1.04 to US$114.67/bbl and West Texas lost US28c to US$91.79/bbl.
The Aussie has slipped 0.3% to US$1.0232 and the SPI Overnight was down 13 points, or 0.3%.
On Saturday, China shocked all and sundry by announcing a widening of its trade surplus in September on a surge in exports. Exports rose 9.9% in the month compared to only 2.7% in August and against a 5% consensus expectation.
The news is not directly a positive result for Australia given imports grew 2.4% in September compared to 2.6% in August, roughly as expected. Imports of Australian commodities were lower, however, with spot iron ore prices collapsing in the month before rebounding this month. The Chinese will have been taking advantage of local pricing and not seaborne contract prices.
October should see a different story on iron ore, and indirectly China's trade balance is a positive for Australia as it indicates China is not heading further down the gurgler as many have feared. The breakdown highlights a pick-up in exports to the local Asian region, which is providing an offset to lost markets in Europe and the rest of the developed world. If this is an indication of a slowing in the contraction of Chinese growth, this is a good thing.
This week sees a raft of Chinese data beginning today, with the September inflation numbers. They will be followed on Thursday with September industrial production, retail sales and fixed asset investment, and, importantly, the September quarter GDP result. Consensus has an easing to 7.4% (year on year) from 7.6% in June.
Now, back to Spain…
It has been suggested already that Madrid will not be going cap in hand to the troika before the results of the Catalan regional vote on greater independence is known. However, when last the world was expecting a weekend bail-out request, news was that Berlin had told Madrid to hang on. It was not clear at the time as to why, but “leaks” from European officials following a meeting on the weekend have provided the answer.
Spain is apparently ready to ask for a bail-out. Cyprus needs a bail-out. And a decision on whether to give Greece its next bail-out tranche has to be made. In each case, Angela Merkel would have to take her decision to the German parliament for approval. So why not, she has supposedly decided, avoid the slow torture and take all thee to the parliament in one hit? On that basis, it is assumed Spain will be bailed out in November. Just as the world assesses the US election and America either falls off or avoids the fiscal cliff.
An issue that may encourage further fear and loathing with regard to Europe this week arose on Friday when the Royal Bank of Scotland's (RBS) deal of two years in the making to sell 318 branches to Spain's Santander Bank collapsed, supposedly on problems with IT integration. The sale was ordered by the European Commission as the trade-off for the UK government's 45bn pound rescue of RBS post-GFC. What happens now? It's another knife in the side of a UK banking system still reeling from the Libor scandal.
Speaking of fear and loathing, Spaniards were back out on the street on the weekend protesting again, which is no great surprise, but a bit more surprising was similar protests in Portugal. Hello Portugal – you've been very quiet of late. Seems the locals have become fed up with the austerity measures accompanying the country's earlier E78bn bail-out and would like a new government.
What about you Paddy? Any more gripes?
The US earnings season will roll on this week and feature more banks, several big tech names and, on Friday, bellwether General Electric. It will also be a busy week on the economic data front beginning tonight, with the Empire State manufacturing index, retail sales and business inventories.
Tomorrow night it's the CPI, industrial production and housing sentiment, Wednesday housing starts, Thursday the Philly Fed manufacturing index and the leading economic index, and Friday existing home sales.
In Australia today we'll see housing finance and investment lending along with vehicle sales. Tomorrow, the minutes of this month's RBA meeting will be released and will be scoured for clues as to whether the central bank will make another bet on Cup Day. We've since had a rise in unemployment, albeit the numbers are potentially misleading.
On Wednesday, Westpac will provide a leading index for Australia and on Thursday NAB will provide a summary of September quarter business confidence. On the local stock front, this week sees AGM season stepping up a gear before the flood next week.
Rudi will be appearing on Sky Business at noon on Thursday and later that day on Switzer TV between 7-8pm.
For further global economic release dates and local company events please refer to the FNArena Calendar.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
