The Monday Report

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By Greg Peel

The Australian market succumbed to Wall Street’s lead and weak global markets on Friday in once again failing to hold above 5500. The ASX 200 had poked its head above this resistance level last week after deciding the federal budget was not quite as bad as had been priced in on anticipation. Uncertainty will nevertheless now prevail given budget backlash not just from the Senate, but from the states. There may yet be some major tweaking ahead.

Trading began indifferently on Wall Street on Friday night before the Dow fell to its low point of the session, down 32 points around 10am. Once again economic data releases painted a frustrating picture.

US housing starts shot up 13.2% in April – the fastest pace in five months – suggesting the winter is well and truly over and construction is back in business. This should be very good news, but it isn’t. The jump was all about multi-family homes (5+ apartments), which rose 43%, and not about single family houses, which rose only 1%. Aside from being a lumpy and volatile contributor to net starts, apartment blocks contribute considerably less to GDP per dwelling than free-standing houses.

Michigan Uni’s fortnightly measure of consumer sentiment fell to 81.8 from the end of April when economists had expected a rise to 85.0.

From 10am Wall Street meandered around and looked very “Friday” without really going anywhere, until suddenly at 3pm the buyers arrived. Last week provided another chance to buy the dip after a couple of weak sessions, and traders don’t like going home short over the weekend in this market either. The Dow closed up 44 points or 0.3% while the S&P gained 0.4% to 1877 and the Nasdaq rose 0.6%. The Russell 2000 small cap index also gained 0.6%.

There was also some selling on US bonds on Friday night after a week that saw yields falling and global confidence diminishing. The US ten-year yield managed to hold the 2.5% level in ticking back up to just over 2.51%. The US dollar index was steady at 80.05 while gold fell US$3.80 to US$1292.70/oz and the Aussie is a little higher at US$0.9373.

Base metals were mixed on small moves in London with the exception of nickel which, having been thumped last week after its relentless surge, bounced back 2%.

There’ll potentially be much wailing and gnashing of teeth among the iron ore pure-plays today given a US$2.10 fall in the spot iron ore price on Friday to US$100.70/t. Double digits loom, and a breach of 100 would be a psychological knock to high-cost and leveraged miners, as was the case back in 2012. The episode in 2012, which saw the spot price fall very sharply through 100 to 76.70, caused a few heart attacks but a swift rebound confirmed a destocking-restocking blip. With Beijing now having clamped down on the use of commodity inventories as collateral for loans, and seaborne supply increasing every day, this time iron ore may be more structurally weak.

The oil markets liked the US housing data, but traders are also looking ahead to the start of the US summer driving season which unofficially revs up from the Memorial Day long weekend later this month. Brent rose US74c to US$109.62/bbl and West Texas rose US66c to US$102.16/bbl.

The SPI Overnight gained 7 points.

The focus is now squarely on US economic data with the earnings season all but over. One late reporter caused a stir on Friday, nonetheless. Mid-price department store JC Penney has halved in value over twelve months and looked increasingly like a dead man walking, but a 6% jump in sales in the quarter saw JCP shares surge 16% on Friday. A bit of short-covering there, methinks.

Next week brings the minutes of the last Fed meeting on Wednesday, and a speech by Janet Yellen, which will have the markets on edge. Thursday sees the Chicago national activity index, the Conference Board leading economic index and existing home sales, and Friday new home sales.

Watch out for the flashers on Thursday, as the US, eurozone, Japan and China (HSBC) all see preliminary May manufacturing PMI estimates. Mario Draghi will no doubt be carefully watching the eurozone PMI, along with retail sales data and the German IFO investor sentiment survey during the week.

In Australia the minutes of the May RBA meeting are due tomorrow, with the March quarter wage cost index following on Wednesday along with the monthly Westpac consumer confidence survey, which will have captured pre-budget dread.

Action on the local corporate front this week includes a half-year from DuluxGroup ((DLX)) today, full-years from Thorn Group ((TGA)) on Wednesday and James Hardie ((JHX)) on Thursday, quarterly production from Arrium ((ARI)) and an update from Transurban ((TCL)) tomorrow and a briefing from BT Investment Management ((BTT)) on Thursday, along with another handful of various AGMs across the week.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon and on Friday in a special (final?) BRR Media Friday Afternoon Round Table.
 

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

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