The Overnight Report: The Reign In Spain

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By Greg Peel

Mad Monday

One gets the impression that following on from Thursday’s strong rebound in the Australian market, investors were keen to go on with it on Friday but traders felt it safer to square up ahead of the weekend, and lock in a few bargain-hunting profits. The weekend passed without incident, so yesterday the buyers were back in force.

It was green across the screen for all sectors, with materials (+1.0%) enjoying a bounce in the iron ore price and a takeover bid in the nickel space, the banks (+0.9) enjoying yield support and ditto for the telco (+1.1%) and recently unwanted utilities (+1.7%). The staples (+1.2) were another to turn their fortunes around.

So we’ve found the bottom of the market, barring anything out of left field. The question is, what’s the upside target? What will take us back to 6000 and, this time, beyond? Some stockbrokers have been reining in their earlier 2015 forecasts for the ASX200, believing 6000 to be a bridge too far when the earnings outlook for the banks is muted and issues remain with iron ore oversupply.

Contagion?

With the US, UK and German markets closed last night, attention turned to the lesser European nations. Remember back in about 2011 when Greece was looking like collapsing and markets were worried that were Greece to fall, the likes of Portugal and Ireland and even Spain and Italy would be brought down in a domino effect? Well such contagion concerns are back again, except this time from a different angle.

Ever since the new Greek government took office with a mandate to renegotiate the austerity restrictions placed on the country by its creditors, the concern has been that were the IMF and company to bow to Greece’s demands, one by one the other peripheral eurozone members, and some of the biggies as well, would elect anti-austerity governments and the whole zone rescue plan would fall to pieces.

On Sunday Spain held regional and municipal election, and in the important cities of Madrid and Barcelona the ruling Popular Party was thumped by a mix of votes for the leftist We Can party and the centre-right Citizens party, which ran on platforms of anti-austerity. The mayoral election in Barcelona also saw an upset as the incumbent was knocked off by a social housing activist.

In November, a general election will be held in Spain. If the Spanish people go down the path of their Greek counterparts, we may have another long period of debt renegotiation to contend with. The euro fell last night to reflect this risk, sending the US dollar index up 0.3% to 96.40. The Spanish stock index fell 2%.

Iron Will

After its big surge on Friday night, spot iron ore jumped again last night by US$1.20 to US$61.10/t. It is coincidental that both West Texas crude and iron ore seem to like the idea of establishing a new level at US$60, but most metals analysts believe, in iron ore’s case, this is just a relief rally brought about by Chinese steel mills deciding to take advantage of low prices and restock.

Once restocking is completed, the simple maths of demand and supply will force iron ore prices lower again, analysts contend, as Chinese steel demand remains muted and global iron ore supply continues to build.

It would be self-defeating if those smaller companies which curtailed production with the price in the fifties were to see the sixties as reason to fire up the Tonka trucks once more.

The LME was closed last night, so no base metals trading.

West Texas traded electronically for a small dip to US$59.85/bbl and Brent posted a small gain to US$65.72/bbl.

Gold again did very little to close at US$1207.00/oz.

The Aussie is flat at US$0.7823.

Today

The SPI Overnight closed down 4 points.

US traders may have enjoyed a long weekend but they’ll quickly forget once hit with a barrage of economic data tonight, including durable goods, consumer confidence, new home sales, two house price indices and the Richmond Fed index.

On the local stock front, Ozforex ((OFX)) and Technology One ((TNE)) will post earnings results.
 

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