SHERWOOD OVERNIGHT UPDATE REPORT 24th November 2014 Markets move higher in the wake of better than expected German confidence. Summary • A shorter morning report as Im catching an early flight. Global markets moved higher but the uplift was more subdued than recent sessions as the impact of increased stimulus by Asian and European central banks faded. There was little macro data to continue to market optimism (even though German confidence came out stronger than expected) and most company updates weighed on regional indices. With around 45 minutes left in the US session, the MSCI World Index is higher (+0.3%) with advances in Asia (+0.8%), Europe (+0.5%) and the US (+0.2%). • In other financial markets, 10-year government bond yields rose marginally in the wake of slightly firmer optimism on global growth (US Treasuries up to 2.32%, UK gilts higher at 2.05% and Japanese bonds closed lower at 0.455%), high beta currencies were mixed against the Greenback (AUD -0.7% to 86.09 and the Euro +0.4% to 124.39) as were commodities: • gold +0.6% to USD1,198 per troy ounce. • Dr copper +0.6% at USC302.98 per pound. • base metals were universally higher. • iron ore -0.5% to USD69.63 per metric tonne in US futures markets. • oil -0.5% to USD76.14 per barrel. • The SPI suggests that the Australian market will open -11 points lower (-0.2%) at 10am AEST. Market news • Asia - Asian sharemarkets closed higher on Monday as bourses caught up with the Chinese rate cut late on Friday night with greater Chinese markets reaching three-year highs and Australian commodities plays also outperforming. Markets in Japan were closed for labour thanksgiving national holidays and it was reasonably quiet elsewhere which meant that Fridays news dominated market direction and gains. Meanwhile, markets in Korea rose despite a sizable pullback in Samsung following reports of a management reshuffle. By the regional close in Mumbai, the MSCI Asia Index was higher (+0.8%) with gains in Hong Kong (+2.0%), China (+1.9%), Australia (+1.1%), Korea (+0.7%), India (+0.6%) and Taiwan (+0.3%), whereas Singapore declined (-0.1%) and Japan was closed. In the local market the S&P/ASX 300 Index was +56 points higher (+1.1% to 5,303) with nine sectors closing higher led by materials (+3.3%), energy (+2.5%) and healthcare (+1.3%). • Europe - European sharemarkets closed higher, but there were some losses in individual markets. Spain led the pace of regional advances as its 10-year bond yield declined below 2% for the first time ever, but hawkish comments from Bundesbank officials saw the Draghi optimism begin to moderate from recent highs. German economic data was constructive as the November Ifo business climate came out stronger than expected, which combined with last weeks ZEW survey suggests that the regions largest economy has begun to stabilise. In the corporate space, energy services group Petrofac (-26%) issued a profit warning which sparked sharp losses, whereas British Telecom rallied after confirming potential acquisitions. By the regional close, the EuroStoxx Index was higher (+0.5%) with advances in industrials (+1.3%), banks (+0.8%) and consumer discretionary (+0.5%) offset by losses in healthcare (-0.2%) and energy (-0.5%). In the major markets, France (+0.5%) and Germany (+0.5%) moved up in unison, whereas the UK (-0.3%) moderated from its recent high. In the periphery markets performance was less upbeat than recent sessions with advances led by Spain (+1.2%), Ireland (+0.5%) and Portugal (+0.2%), whereas Italy (-0.1%) and Greece (-0.5%) retreated. • US - on Wall Street, with around 45 minutes left in the trading session US equities are higher, as the impact of the weekends monetary policy support/speculation in China and Europe, respectively, lessened but remained positive. There was no major macro data out overnight as corporate news dominated sentiment with telcos weighing on index trends as Verizon and AT&T were forced to pay higher than expected prices (totalling USD34 billion) for spectrums at the Federal Communications Commission’s AWS-3 auction. As households and businesses spend more time on their smartphones downloading data, demand for airwaves has increased exponentially and the price paid raised investor concerns about cost pressures decreasing margins. Within the last hour of trading, the Dow Jones Industrial Average is up +5 points (+0.1% to 17,815) with the S&P 500 (+0.2% to 2,068) and the NASDAQ (+0.8% to 4,750) outperforming with six sectors currently posting gains led by consumer discretionary (+1.0%), IT (+0.7%) and financials (+0.5%), whereas utilities (-0.7%), energy (-1.0%) and telcos (-1.5%) are heading the other way. Mondays economic news • Australia/Asia - no major releases. • Europe - The December quarter economic outlook for the Eurozone, which has anchored regional share price trends in recent months, improved as Germany’s Ifo index of business confidence rose for the first time in seven months. The index’s November’s reading came in at 104.7, relative to consensus expectations of 103.0 and an October result of 103.2. The Ifo index is the clearest single leading indicator for the German economy and the overnight reading gives comfort to investors that the region’s largest economy could expand in the December quarter, even though activity remains very subdued. • US - no major releases. Tuesdays major data releases Australia/Asia • Economics - no major releases. • Equities - Medibank Private is due to begin trading on the ASX. Meanwhile, Aristocrat Leisure is expected to post full-year results and OZForex its half year results, while Harvey Norman, Brickworks, Retail Food Group and Mesoblast have annual general meetings scheduled. Europe/US • Europe - September quarter final Germany GDP (Jun: -0.2% q/q), November France business confidence (Oct: 91) and September Italian retail sales (Aug: -0.1% m/m). • US - no major releases. What is the key investment message overnight? There is no doubt that whenever financial markets get a sense that the Chinese authorities are poised to apply more stimulus to stabilise and boost growth that a positive market reaction is assured. However, the key for investors is to determine whether China’s recent growth moderation is cyclical or structural. China currently has a growth target of +7.5%, which it can only hit with additional stimulus or asset bubbles, neither of which are sustainable. Therefore, while the PBoC has more stimulus to unleash in the form of either lower official interest rates or reserves ratio requirement (which are likely in early 2015), investors should not expect a sharp rebound in Chinese growth. Instead, the measures announced on Friday night are meant to reduce downside risks to growth and won’t spark sustained rises in consumer spending, commodity prices or regional trade. This can only be accomplished by reforms, but even these can’t uphold growth in the 7% range for much longer, given demographic and leverage trends. However, on the positive side, a further growth moderation will make the business cycle more sustainable over the long run and that is a reason to be more optimistic. Regards, Matt Sherwood Head of Investment Markets Research
Posted on: Mon, 24 Nov 2014 23:58:05 +0000
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