The Monday Report

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By Greg Peel

Rock and Roll

I suggested on Friday morning that the pullback on Wall Street on Thursday night, following Wednesday night’s post-Fed surge, need not be repeated in the Australian market. If the Fed is back to being dovish again, and the first rate rise is no longer assured in 2015, then Australia’s high-yielding stocks are attractive both offshore and locally – the latter enhanced by an expected rate cut ahead from the RBA. And indeed, the ASX200 closed up 23 points.

Not even the energy and materials sectors, both of which faced further falls in relevant commodity prices, could finish in the red on Friday given the big miners and big oil & gas companies pay, or are about to pay, attractive dividends. The question now is: just how expensive can Australia’s yield stocks get? They were expensive during the February reporting season, according to the analyst fraternity, and here we are with the index back near its post-GFC high.

It appears there’s more upside, nevertheless, with Wall Street swinging back into the positive again on Friday night. The last couple of hours of trading post the Fed statement release on Wednesday night saw US stocks and bonds surge and the US dollar tank, then Thursday saw everything reverse almost back to the starting point. After another night to sleep on it, it appears Wall Street decided it was right the first time around. On Friday the Dow closed up 168 points or 0.9%, the S&P gained 0.9% to 2108, and the Nasdaq added 0.7% to 5026, to be just under its all-time 2000 closing high of 5048.

The US ten-year bond yield fell 5 basis points 1.93%, and the US dollar index fell 1.5% to 97.83.

So on that note, the Local SPI Overnight closed up 28 points, or another 0.5%, on Saturday morning. The bad news, however, is that the weaker greenback has sent the Aussie up again, by 1.9% to US$0.7777. But we can only assume a more dovish Fed will force a more dovish RBA.

The good news is that the weaker greenback has also provided a boost for commodity prices.

Copper Surge

Copper is one metal that has suffered from the Chinese economic slowdown yet remains very sensitive to disruptions in global supply. Last week saw workers at Freeport’s Grasberg mine in Indonesia going on strike and blocking access to the mine. Throw in the drop in the dollar on Friday night and short-covering, and copper jumped 3.4%.

The move was matched by lead, which rose 3.9%, while nickel added 2.8% and aluminium, tin and zinc were all up around 1%.

Iron ore rose US50c to US$55.00/t.

Gold gained US$12.10 to US$1183.40/oz.

Another announced decline in the US rig count added to the US dollar influence in sending West Texas crude up US$1.76 or 4% to US$45.72/bbl, while Brent rose US76c or 1.4% to US$55.11/bbl.

Where to Now?

The Fed’s statement, released last week, appears to suggest a significant shift in policy from the world’s most influential central bank. But realistically, a rate rise would have been the “shift” that capped off the end of QE last October, so really we’re just back in stimulus land once more. Is it a long dream or a long nightmare? Across the globe, countries are attempting to devalue their currencies and boost their economies through monetary easing and in the case of Japan, the eurozone and UK, through QE. The more they move to counteract each other, the less effective that easing is.

Let’s call the whole thing off? Maybe they should all get together and agree to equally write off each other’s debts.

Meanwhile, Fed policy has drawn attention away from our old friend Greece, which is still negotiating with its EU creditors to arrive at an acceptable bail-out deal. The EU is standing firm, and according to some commentators, is at the point of no longer fighting desperately to prevent a Grexit. Either as an alternative or as a bargaining chip, Greece has turned to Russia. The Greek prime minister, who we must remember leads a far left political party, has brought forward his meeting with Vladimir Putin.

Imagine Germany’s response were Russia, amidst the ongoing battle in Ukraine, suddenly to “annexe” Greece via debt commitments. It might have a tiny economy but Greece sits at the crossroads of Europe and the East, and to that end has been strategically important from antiquity right through to World War II. It would seem Mr Tsipras has a bit of leverage on his side.

The Week Ahead

The Fed has thrown away the Thesaurus and from now on will let the numbers do the talking. And just when everyone assumed the strong US February jobs numbers were enough to assure a Fed rate rise, Janet Yellen has downplayed those as well. Wage growth has not been kicking any goals, despite consistently solid new hirings. Only when wage inflation is apparent will the Fed consider a rate rise to be necessary.

Interestingly, the March jobs numbers will be released next week on the first Friday of the month as usual. But that’s Good Friday, and US markets are closed. Wall Street will have a whole weekend to think about it on a chocolate high, before responding on Monday. The rest of us have to wait until Tuesday.

Before then, this week brings the Chicago Fed national activity index and existing home sales tonight, and the Richmond Fed activity index, new home sales, FHFA house prices and the CPI tomorrow, along with a flash estimate of the March manufacturing PMI. Wednesday it’s durable goods, Thursday an estimate of the services PMI, and Friday the fortnightly consumer sentiment measure. The final revision of December quarter GDP will also be released on Friday, and the market is forecasting an increase to 2.4% from the previous 2.2%.

Japan, the eurozone and China, via HSBC, will also be flashing PMIs this week, with all the manufacturing numbers due tomorrow. Japan will also deliver monthly industrial production, retail sales and jobs numbers on Friday, while Germany’s influential IFO business sentiment survey is out on Wednesday.

Australia’s week is devoid of major economic releases, but on Wednesday the RBA will release its biannual Financial Stability Review. This might prove significant for the banks, given the yet to be ratified FSI recommendations and ongoing talk of possible macro-prudential controls for the mortgage market.

Thursday is expiry day for quarterly stock options on the ASX, and we’ll see another round of ex-dividends across the week. Their impact is nevertheless beginning to peter out.

But we will see a burst of off-season earnings results this week, including those from Kathmandu ((KMD)), TPG Telecom ((TPM)), Nufarm ((NUF)) and Bank of Queensland ((BOQ)).

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. On Friday, Rudi will participate on Your Money, Your Call. Bonds versus Equities, 8-9pm.
 

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

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