The Monday Report

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By Greg Peel

Rule Britannia, and pass the scotch. Australia’s was among the first markets in a position to respond to Scotland’s waning hopes for independence as the session progressed on Friday. As to whether 55/45 against had any influence on Bridge Street is nonetheless debatable, and connection to a 1.6% rally in Japan seems remote.

If there was any influence downunder it would likely have been a green light for bargain hunters to pick up some of the week’s most beaten-down big caps – the banks, the telco and healthcare. With materials still wallowing in the mire of iron ore prices, these sectors were the sole drivers of Friday’s modest rebound.

Wall Street took off on a flyer, with the Dow up 85 from the bell. Whether that was another Scotland-based rally following the previous day’s rise or whether it was because everyone was so hyped up over Alibaba is unclear. The genie was let out of the bottle on the opening bell of the NYSE but it wasn’t until almost midday that they found enough sellers to establish an opening price. That was around US$91, which is a nice little earner on the US$68 offer price. Unlike Facebook, which was subsequently slaughtered on day one, Alibaba closed at US$93.89.

Alibaba will never be in a US stock index unless they change the rules, and now it’s all done we need speak no more of it. But once the dust settled, someone pointed out it was Friday, we’re all tired after a frantic week, and the Dow and S&P are at new highs. Let’s square up and go home. And so they did, sending the indices back towards the flatline. Quadruple witching probably helped.

The Dow closed up 13 points or 0.1% while the S&P lost a point to 2011 and the Nasdaq lost 0.3%.

Scotland was more of an influence on currency markets on Friday night, where attention was otherwise focused. We recall that the pound plunged from around US$1.65 to near US$1.60 a week or so ago when it seemed the Yes vote might just get up after all, despite initial assumptions. This sudden plunge provided opportunity for those who, irrespective of neck-and-neck polling, were prepared to bet No could be the only result. The pound subsequently recovered most of that loss ahead of the vote.

Thus when Yes was confirmed, profits were taken. The pound fell 0.6% against the greenback on Friday night, sending the US dollar index up 0.6% to 84.78, and allowing the Aussie to fall 0.8% to US$0.8923. The Aussie is rather quickly transitioning itself back to being a commodity currency after spending several years as a carry trade currency. The carry trade is not dead, but two-year lows for iron ore, not to mention weak coal prices and lower oil and copper prices, do rather focus one’s valuation.

To that end, iron ore dropped by US$1.30 to US$81.70/t on Friday. Base metal prices were mostly little changed on the day except for tin, which rallied 1%.

Britain gets to keep its North Sea oil interests thanks to the loyalist Scots, which may have had something to do with a US66c rise in Brent to US$98.39/bbl when West Texas fell US55c to US$92.48/bbl under the influence of the stronger greenback.

The fact the world has avoided the likely turmoil it would have experienced had it been a Yes vote probably helped gold down US$9.30 to US$1216.20/oz.

Having carefully weighed up the implications of last week’s Fed statement, forecasts and press conference, buyers returned to US bonds on Friday night. The ten-year yield fell 4 basis points to 2.59%.

The SPI Overnight fell 18 points or 0.3%, likely suggesting futures traders were expecting more of a kicker from the Scotland result. Even the FTSE was timid in London, rising only 0.3%.

That said, the fact US bond yields fell on Friday might suggest the foreign selling pressure impacting the Australian market last week might ease this week, albeit the lower Aussie may yet encourage more selling.

Now that we’re ex-Fed, Scotland and Alibaba, things should go back to some sort of normal this week. There are plenty of data points for Wall Street to ponder, in light of the Fed’s reinforced policy guidance of “data dependent”.

Tonight sees the Chicago Fed national activity index and existing home sales. Tomorrow night it’s Conference Board monthly consumer confidence, the FHFA house price index, the Richmond Fed manufacturing index and a flash estimate of September manufacturing PMI. Wednesday sees existing home sales.

On Thursday it’s durable goods and on Friday it’s Michigan Uni fortnightly consumer sentiment along with another revision of the US June quarter GDP. Economists are forecasting a rise to 4.6% annualised from the last revision to 4.2%.

HSBC will also release its flash estimate of China’s manufacturing PMI on Tuesday and the eurozone will chime in. It will be interesting to see just what impact ECB easing and apparent calm in Ukraine will do to Wednesday’s German IFO business sentiment index.

Japan will be closed for a holiday on Tuesday.

There are little in the way of Australian data releases this week, but the RBA will be in the spotlight. The central bank releases its Financial Stability Review on Wednesday and Glenn Stevens will make a speech on Thursday.

There’s more action in the stock market, where Kathmandu ((KMD)) will report earnings today, Nufarm ((NUF)) and TPG Telecom ((TPM)) tomorrow and Brickworks ((BKW)) on Thursday. Telstra ((TLS)) will hold a shareholders meeting on Tuesday and there is another handful of ex-divs over the week.

Rudi will appear on Sky Business on Wednesday at 5.30pm, on Thursday at noon. and on Friday, 7-8pm, for Your Money, Your Call – Fixed Income.
 

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