The Overnight Report: Another Failed Correction?

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By Greg Peel

The Dow closed up 75 points or 0.5% while the S&P gained 0.7% to 1938 and the Nasdaq rose 0.8%.

Portugal’s central bank announced yesterday it would “bail out” the collapsing Banco Espirito Santo although not in the same manner as taxpayers were called upon to bail out banks in the US and Europe in the post-Lehman panic of 2008. The Bank of Portugal will inject E4.9bn into a new bank which will hold deposits and safer loans and pay senior bondholders. The remaining rump of BES will hold the risky loans and be left to the shareholders and subordinated bond holders.

The “moral hazard” argument in this deal is not quite eliminated given the E4.9bn is, indirectly, taxpayer money, although a balance has been struck between nationalisation and risk capitalism. That rescue money is actually left over from when Portugal itself was bailed out by the ECB at the depths of the GFC.

The news helped restrain the potential for further falls on the Australian market yesterday and indeed a 32 point opening plunge for the ASX200 became only 15 points down at the close. But there were also some economic data releases to consider.

Retail sales jumped 0.6% in June, beating 0.3% expectation and reversing a revised 0.3% fall in May. May was all about unseasonably warm weather and budget fears, but June saw winter finally arrive and budget fears begin to ease once the Senate became involved. Annual growth in sales at June hit 5.5% but June quarter volumes, as opposed to revenues, were down by 0.2% which will actually prove a small negative to June quarter GDP, CBA’s economists note.

Having risen in June, ANZ’s job ads series rose by another 0.3% in July to be only modestly lower than three months ago. In isolation this points to rising unemployment but take out the monthly noise and the series is up 6% over six months, which ANZ economists suggest points to a gradual improvement in labour demand.

TD Securities inflation gauge rose by 0.2% in July at the headline and 0.4% for the trimmed mean (core), leaving both measurements at 2.6% annual. This is smack bang in the middle of the RBA’s comfort zone and indicative of no pressing need to raise the cash rate.

So all up the local market was able to stabilise yesterday on net positive data and the news from Portugal, despite further Wall Street weakness on Friday night. The news from Portugal was then cited as a major driver of last night’s rebound on Wall Street.

It was a session otherwise devoid of US economic data or major corporate earnings releases. The response was not immediate on Wall Street, indeed a timid rise on the open quickly gave way to a 46 point Dow fall to 11am. But then the buyers moved in, and momentum gained towards the close.

So was this yet another blink-and-you’ll-miss-it correction? Or just a brief relief rally in a real correction still unfolding? On the positive side, analysts are chirping over the earnings season run-rate which, after more than 75% of S&P500 stocks have reported, is running at just under 10% earnings growth and 5% revenue growth. While the gap remains an issue, and points to ongoing cost cuts as well as share buybacks bolstering the bottom line, the revenue growth number is actually better than it has been for years.

On the negative side, renowned market commentator Dennis Gartman will be ready with the Baygon on the back of his mantra that “if you see one cockroach, there will be many more”. Is the BES collapse emblematic of a wider spread issue of poor asset quality across European banks? Have the stress tests to date proven inadequate? The ECB holds a policy meeting on Thursday night so no doubt Mr Draghi will have something to say on the matter.

It would appear the US bond market is scared of cockroaches. Despite the sudden jump in yields last week on renewed inflation fears and Fed rate rise nervousness, the ten-year yield is back under 2.50% once more, falling over a basis point to 2.49% last night. The world entered 2014 thinking the days of worrying about Europe were past. But disinflation, the impact of sanctions against Russia, particularly on Germany’s economy, and the BES scare have conspired to remind us that Europe has not gone away.

Despite lower bond yields, gold fell back again last night, down US$5.50 to US$1288.00/oz. The US dollar index was steady at 81.32 but the Aussie jumped 0.3% to US$0.9335 on the strong retail sales number.

The BES bail-out appeared to light a bomb under base metal prices last night, although we must remember it is the height of the northern summer, most LME traders are lolling on the Costa del Sol, and volumes are very thin. Hence a lack of sellers allowed aluminium and zinc to jump 2.5% last night, lead 2% and copper and nickel 1%.

Iron ore rose US20c to US$95.40/t.

The oils also saw a rare up-day after some pretty consistent falls of late. Brent rose US80c to US$105.43/bbl and West Texas rose US79c to US$98.41/bbl. The rebound was also cited as a reason Wall Street managed to regain territory last night, given a rush back into energy stocks.

The SPI Overnight rose 4 points.

The data continues to flow downunder today with the June trade balance and the service sector PMI due for release. HSBC will publish its China service sector PMI. The RBA will meet this afternoon and leave rates on hold so the market will be looking for any subtle change in language.

Service sector PMIs are due across the world over the next 24 hours.

On the local stock front, Cochlear ((COH)), Downer EDI ((DOW)) and Transurban ((TCL)) all report earnings.
 

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