The Monday Report

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By Greg Peel

“Constructive” – that was the key word from Friday, as Wall Street took heart that early talks between the president and Republican representatives with regard to fiscal policy are not indicating a crippling stalemate at this stage, as was the case in 2011. One Republican senator noted measures to raise tax revenue were “on the table”.

It's not time to get too carried away, however. The Republicans want to raise tax revenue by closing loopholes, while Obama wants to raise tax revenue by raising taxes, which the Republicans in theory still remain dead against. Supply-side theory argues that lower taxes actually raise net tax revenue by promoting economic growth, while higher taxes reduce growth and thus revenue collections. Hence “measures to raise tax revenues” do not suggest the Republicans are ready to bow to Obama's unmovable position on the expiration of the Bush tax cuts for the wealthy. Then there's the matter of simultaneous spending cuts. Anyway, we'll take “constructive” for the time being.

It was certainly enough to help Wall Street turn around on Friday. The early release of the October industrial production provided evidence of another Sandy-impacted data point, with production falling 0.4% when economists had expected a 0.2% increase. The Dow was down over 70 points late in the morning, but with the help of some bargain hunters and ultimately the positive signals from early fiscal talks, the Dow managed a rally to close up 45 points, or 0.4%. The S&P finished up 0.5% at 1359 and the Nasdaq gained 0.6%.

It was nevertheless a net down-week for the tech-laden Nasdaq and now the worst run in three years, which among some other problems in tech land last week (Microsoft) reflects the significant correction in Apple shares (25%) since its September all-time high. It started with slower than expected initial sales for the iPhone5, moved to concern over the viability of the mini iPad, and kept snowballing. Despite the share price reduction, Apple remains a big market cap chunk of the Nasdaq and might as well be its own sector in the S&P 500. It is not in the Dow, but on a broad market basis, a Wall Street rally is not underpinned unless Apple is part of that rally. Technicians have begun to call a bottom for the shares.

There was no new news out of Europe on Friday as we head towards Tuesday night's eurozone meeting at which the Greek bail-out tranche will be discussed, but not necessarily approved. We may yet have to wait until later in the month for the green light to be given as long as Greece doesn't run out of money in the meantime. It is more likely that approval will come when Spain asks for its own bail-out, which is tipped to happen before month end. However, nothing would surprise.

The euro was steady on Friday, but the yen is under pressure following the dissolution of Japan's lower house on Friday as the precursor to yet another Japanese election. Shinzo Abe, tipped to be the new prime minister, is all for “unlimited easing” in order to cap the yen, which while drawing criticism, is simply a counter to unlimited Fed QE.

The US dollar index finished slightly higher on Friday at 81.20 and the Aussie was similarly up a tad to US$1.0347, while gold was steady at US$1713.70/oz.

Base metal prices were a little weaker in London, while oil is now caught between the impact of a slowing global economy, increasing US domestic supply and the escalation of tensions in the Middle East. An oil rig fire that ended in tragedy in Gulf also helped push prices higher on Friday, with Brent rising US$1.86 to US$109.20/bbl and West Texas adding US$1.22 to US$86.67/bbl.

Throughout the post election pullback in stocks, US bonds have remained relatively steady, with the ten-year yield sitting at 1.57%. There's no indication of grave cliff fears here, while the VIX volatility index has generated much commentary, spiking on the initial stock market fall, but quickly settling back to a “complacent” 16. One must remember, nevertheless, that equity allocations are at record lows, hence the need for option protection is low, hence there's little upward pressure on volatility measures.

The SPI Overnight was up 12 points, or 0.3% on Friday.

We now enter an abbreviated week for the US this week, with Thanksgiving on Thursday and a half -day for the NYSE on Friday, which is as good as a holiday anyway. There may well be some argy-bargy in stocks up to Wednesday as traders square up ahead of the holiday break, but by Wednesday afternoon there'll be tumbleweeds rolling past the trading posts.

This week's US data releases will be crammed into three days, with housing market sentiment and existing home sales out tonight, housing starts on Tuesday and the Conference Board leading index and Michigan Uni fortnightly consumer sentiment measure out on Wednesday. Consumer sentiment will be important going into “Black Friday”, on which American shoppers invade stores for Christmas bargains and retailers hope to swing their annual incomes into the black.

The rest of the world will be watching intently on Thursday when HSBC releases its flash manufacturing PMI for China, hoping for further indications of a turnaround. The eurozone will follow with its own version on Thursday night.

In Australia, it's AGMs, AGMs and more AGMs as the last two weeks of November signal the final avalanche. Economic data are a lot thinner, with the Conference Board and Westpac leading indices out tomorrow and Wednesday and housing affordability also on Wednesday. Tomorrow will see the release of the RBA minutes of the meeting which gave us no Cup Day rate cut.

Arrium ((ARI)) will post a quarterly production report today. Thorn Group ((TGA)) will release its interim result tomorrow and Programmed Maintenance ((PRG)) will follow suit on Wednesday. ALS ((ALQ)) will provide its interim on Friday.

Rudi is back in town and will reinstate his Thursday appearances on Sky Business this week at noon.

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

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