Daily Market Reports | May 20 2013
By Greg Peel
Last week on Wall Street all talk was of a Fed wind-back commencing as early as the US summer. While the last Fed policy statement suggested QE could be incrementally reduced if the US economy is improving, it also talked of topping up QE further if the economy appears to be sagging once more. On Wednesday the minutes of that meeting will be published, likely providing further insight.
In the meantime, Wall Street surges onward. Last week’s economic data releases were mostly weak, yet despite all the QE exit talk the stock market pushed higher on a net basis after only the slightest of stumbles. Friday’s data were much improved, so Wall Street finished the week on a high note. The Dow rose 121 points, or 0.8%, the S&P gained 1.0% to 1667 and the Nasdaq added 1.0%. The S&P continues into blue sky, so technical analysts are now at a loss.
The Conference Board leading US economic index for April was released on Friday and showed a 0.6% jump after a fall of 0.2% in March. Note that stock market indices form part of the leading indicators. Most surprisingly, Michigan Uni’s fortnightly measure of consumer sentiment showed a jump to 83.7 from 76.4. That’s the highest level in almost six years. Only a month ago, consumer confidence had plunged on the introduction of budget cuts.
Economists put renewed confidence down to a strong stock market, improving housing market, and lower energy costs. Given the US economy is reliant almost entirely on the consumer, a strong read on confidence is a positive for the stock market.
So let’s recap. The leading indicators are up because the stock market is up and confidence is up because the stock market is up and both these results caused the stock market to go up.
Speaking of bubbles, Beijing announced on Friday that total credit, including bank loans and other financing, rose 64.7% year on year for the first four months of 2013. House prices rose 4.3% in April (yoy) after rising 3.1% in March, despite new measures introduced in March to curb property speculation. Meanwhile, growth in China’s domestic economy is failing to overcome the ongoing loss of export demand from Europe, and China’s sagging PMI’s are suggesting the 2013 rebound expected by economists, post the settling in of the new regime, is not eventuating. Forecasts of a return to 8% GDP growth are now being pulled back to a flat 7.5% or worse. Beijing is constrained in providing further stimulus if a property bubble continues to be a risk.
Lower expectations for China are weighing on the Australian dollar. Throw in a surging greenback and suddenly everyone’s favourite currency to buy has become everyone’s favourite currency to sell. The Aussie fell another 0.8% to US$0.9730 over Friday. Australian industry has been screaming out for a lower currency, but a weaker China is not the way we want to get there. Reduced QE? Yes please.
The US stock market does not seem to be too concerned about a QE exit, otherwise it would be falling. The US dollar index, on the other hand, has broken up past its 2012 high and gained another 0.5% to 84.21 on Friday night. While yen weakness is a clear driver, it seems the forex market is paying more attention to a potential QE wind-back than the stock market. The same goes for the US bond market. The US ten-year yield rose another 8bps to 1.95% on Friday night.
The major victim of QE exit talk and a resultant strong greenback is gold. The plunge continued on Friday, with gold falling a further US$25.80 to US$1360.20/oz.
The world is now looking at China and looking at the Aussie and finally agreeing the currency was overbought. On Friday Goldman Sachs reduced its Aussie forecasts, cutting its three month expectation to 97 from 105, its six month to 96 from 103, and its twelve month to 90 from 98. The question now is as to whether a lower Aussie can actually provide a shock absorber against slower Chinese growth, resurrecting the fortunes of previously struggling sectors, and even offsetting lower mining revenues. Will the RBA get its wish?
It will also be interesting to see whether, if the Fed does begin to wind back, the Australian stock market can hold its ground. Wall Street is in blue sky yet Bridge Street is 30% below the 2007 high, basically because of the Aussie. A lower Aussie helps the Australian economy and a strong greenback hinders the US economy. Can that gap be closed, or do we just go down with Wall Street, if that occurs?
And let’s not forget the world’s central banks. Those with surpluses have been madly buying Aussie and gold. Will they see value and come charging in to push prices back up again?
Commodity prices held up against the stronger greenback on Friday, with positive US data the offsetting influence. Moves were small, but mostly positive in base metals, while Brent and West Texas crudes both rose US86c to US$104.64/bbl and US$96.02/bbl respectively.
Spot iron ore fell US$1.90 to US$123.10/t.
The SPI Overnight rose 19 points, or 0.4%.
On Wednesday night, as noted, the Fed will release the minutes of its last policy meeting. Wall Street will be pouring all over them. In the last couple of weeks, it’s only been the more hawkish cohort of Fed presidents who have been vocal. We haven’t heard a lot from the doves, who are led by Ben Bernanke.
There will also be plenty more data releases to consider. Tonight it’s the Chicago national activity index and on Wednesday, existing home sales. Thursday it’s new home sales and the FHFA house price index, and Friday it’s durable goods.
Thursday night also brings a flash estimate of the US manufacturing PMI for May, which will follow a eurozone equivalent and HSBC’s estimate for China. The Bank of Japan will hold a policy meeting on Wednesday, although no change is expected there, and the UK will release its March quarter GDP result on Thursday amidst increasing Tory pressure for a withdrawal from the EU. Germany’s influential IFO business sentiment survey is due on Friday.
The minutes of the May RBA meeting will be released on Tuesday and provide more clues as to why the central bank cut and whether, or when, it might cut again. With the Aussie now falling, the picture is nevertheless changing. Westpac’s monthly consumer sentiment survey, due on Wednesday, is the highlight in an otherwise quiet data week.
On the local stock front, Myer ((MYR)) will release quarterly sales numbers on Wednesday and James Hardie ((JHX)) will release its full-year profit result on Thursday.
Rudi will appear on Sky Business today at 11.15am, Tuesday at 5.30pm, Thursday at noon and again at 7pm for the Switzer Report, and on BRR Media on Friday at 1pm.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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