The Overnight Report: Putin On The Pressure

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By Greg Peel

The Dow closed down 21 points or 0.1% while the S&P was flat at 1883 and the Nasdaq rose 0.3%.

Someone must have pointed to the calendar at the ASX yesterday and everyone realised it was now May, and we know what investors must do in May. Realistically though, it appears the market has returned from a nice extended Easter break and, with a clear head, decided there’s very little reason on offer as to why the ASX 200 should be trading at a new post-GFC high.

The selling on Bridge Street yesterday was more widespread than sector-specific. The banks continue to return from lofty valuations, despite a decent result and increased dividend from ANZ Bank ((ANZ)), the materials sector was thumped again on another fall in the iron ore price, and consumer staples continue to fall since neither supermarket group managed to wow the market. These sectors take account of most of the largest caps. But telcos, utilities and healthcare were all down yesterday as well.

Budget fear is possibly involved. Stock markets usually pay scant heed to politics but given the extent of Joe the Axeman’s warnings and the suggestions made in yesterday’s Commission of Audit report, there is no doubt concern building around everything from tax rates to the PBS. The Australian manufacturing PMI for April was a shocker, falling to 44.8 from 47.9 in March, but quite frankly this series is so ridiculously volatile compared to equivalent surveys around the developed and even emerging world its value is questionable.

The PMI that matters – China’s – rose to 50.4 from 50.3. It was a positive move, albeit barely so, and economists were looking for 50.5. Drilling down, the new export orders component fell to 49.1 from 50.1, which has done nothing to allay fears of further slowing in the world’s second biggest economy.

Over in the world’s biggest economy, the focus is on tonight’s April jobs number. Last night’s data releases were positive, with the US April manufacturing PMI rising to 54.9 from 53.7 and construction spending rising 0.2% in March after falling 0.2% in February. Personal spending in March rose 0.9% to mark the fastest pace in almost five years, when economists had forecast 0.6%. It’s another argument to suggest the winter hampered consumers but the spring has seen them catching up. Personal incomes rose 0.5% against 0.4% expectation while savings fell to 3.8%, down from 4.2% in February.

But it’s the jobs number that everyone focuses on, which is likely why the Dow pulled back last night from the all-time high posted on Wednesday and traders set themselves for another guess and giggle on what the non-farm payrolls number might be, and how to respond to it.

US earnings results have continued to be more positive than negative, albeit off lowered expectations, with the score card now running at around 2% growth for the S&P 500. Last night shares in Yelp, which is apparently an online review platform, jumped 9% following its earnings release. Last night’s after-the-bell highlight was another social media darling in the form of Linkedin. Its shares rose 5% ahead of the release, the result was a beat, and the shares are now down 4% in the after-market.

While S&P 500 companies might be seeing better results than lowly forecasts had suggested, earnings growth continues to come more from cost cutting than from revenue growth. Moreover, the extent of M&A activity and share buybacks, which link back to QE, low interest rates and strong corporate cash positions, is reducing the equity pool. Ergo, stock price should rise by default without fundamental justification.

I have been suggesting for a while now that the real concern over the Ukraine/Russia situation and subsequent Western sanctions lies with global energy markets. The latest round of sanctions merely extended asset and visa freezes to a wider circle of Putin cronies, but among them were oil bosses. Putin has now warned that while he doesn’t want to, he may be forced to “think about who is working in the Russian energy sector, and how”. He is referring to long-term Russian projects being carried out by the likes of BP (UK), Shell (Netherlands), Total (France) and Exxon-Mobil (US).

Europe is backing away from energy-targeted sanctions, given the continent imports 30% of its gas supply from Russia. But by the same token, energy represents 40% of Russia’s GDP and 75% of its exports. Were Putin to turn off the spigot, Europe would be challenged but would cope, while the real victim will be the Russian economy. It is for that reason analysts suggest this Cold War II will not get beyond threats, but then no one would be surprised if Putin threw logic to the wind in his neo-imperialistic tango.

Furthermore, were Putin to go down the oil war path, and Europe looks to more reliable sources of energy, Russia may forever lose a customer. The above global oil giants are all involved in Australian LNG, US shale, and more.

But oil markets seem none too worried at this stage. Last night Brent fell US33c to US$107.79/bbl and West Texas fell US37c to US$99.37/bbl. Recent inventory data suggest the US is very well stocked ahead of the approaching summer driving season, although analysts concede WTI might be a lot further under the 100 mark were it not for Ukraine implications.

Base metal markets have the Chinese on holiday yesterday and today and the LME closed on Monday, so action there is patchy right now. Last night saw prices mostly lower, with aluminium and zinc down 1%. The iron ore market is closed for the Chinese holiday.

Rising East-West tensions don’t appear to be having much effect on gold, which was down another US$7.40 to US$1284.30/oz last night with the US dollar index steady at 79.51. If you want to know where US fund managers think the US economy is really heading, ignore the stock market and look at the bond market. Last night the US ten-year yield fell 4 basis points to 2.60% and left stock brokers scratching their heads. It’s now almost bizarre to recall the plus 3% levels that were quickly established in December when Fed tapering was confirmed.

The Aussie is off 0.2% at US$0.9270.

Those SPI futures traders remain ever optimistic (I think they’ve called it up every day this week), so last night the SPI Overnight rose 14 points or 0.3%.

China is closed today, although Beijing will release its April service sector PMI tomorrow. US jobs will capture everyone’s attention tonight.

Australia will see building approval and new home sale data today along with the March quarter PPI. Macquarie Group ((MQG)) will report its full year result and Myer ((MYR)) will release quarterly sales numbers.
 

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