The Monday Report

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By Greg Peel

The ASX200 finished last week with yet another soggy session, marking five days of consecutive falls and a net 2.9% drop for the index. A 1.9% bounce for the energy sector on Friday, driven by higher oil prices, was the only bright light amongst otherwise generalised selling. But the good news is the new week is set to begin on a brighter note.

There were no major economic announcements across the globe on Friday, so it was up to the central banks to take up the slack. And so they did.

First out of the blocks was the People’s Bank of China, which surprised markets late on Friday by announcing its first interest rate cut in two years. The central bank’s benchmark one-year loan rate has dropped 40 basis points to 5.6%, and its deposit rate has dropped 25bps to 2.75%. Greater flexibility has been provided, however, for Chinese banks to compete with higher deposit rates.

The Chinese government and the PBoC had appeared up to now calmly sanguine about China’s slowing economy, believing its targeted stimulus parcels intended to encourage bank lending to the right sectors and not the overly speculative sectors were sufficient to maintain the government’s GDP growth goal. Indeed at one point the government suggested it wouldn’t mind too much if 2014 growth came in a little below the 7.5% target. But the September quarter saw 7.3%, and last week’s flash reading of HSBC’s November manufacturing PMI showed 50 – on the cusp of contraction. Ultimately the PBoC has bowed to political and market pressure to get a bit more serious about stimulus.

Mario Draghi is serious about stimulus, although he usually prefers to talk about it rather than act on it. But Friday night finally did see some ECB action, as the eurozone central bank announced it had begun to purchase asset-backed securities as part of its goal to boost its balance sheet and encourage European banks to lend. “We will do what we must to raise inflation and inflation expectations as fast as possible,” said Draghi as he announced the commencement of purchases, “as our price stability mandate requires”. Inflation expectations “have been declining to levels I would deem excessively low”.

Draghi is sending a signal more stimulus is coming, commentators believe. If current ECB measures prove inadequate, and inflation expectations fail to recover, the central bank will act to expand its QE program. Draghi would love to be able to buy eurozone sovereign bonds but to date Germany has resisted. However, the eurozone’s primary economy has become its main drag in past months, weighed down by the impact of sanctions against Russia. At some point one feels the Bundesbank must relent.

The ECB announcement sent the euro plunging once more and the US dollar index thus rising, by 0.7% to 88.30. The Aussie was not a beneficiary of the strong greenback in this case, itself rising 0.8% to US$0.8670 on the back of the Chinese rate cut. The Chinese rate cut also dragged down the US ten-year bond yield by 2 basis points to 2.32%.

And both central bank announcements served to finally snap Wall Street out of its stupor. The major US indices have been stumbling along the all-time high level now for over a couple of weeks, breaking low volatility records along the way. Hesitation at the high is usually a sign the market is set to fall back, but Wall Street has simply refused to do so. Thus finally we have a break, and it’s to the upside. The Dow closed up 91 points on Friday night, or 0.5%, while the S&P gained 0.5% to 2063. Both indices hit fresh blue sky. The Nasdaq rose 0.2%.

Commodity prices enjoyed the announced stimulus measures, with all base metal prices rising 0.5-1.5% in London. Brent crude managed to recover the 80 mark, rising US$1.23 to US$80.54/bbl, while West Texas gained US$1.00 to US$76.60/bbl.

Gold likes a bit of central bank money printing, and it has recovered the 1200 mark with a US$5.70 gain to US$1201.00/oz.

Alas, the odd one out is iron ore, which despite the Chinese rate cut now has a 6 in front of it, as feared, falling US20c to US$69.80/t on Friday.

The Australian futures market is nevertheless undeterred, sending the SPI Overnight 52 points or 1.0% higher on Saturday morning.

It would seem the local market was of the impression Wall Street might be set to break to the downside as well, but now the local market will have to scramble.

Fresh central bank action from both China and Europe may just impact on Thursday’s OPEC production meeting, and in particular a recovery in the Brent price to US$80. At this stage it remains a 50-50 bet as to whether OPEC will announce production quota cuts in order to boost oil prices (which members never stick to anyway) or continue production at current levels with a view to squeezing out marginal US shale production. OPEC is usually happy with a Brent price of 80-85.

The OPEC meeting will be the big event this week and it just happens to coincide with Thanksgiving in the US, for which all US markets are closed. Nymex trading nevertheless continues electronically, along with Brent trading, so there may just be a deal of volatility for oil prices towards the end of the week.

Thanksgiving provides for a disruptive week in the US, in which everyone tries to make home ahead of everyone else for the family gathering. Market participation will decline towards midweek until the NYSE becomes a ghost town by Wednesday afternoon. The exchange reopens on Friday but only for a half-day session, with a handful of skeletons in attendance.

There are plenty of US data releases crammed in ahead of Thursday, nonetheless. Tonight sees the Chicago Fed national activity index and a flash estimate of the November services PMI, tomorrow brings the Case-Shiller and FHFA house price indices, the Richmond Fed manufacturing index, the Conference Board consumer confidence index and the first revision of September quarter GDP. Economists are expecting an unchanged 3.0%.

On Wednesday its durable goods orders, new and pending home sales, personal income and spending and the Michigan Uni fortnightly consumer sentiment index. Thursday markets are closed and then Friday brings the Chicago PMI.

Germany’s influential IFO business sentiment survey is due tonight before the first revision of Germany’s September quarter GDP on Tuesday. A flash estimate of Germany’s CPI will be released on Thursday, with Mario Draghi closely watching, and the eurozone equivalent is due on Friday.

Japan is closed today but on Friday will deliver monthly industrial production, retail sales and unemployment data.

In Australia we begin the countdown this week towards next week’s September quarter GDP release. Quarterly construction work done is out on Wednesday and private sector capital expenditure on Thursday. Monthly new home sales numbers are out on Thursday and private sector credit on Friday.

ALS Ltd ((ALQ)) will report its interim profit result today and Aristocrat Leisure ((ALL)) its full-year tomorrow. There remains a scattering of corporate AGMs to get through this week, with highlights including Harvey Norman ((HVN)) and a battered and bruised Woolworths ((WOW)).

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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