Daily Market Reports | Jun 15 2015
By Greg Peel
Poised
Activity quietened down on Bridge Street on Friday – a typical Friday session – as the dust settled on Thursday’s big snap-back rally. Materials and the banks gave a bit back in what was otherwise a mixed session across sectors, which saw utilities (+0.9%) find some yield hunters.
The ASX200 has moved up from under 5500 to be sitting at 5550. What happens next will be determined by what happens this week, with the Fed policy meeting taking centre stage on Wednesday night and the Greek spectre hovering.
Greece
With negotiations in Brussels now reaching what this time looks like an unresolvable impasse, given the IMF has stormed out, a Greek default seems inevitable unless either Tsipras sees no alternative but to capitulate to creditor demands or the EU comes up with some other conciliatory plan. The latter seems increasingly less likely.
As to what happens next were Greece to default, nobody knows. While other countries have in the past been forced to organise a work-out of their IMF loan repayments, no one has ever actually defaulted. And no one has ever left the eurozone.
European stock markets went into selling mode on Friday night, with Germany down 1.2% and France down 1.4%. While there has been much talk that global markets are ready for a Grexit, and that the fallout would be minimal, the “nobody knows” factor encourages investors to play it safe rather than sorry.
That feeling spilt over into US markets, sending the stock indices south from the opening bell. The Dow closed down 140 points or 0.8%, the S&P lost 0.7% to 2094 and the Nasdaq fell 0.6%. The day’s major economic data release met forecasts.
The US producer price index rose 0.5% in May at the headline – the biggest jump since 2012. But it was all about the bounce-back in oil prices, and in fact the core PPI, ex food and energy, fell 0.1%. The core rate is tracking at a mere plus 0.6% annualised, which is not in itself impetus for a Fed rate rise. Despite May’s jump, the headline is actually tracking at minus 1.1%, given the big fall in oil prices on a twelve-month basis.
Nonetheless, with the Fed holding a policy meeting this week, releasing a statement and holding a press conference on Wednesday night, it is also safer for Wall Street to retreat to the sidelines, Greece notwithstanding. Despite the German ten-year yield falling back to 0.83% from 0.89% on Friday night on Greece fears, the US ten-year closed unchanged at 2.38%.
The US bond market appears to have now settled itself ahead of what might happen next. No one is expecting the Fed to announce a rate rise in this week’s statement, but there is a chance Janet Yellen might expand on her previous “this year” suggestion and hint that the September meeting – the next to include a press conference – is closing in as the likely candidate. Recent US data have suggested a rebound is indeed occurring in the US economy out of the weather-impacted March quarter.
As to what might happen were the Fed to specifically set a timetable, once again, nobody knows. Opinions range from “already baked in” to “there’ll be chaos, just like 2013’s taper tantrum”. The middle ground argument suggests there will be some initial volatility, but that markets will right themselves fairly quickly.
Or Janet Yellen may not add any more colour on Wednesday night, and simply reiterate that a rate rise is “data dependent”. Then we can all speculate for another three months. Oh joy.
Commodities
Two pieces of news impacted on oil prices on Friday night. The weekly US rig count dropped again, which is a positive for prices, but data indicated OPEC is currently producing at around a million barrels per day more than its own 30 million bpd quota. The implication is that Saudi Arabia is determined to maintain its market share even if it has to accept lower prices.
The impact was a US50c fall in West Texas to US$60.05//bbl, but a steeper US$1.24 fall in Brent to US$63.87/bbl. At under US$4, the Brent-WTI spread has begun to look more historically “normal” now a combination of reduced US supply and expanded US supply infrastructure has reduced the Cushing storage premium. A few years ago that spread blew out to US$27/bbl.
After falling steeply on Thursday night, base metal prices stabilised on Friday night. All metals posted small, mixed moves, except for nickel, which fell 1.2%.
Iron ore fell US40c to US$65.00/t.
Gold was steady at US$1181.30/oz.
A steady US dollar index, at 94.97, supported stability in commodity markets. The Aussie is nevertheless down 0.3% to US$0.7732.
The SPI Overnight closed down 6 points.
The Week Ahead
Negotiations between Greece and its creditors continued through to last night but again ended in stalemate. Tsipras again offered an alternative reform package, but EU officials saw nothing new. Tsipras’ refusal to touch pensions and taxes is the stumbling block. He has offered to continue discussions, but EU and IMF officials have now said they are no longer authorized to negotiate further.
Last night’s meeting was considered by the creditors as the “last attempt”. EU finance ministers will meet on Thursday to decide what to do next.
The Fed policy meeting will otherwise be the focus of global attention this week.
The US economic calendar is a full one this week, beginning with industrial production, housing sentiment and the Empire State activity index tonight. Tomorrow sees housing starts, and Thursday brings the CPI, Philadelphia Fed activity index and leading economic indicators.
Friday brings the quarterly derivatives expiry, or “quadruple witching”.
ECB president Mario Draghi will speak tonight, ahead of eurozone trade, employment and inflation data due this week and the ZEW investor confidence survey tomorrow night.
The Bank of Japan will hold a policy meeting on Friday.
It’s also an expiry week in Australia, with SPI futures and index options maturing on Thursday. On Friday, the quarterly S&P/ASX index changes come into effect.
Tomorrow sees the release of the minutes of the June RBA meeting. Opinions on whether we’ll see another rate cut or not have bounced back and forward since that meeting was held. The RBA Bulletin will be published on Thursday.
Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. He shall host Your Money, Your Call – Equities again on Wednesday, 8-9pm.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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