The Monday Report

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By Greg Peel

There was some bargain hunting in the big-name material stocks on Friday on Bridge Street but the banks and telco followed the trend of the week to ensure another soggy session. The focus for the Australian market right now is nevertheless the Aussie, which fell another 0.7% to US$0.9038 by Saturday morning.

While it is easy to make the connection between the Aussie and falling commodity prices, it is more realistic, at present, to look at the US ten-year bond yield. It shot up a whopping 8 basis points on Friday night to 2.61%. The German equivalent has also recovered slightly from its depths, to 1.04%, on the back of renewed support for the eurozone economy from the ECB.

There are those who maintain the RBA will still be forced to lower its rate again to help the Australian economy in its rebalance against mining investment, but suddenly the currency is doing the central bank’s bidding. If the Aussie can fall meaningfully into the eighties the impact of lower commodity prices is offset, albeit higher cost and lower grade producers remain at risk. And we should not just focus on iron ore but on oil prices and their connection to pending LNG revenues.

This means the Aussie can go some way to reverting to a “commodity currency”, but right now it’s all about this week’s Fed meeting. If the Fed statement suggests a shift to a more hawkish stance, in particular dropping the “considerable time” element for zero interest rates, then the path to normalisation, for both the US and Australia, has begun.

There are nonetheless those in the US who believes Janet Yellen’s very particular focus on labour market slack will ensure the doves will continue to hold sway. If that proves to be the case, look out for sharp snap-back rallies in US bonds and the Aussie. Last month’s US jobs numbers did not help the hawkish cause. But other data points continue to suggest an improving US economy.

US August retail sales were released on Friday and showed a 0.6% gain or 0.3% ex-autos. While these numbers matched expectation, they represent the best growth since April and 5.0% growth over 2014. June and July numbers were also revised up. Michigan Uni’s first fortnightly measure of consumer confidence for September showed a rise to 84.6 from end-August’s 82.5 to mark the highest level since July 2013.

The US economy is consumer-driven and while employment is clearly a requirement of spending, lower oil prices also translate into more spending power for the average American. (Alas not for the average Australian if the Aussie is falling in tandem.) The Brent crude price, which is what Americans effectively pay, is down 16% since June.

It was Friday’s US consumer data which really set the bonds on fire, but the flipside is ongoing weakness in US stocks. Low bond yields, via QE, have been the driving force for US stocks since 2009 and now Wall Street has to come to terms with yields finally moving higher. This is an apparent negative for stocks, except that the reason for higher yields – a stronger US economy – is a positive for stocks. There will nevertheless need to be a period of adjustment, perhaps even painful adjustment, before markets can settle down into some kind of “new normal”. US stocks were down again on Friday, with the Dow falling 61 points or 0.4%, the S&P down 0.6% to 1985 and the Nasdaq down 0.6%.

Once upon a time when the US and its allies declared war on a Middle Eastern state, oil prices would leap up in response, but those days are gone. IS is not a state but by its own declaration and does not control a significant level of oil production, and even if it did, Northern American energy independence is moving closer to reality and thus the days of Middle East oil shocks are behind us. What’s more, the Ukraine-Russia ceasefire appears to be holding for now, although I wouldn’t be counting my Matryoshka dolls on that one.

Brent fell US$1.30 to US$96.94/bbl on Friday night and West Texas fell US86c to US$92.26/bbl.

Base metals were mostly positive but on small moves on Friday night but we did see a bounce for iron ore – all of US10c to US$82.00/t.

The futures market is expecting more of the same this week, given the SPI Overnight closed down 19 points or 0.3% on Saturday.

There are two very significant events due this week. FOMC meetings are always big events, particularly the quarterly ones that are followed by a press conference, and the post-Jackson Hole meeting has proven to be the most significant of the year in almost every year since 2010. First it was three step-ups in QE, and then last year we saw QE tapering. This year sees a meeting which may just take the next step in QE reversal – an indication of the first rate rise. Or maybe not. That will be Wednesday night.

On Thursday night the Scots decide their fate. While polling still has the yes/no vote neck and neck, the odds of independence are starting to move out amongst the bookies, and it’s not wise to cross an English bookmaker. However if it does look like Yes is the answer, brace yourselves. The pound will collapse and volatility will reign.

The problem is one of uncertainty. Not uncertainty over the vote itself, but uncertainty over how an independent Scotland would function. Most importantly, would Scotland keep the pound? No one’s actually gone as far as to decide that yet. What happens to England’s energy supply, given North Sea oil and gas is produced in what would be Scottish sovereign territory? What happens to the significant British North Sea naval base on the Scottish coast?

Would Scotland keep the Queen, and be a Commonwealth member? That one I seriously doubt, as I suggest that’s the whole historical point. The Jacobites are rising once more. Oh flower of Scotland, when will we see your like again? This week?

The US will see industrial production and the Empire State manufacturing index tonight and the PPI on Tuesday. Wednesday it’s the CPI, housing market sentiment and that Fed statement. Thursday sees housing starts and the Philadelphia Fed manufacturing index and Friday leading economic indicators.

It’s also the “quadruple witching” expiry of US stock market derivatives on Friday night.

Japan is closed today, Chinese property prices are out on Thursday. The eurozone ZEW investor sentiment index is due on Tuesday and the ever important flash CPI estimate on Wednesday.

Australia sees vehicle sales today, the minutes of the September RBA meeting tomorrow and the RBA’s third quarter Bulletin on Thursday.

Quarterly stock options expire on Thursday to provide a bit of ASX witching while Premier Investments ((PMV)) reports its full year result on Wednesday followed by OrotonGroup ((ORL)) on Thursday. There will be another smattering of ex-divs this week as well.

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.
 

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

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