The Monday Report

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By Greg Peel

If we look at the five-day chart of last week’s activity in the ASX200, it is clear there was a concerted effort to return the index to 5300 during the week, with the buyers keen to pick up stocks under that level. That is, until Friday. On Friday it appears the market conceded to a new level of 5200. This is evident in the fact that Friday did not see a slippery slope of trading ever lower to the close. Instead we simply opened down 100 points from the bell and stayed there, at 5200. No sector was spared.

The question now is: has the domestic market rebased its “value” level to 5200 from 5300 or will this floor ultimately give way as well? After further falls offshore on Friday night, the SPI Overnight closed down 38 points on Saturday morning. There is significant technical support at 5000, and the way things are going right now, and the fact there are still three weeks of October left, we may yet take a look at that level.

After a disastrous week in Europe, the German stock market fell another 2.4% on Friday night, France fell 1.6% and London 1.4%. While sanctions against Russia are hitting Germany the hardest, surprisingly weak industrial production and export numbers released last week suggest the mighty Atlas of the German economy can no longer hold up the eurozone sky. Deflation now seems a very real threat.

The German government and central bank are under attack from all fronts, including the ECB. Germany’s determined austerity policy is not providing the support needed across the zone-wide economy. The ECB cannot go it alone, said Mario Draghi last week, and France is setting up to break ranks and increase fiscal spending. Across Europe and in the UK, euro-scepticism is building and nationalism is rising – something Germans would find unsettling.

A year ago, Wall Street dismissed Europe as no longer an issue. The European economy was not likely to rebound rapidly, but nor would it sink into the mire, as was feared two and three years ago. This, and Japan’s all-out inflation drive, allowed Wall Street to soar to new all-time highs. But now Europe is sinking again, Japan is struggling to meet its objectives, and China is also finding it difficult to reform its markets without sacrificing growth. Those all-time highs had begun to look stretched.

Particularly stretched have been the tech and social media stocks and small caps. On Friday night the Dow bounced around before capitulating to the close with a 115 point or 0.7% fall. But the real damage was done in the Nasdaq, which fell a whopping 2.5%. The Russell small cap index tuned in with a 1.4% fall, and the broad market S&P averaged out to a 1.2% fall to 1906. The S&P has now fallen 100 points, or 5%, from mid-September.

There are two clear indicators world markets have swung quickly from being smugly optimistic to being considerably nervous. Firstly, Friday night saw the US ten-year bond yield fall another 2 basis points to 2.31%, to end the week down 13bps to a 16-month low. When the US stock market hit new highs in mid-September, the US ten-year hit 2.60%. At that point markets were thinking “here we go – here comes the US bond sell-off we’ve been expecting all year” as expectations for the first Fed rate rise began to crystallise.

Wrong yet again.

The other factor is the VIX volatility index on the S&P500. Having wallowed in the low to mid-teens for most of 2014, falling as low as 10 in July, the VIX closed on Friday night at 21 after a week of solid gains reflecting solid demand for put option protection. The thumbnail measure is that when the VIX is below 20, the market is “complacent”.

The benchmark indicator of global economic growth perception is the price of oil, and Brent crude has fallen 20% since its last high in June, having fallen the most in a week last week since January. With OPEC production cuts and US shale oil production curtailments in the offing at current price levels, the oils stabilised on Friday night. Brent rose US16c to US$89.69/bbl and West Texas rose US12c to US$85.39/bbl.

Assisting the falls in commodity prices is the US dollar, which continues to rise to reflect the ever-widening disparity between the US recovery and lack of growth elsewhere. The dollar index closed up another 0.4% on Friday night at 85.90. The Aussie dollar took another hit, falling 1.1% to US$0.8682 to re-establish the trajectory in place since early September.

Gold remains confused, down US$1.60 on Friday night to US$1222.70/oz.

Weak German data is being noted on the LME but base metal markets are showing signs they don’t have much more downside left to pursue. Nickel fell 1% on Friday night and aluminium fell 0.5% but copper was steady and other metals posted mixed moves.

Is iron ore, too, finding a floor? It rose US40c to US$79.90/t on Friday.

As noted, the SPI Overnight fell 38 points or 0.7%.

As we move into the new week, China will be thrust back into the spotlight. Today sees China’s trade numbers for September and inflation numbers follow on Wednesday.

Germany was the centre of attention last week, and this week the net will be widened on the release of aggregate eurozone data. We begin with the ZEW investor sentiment index tomorrow along with industrial production, with the trade balance and flash estimate of September CPI due on Thursday.

Japan will be closed today and tonight sees the Columbus Day holiday in the US, for which banks and the bond markets are closed but stock and commodity markets remain open, albeit thin.

A busy week thereafter for US data releases sees retail sales, business inventories, the PPI, the Empire State manufacturing index and the Fed Beige Book on Wednesday, housing sentiment, industrial production and the Philadelphia Fed manufacturing index on Thursday, and housing starts and fortnightly consumer sentiment on Friday. Janet Yellen is also due to make a speech on Friday, and various Fedheads have speaking engagements lined up all week, which will no doubt add to confusion.

Australia sees the NAB business confidence survey out tomorrow and the Westpac consumer confidence survey on Wednesday, along with vehicle sales.

It starts to get busy now on the local corporate front as the AGM season and the September quarter resource sector production report season coincide, beginning this week. The AGMs kick off tomorrow and over the week the highlights include Telstra ((TLS)), Cochlear ((COH)), CSL ((CSL)) and Ansell ((ANN)) while among the production reports, Rio Tinto ((RIO)) gets the ball rolling on Wednesday followed by Fortescue Metals ((FMG)), Iluka Resources ((ILU)) and Woodside Petroleum ((WPL)) on Thursday and Santos ((STO)) on Friday.

Ten Network ((TEN)) will report its full-year result on Thursday.

Rudi will appear on Sky Business 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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