The Monday Report

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

Central Bank Tango

Wall Street was upset on Thursday night that Janet Yellen did not take the opportunity in a speech to provide more clarity on a December Fed rate hike in the wake of the very strong US jobs numbers. So stock markets were sold off on uncertainty and frustration.

But commodity markets are more certain and see a real threat in the dichotomy that is opening up across the globe regarding monetary policy. Commodities are traded in US dollars, and the Fed is set to raise, thus boosting the US dollar. With the exception of the UK, where the BoE is still holding back on a rate rise, every other major economy is looking at further stimulus. The eurozone will extend QE in December, China will continue ongoing stimulus measures and the BoJ is expected to be forced into extending QE anytime soon.

Thus we have the problem of commodity prices falling both on weaker demand from struggling economies, a rising US dollar, and on overriding global oversupply issues.

Falling commodity prices were always going to be the factor for the local resource sectors on Friday and so it was materials fell 2.2% and energy 3.5%. Within those sectors we also have the individual issues of BHP, the tragedy in Brazil and its share price being front page news, and Santos, its balance sheet issues and just what the company is planning to do.

A stronger US dollar means a lower Aussie dollar and that is good news for the Australian economy but not for offshore investors in the near term. If the Fed does start raising then the Aussie is destined to head into the sixties. As US investors lose on the falling currency, they are best to get out now and get back in when the currency has adjusted and yields are even more attractive.

Every sector took a beating on Friday.

Euro Woes

The attacks in Paris were yet to occur when the first estimate of eurozone September quarter GDP was released on Friday night. It showed a slowdown in the pace of growth to 0.3% from 0.4% in June, missing expectations of a steady 0.4%. Year on year growth is 1.2%.

The “miss” was blamed on Germany, which posted the same 0.3% growth when 0.4% was expected. France managed 0.3%, as expected. For major exporter Germany, the slowing Chinese economy is having a significant impact.

Expectations that the ECB will announce an extension to QE in December are already largely baked in, and this GDP result only serves to underscore that assumption. The euro did fall on Friday, pushing the US dollar index up 0.3% to 98.93, and most believe the falls will continue toward parity.

European stock markets were also weaker on Friday night as the whole world adjusts to monetary policy imbalances, but as noted, the terrorist attacks in Paris were yet to come. European markets will have their first chance to respond tonight.

Retail Woes

The problem for the Fed is that the data in the US, outside of jobs, are not looking flash.

Retail sales grew only 0.1% in October when economists had forecast 0.4%. Lower oil prices were a factor, as were a drop-off in auto sale value from the month before, suggesting discounting. Ex of autos and energy, sales rose 0.3%.

Within the sector, the death of bricks & mortar retail continues. In the wake of an earlier poor result from Macy’s, Friday night saw a similarly weak result from JC Penney and a profit warning from Nordstrom, sending both share prices down 15% each.

US producer prices fell 0.4% in October when a 0.3% gain was expected. The core PPI, ex of food & energy, fell 0.1%.

Looking at these numbers in isolation, one would not be expecting the central bank to be considering tightening policy. Yet in contrast, the Michigan Uni fortnightly consumer sentiment index showed a rise to 93.1 from a previous 90.0.

Retail and resources led Wall Street lower on Friday night, in a continuation of the US dollar-related selling across the week. The Dow fell 202 points or 1.2% while the S&P lost 1.1% to 2023 and the Nasdaq fell 1.5%.

The broad market S&P500 has broken down through its 200-day moving average – a bearish signal – as Wall Street posted its worst week since early September. The S&P is now back to being down for the year.

Commodities

On Friday night the International Energy Agency published a forecast for global oil demand growth of 1.2m barrels per day in 2016, down from the 1.8mbpd run rate for 2015 to date. This year’s demand growth actually represents a five-year high, which just goes to show the impact of oversupply.

On that note, the US rig count rose by 2 last week, to 574. Doesn’t seem earth-shattering, but it is the first time in eleven weeks the count had risen rather than fallen. With oil markets already suffering weakness, it was no surprise that Friday night saw West Texas fall another US92c to US$40.77/bbl and Brent fall US66c to US$43.61/bbl.

WTI’s 8% price fall over the week is the biggest since March.

The LME opened on Friday night with yet more selling. If Chinese weakness and prospects of a rising US dollar aren’t enough, weak US retail sales and inflation numbers didn’t help either. But base metal prices have fallen low enough for some to start risking the contrarian trade. Prices recovered from session lows by the end of the day. Aluminium, copper and lead still closed mildly weaker but nickel, tin and zinc posted modest gains.

The slight tick-up in the iron ore price on Thursday night proved but a blip. Iron ore fell US40c to US$47.40/t on Friday night.

Gold was relatively steady at US$1182.50/oz.

The Aussie was also steady at US$0.7125 on Saturday morning.

The SPI Overnight closed down 37 points or 0.7% on Saturday morning.

The Week Ahead

Then came Paris.

The G20 leaders may be steeling their resolve in Turkey but the next 24 hours will indicate just what dent to global confidence the attacks will precipitate. On the 37-point SPI fall alone pre-attacks, the ASX200 will be looking closely at the psychological 5000 support level.

Japan will release its September quarter GDP result today. The Bank of Japan will hold a policy meeting on Thursday and the world is still assuming an extension to QE must be a possibility as a counter to Europe and China, with a Fed rate hike being the swing factor.

The US will see the Empire State activity index tonight, housing sentiment and industrial production tomorrow night, and housing starts on Wednesday. The minutes of the October Fed meeting will also be closely scrutinised on Wednesday, ahead of the Philadelphia Fed activity index and Conference Board leading economic index on Thursday.

Australia sees vehicle sales today followed by the minutes of the Cup Day RBA meeting tomorrow. At that point the ridiculously strong October jobs numbers were yet to be released.

On Wednesday the September quarter wage price index will be released, commencing the countdown to our own GDP result due in early December.

The AGM season sees a second big wave this week, with meetings to be held by the likes of Commonwealth Bank ((CBA)) and a shell-shocked BHP Billiton ((BHP)), along with a struggling Myer ((MYR)) and a whole lot of others to boot.

AusNet Services ((AST)) will report interim earnings tomorrow, Orica ((ORI)) releases full-year earnings on Wednesday followed by interims for James Hardie ((JHX)) and Programmed Maintenance ((PRG)) on Thursday.

Rudi will appear on Sky Business on Thursday at noon and again between 7-8pm for the Switzer Report, and potentially again on Friday's Your Money, Your Call – Bonds (not confirmed as yet).
 

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

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