The Monday Report

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By Greg Peel

After posting steep post-election falls on Wednesday and Thursday, Wall Street attempted to stage something of a comeback on Friday, but to no avail. The Dow was up almost 80 points mid-session, but closed up only 4 points. The S&P managed a 0.2% gain to 1379 and the Nasdaq added 0.3%.

Impetus for some early strength came in the form of the fortnightly Michigan Uni consumer sentiment measure, which showed a reading of 84.9 – a level not seen since July 2007. The US consumer seems strangely confident as we approach Christmas, which is a lot more than can be said for corporate America. Corporations large and small are now in limbo, unwilling to spend or to hire until tax and spending policy changes have been determined for 2013. Weakness on Wall Street last week reflects this reality.

Over the weekend President Obama invited leaders of both sides of Congress to the White House this week to begin discussions on the fiscal cliff. He's getting stuck right into it – that's good – but the President also reiterated his determination that any agreement must still include the expiry of Bush's tax cuts for the rich. House Speaker Boehner reiterated his call for a “fairer tax code”, which to Republicans does not include any increases. This is the point from which we begin.

As to how long this story will play out, nobody knows. While the eventual outcome will obviously have an impact, positive or negative, the real negativity will come from too drawn out a process. The longer it takes, the more likely Wall Street will react poorly. A swift solution, even if it does include tax hikes Wall Street doesn't like, will avoid this reaction. Uncertainty is the biggest issue.

Meanwhile, the Greek parliament is busy taking another vote, this time on the 2013 budget specifically, but there's no reason why it, too, shall not pass. As to whether Greece then gets the next tranche of its bail-out fund we don't know, given EU officials have suggested there will be no quick decision. That would be very un-European. So again, uncertainty.

The US dollar kicked up again on Friday, with fresh concerns in Europe (might Greece get kicked out this time?) pushing the euro lower. The dollar index rose 0.3% to 81.05, sending the Aussie down slightly to US$1.0387. Gold held roughly steady at US$1731.50/oz.

Base metals reacted as one might expect to a rise in the US dollar, falling up to 1% with the exception of lead, which fell 3%. However, base metals ignored that which supposedly pushed oil prices higher on Friday, being a positive response to the October data dump from China. Brent rose US$2.15 to US$109.40/bbl and West Texas gained US98c to US$86.07/bbl.

Friday's release from Beijing showed Chinese inflation falling once again, to 1.7% in October from 1.9% in September (yoy). Industrial production increased to 9.6% from 9.2%, while retail sales have grown 14.5% over twelve months and fixed asset investment is up 20.7% year to date. The numbers support recent evidence that China's slowdown has found a bottom, suggesting a further slide into a hard landing is no longer a concern. The inflation number provides scope for further stimulus, but any action will likely only come after the new regime settles in next year. No one is expecting China to suddenly turn around and race up to double-digit growth again, nevertheless.

The SPI Overnight was not all that impressed with a flat result on Wall Street, falling 15 points or 0.3%.

On Saturday, Beijing announced an 11.6% yoy increase in exports in October, well exceeding expectations of 9%. While this is positive, Australia will not be buoyed by a mere 2.4% growth in imports.

So as we move on through November, looking forward to a summer break now not too far off, we will be once again watching the headlines – headlines from Europe re Greece, Spain et al, and most importantly headlines from the US on progress in cliff negotiations. Resolutions of one or both will be positive for the market, and failures will be negative. Any Christmas rally will be specifically dependent.

Tonight in the US is Veterans' Day, which is another of these half-holidays in which banks and bond markets close, but stock and commodity markets remain open. In the latter case, most participants take the opportunity for a long weekend anyway and trading is typically quiet.

US economic data releases hot up from Wednesday when we see retail sales, the PPI, business inventories and the minutes of the last Fed meeting. Thursday it's the CPI along with both the Philly Fed and Empire State manufacturing indices, and Friday it's industrial production.

In Australia today we see housing finance and investment lending along with NAB's monthly survey of business confidence. On Wednesday it's Westpac's turn with consumer confidence.

Japan will announce its September quarter GDP today and the eurozone will follow suit on Thursday.

On the local stock front it's another week brimming with AGMs, but there are also quite a few earnings result releases to ponder. Orica ((ORI)) will report its full-year result today and Incitec Pivot ((IPL)) will follow tomorrow. Wednesday sees a full-year from Dulux ((DLX)) and an interim from CSR ((CSR)) and well as a quarterly update from Paladin Energy ((PDN)). Thursday it's a full-year from Graincorp ((GNC)) and an interim from James Hardie ((JHX)).

Rudi remains on assignment in the US this week but will return next week.

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

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