The Monday Report

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By Greg Peel

The Australian market suffered a loss on Friday which looked rather dramatic, but really must be taken in the context of the even more dramatic surge on Thursday, index/futures expiry day. If we net the two sessions together we get a more realistic picture of how the market is balancing a rebound in the iron ore price, stimulus promises from China, ongoing low rates from the Fed and the Iraq insurgency.

With the final week of the financial year upon us, more volatility would not be out of place as tax loss selling meets fund manager window dressing as well as Thursday’s stock options expiry.

Over on Wall Street, Friday night saw another session in which traders kept a wary eye on Iraq but could not get past the assurances of a supportive Fed. There were no economic data releases of note, so the indices continued to drift higher with caution. The Dow closed up 25 points or 0.2% to mark a new all-time high by a slim two points. Sitting at 16,947, the next milestone for the average will be the 17,000 mark. The S&P gained 0.2% to 1962, representing the index’s 21^st record close in 2014, while the Nasdaq’s 0.2% gain took that index to a 14-year high.

Meanwhile, the US ten-year bond yield remains cemented at 2.62%.

Inflation continues to be the major topic of conversation on Wall Street, which itself ties into the Iraq insurgency. ISIL now controls Iraq’s largest oil refinery, in Baija. Baija services Iraq’s domestic demand, hence its loss does not directly impact on exports, but analysts suggest it will not be long before the trickle-down effect is felt. Iran has politely told the US to back off and let the Iraq government handle the situation, which is likely what President Obama would prefer to do, but the fear is that the successful establishment of a Sunni “caliphate” across Syria and Iraq would lead not to peace but to a training ground for jihadists.

In the meantime, the Kurds are looking to “do a Bradbury” in a sense, exploiting the opportunity provided by the Sunni-Shia battle to sell its first ever oil shipment independently of Baghdad, quietly thumbing its nose. Their hope is that whatever emerges from the ashes, it will include a separate state of Kurdistan.

While oil prices have indeed rallied to date, they have not yet exploded. Friday night saw Brent crude fall US41c to US$114.65/bbl and West Texas rise US62c to US$107.26/bbl to counter last week’s spread blow-out. We must not forget that there is still an element of geopolitical premium built into oil prices from the Ukraine-Russia issue, which continues to simmer in the background, but oil traders are not keen to stick their necks out until supply disruptions are confirmed.

Americans continue to watch the West Texas crude price with trepidation yet virtually all Americans pay Brent-level prices at the pump. At least until key North American pipeline infrastructure is completed. The risk is that oil prices will reach a point at which they become a threat to the US economic recovery, which in turn would impact corporate earnings and thus stock prices. The Fed does not include energy prices in its inflation measure, which is one reason Janet Yellen suggested last week that current CPI inflation creep is just “noise”.

Things may soon become very loud.

It was relatively quieter on the LME on Friday, with most metals doing little but the exception being copper, which rallied over a percent. After having spent a long time range-trading, copper may now have begun to awaken. Targeted Chinese stimulus would be supportive of copper, while lower-for-longer US interest rates support all commodity prices.

The other good news for the Australian market on Friday night was a further US$1.40 rebound in the iron ore price to US$92.10/t. At this stage the drop into the eighties and the subsequent sharp rebound is proving very reminiscent of 2012, which would imply a pretty swift return to US$120/t. Or maybe not this time.

Gold is the traditional inflation hedge, but having posted its big short-covering rally on Thursday night, gold took a breather on Friday night with a US$5.60 fall to US$1314.70/oz.

The US dollar index was steady at 80.33 and the Aussie slipped 0.2% to US$0.9388.

The SPI Overnight rose 10 points or 0.2%.

The new week starts with “flash day” today, as China (HSBC), Japan, the eurozone and US roll out their estimates of June manufacturing PMI results. For the US it’s another busy week of data.

Tonight sees the Chicago Fed national activity index and existing home sales, tomorrow it’s the Case-Shiller and FHFA house price indices, new home sales and the Richmond Fed manufacturing index, and Wednesday it’s durable goods, a flash estimate of the June services PMI and the next revision of the March quarter GDP. The first estimate suggested 0.1% growth, the second 1.0% contraction. Expectation is for 1.7% contraction on the last read.

Thursday it’s personal income and spending and Friday sees the fortnightly Michigan Uni consumer sentiment measure.

Japan will provide a data dump on Friday of inflation, industrial production, retail sales and unemployment numbers.

The week is devoid of major Australian economic releases, but the focus will be on corporates as the week careers towards year-end. Metcash ((MTS)) posts its full-year profit today, and Collins Foods ((CKF)) follows suit on Wednesday. Santos ((STO)) will conduct an analysts’ site tour of its GLNG facility on Wednesday, while Thursday sees not only stock option expiry day but a raft of stocks going ex-dividend.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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