Summary: A gloomy Chinese export number over the weekend has prompted a retreat in global equity markets at the start of the new week, with lingering concerns about the Ukraine also weighing on sentiment. While the export numbers were clearly impacted by Lunar New Year falling in February this year, they were still fairly bleak which saw global risk markets sell off after a strong six-week rally. The weak export data sparked rumours that Chinese banks have been told to reduce lending to the steel industry, which sparked one the largest ever declines in the price of iron ore overnight (-6.8% on US futures markets, but down -8.3% to USD104.70 per tonne for iron ore delivered into China, which is its second largest decline on record), which flowed through to all risk markets. Indeed, by the closing bell the MSCI World Index was lower (-0.3%) with losses in Asia (-1.2%), Europe (-0.2%) and the US (-0.1%). In other financial markets, 10-year government bond yields were generally lower as investors increased their exposure to riskless assets (US Treasuries down to 2.78%, UK gilts higher at 2.80% and Japanese bonds closed at 0.62%), high beta currencies were lower as investors increased their US dollar holdings (AUD -0.5% to 90.18 and the Euro -0.1% to 138.71), and commodities were mostly down: Iron ore -6.8% to USD106.00 per metric tonne in US futures markets. oil -1.5% to USD101.09 per barrel. Dr copper -1.2% at USC304.45 per pound (which is close to a four year low). base metals were universally lower (with declines of less than -1%). gold +0.1% to USD1,339.70 per troy ounce. The SPI suggests that the Australian market will open +2 points higher (steady) at 10am AEST. Market news Asia – Major bourses in Asia ignore a positive lead from Wall Street over the weekend and instead declined in the wake of disappointing Chinese and Japanese economic data, which sparked a sizable rise in risk aversion across the region. In particular, figures over the weekend indicated that Chinese exports declined -18% in February, although the change was heavily affected by timing of Chinese New Year celebrations. Regardless, the figures were a disappointment even outside the usual seasonal effects. Meanwhile, Japan’s December quarter GDP was revised down to an annualised rate of +0.7%. The rate initially came down from the preliminary result of +1.0% which itself was well south of initial market expectations of +3.0% for the quarter. By the end of trade in India, the MSCI Asia Index closed lower (-1.2%) with regional losses led by China (-2.9%), Hong Kong (-1.8%), Korea (-1.0%), Japan (-0.9%), Taiwan (-0.6%) and Singapore (-0.3%), with only India (+0.1%) closing higher. Meanwhile, in the local sharemarket the S&P/ASX 300 Index closed -50 points lower (-0.9% to 5,364), but only five sectors closed in the red led by materials (-4.0%), telcos (-0.7%) and energy (-0.7%), whereas defensive sectors outperformed with solid gains in consumer staples (+0.6%) and healthcare (+0.8%). Europe – European markets closed lower following the weak lead from Asia with miners particularly soft. Economic data, on balance, came in weaker than expected which added to the gloom and geopolitical concerns in the Ukraine lingered and weighed in regional indices. Corporate news was mixed but was swamped by the declines in commodity markets and by the closing bell, the EuroStoxx Index was down (-0.2%) with losses in the major markets led by Germany (-0.9%), with the UK (-0.4%) also lower, whereas France (+0.1%) broke above the breakeven line and closed fractionally higher. In the periphery markets performance was also mixed with losses in Ireland (-0.5%) and Greece (-0.2%) and gains in Spain (+0.3%), Italy (+0.6%) and Portugal (+0.7%). US – on Wall Street, US equities are lower as the negative leads from Asia and Europe weighed on bellwether indices. The absence of US economic data and major corporate news, meant that after a weak opening, indices mostly drifted in slightly negative territory and the Dow Jones Industrial Average closed -39 points lower (-0.2% to 16,413) with the S&P 500 (-0.1% to 1,877) and the NASDAQ (-0.1% to 4,333) slightly outperforming. Overall, six sectors in negative territory led by industrials (-0.5%), consumer discretionary (-0.4%) and telcos (-0.3%), with only energy (+0.2%) and healthcare (+0.3%) putting on meaningful advances. Economic news Australia/Asia – no major domestic releases. Europe – France industrial production declined in January (-0.2%) which was well below street estimates (+0.2%), but much better than the downwardly revised December result (-0.6%). Conversely, the economic data continues to point to a recovery in Spain even though January’s industrial production (+1.1% y/y) came in slightly below market consensus (+1.3%). Meanwhile, Italian industrial production (+1.0% m/m) boomed in January with activity posting its largest rise in two years underpinned by a +3.9% rise in capital goods production, which suggests the corporations at home and abroad have increased their level of investment. US – no major releases. Major company news Europe Miners weighed heavily on the performance of the LSE after weak Chinese export numbers sent iron ore prices down to a nine-month low. Shares in iron ore producers Glencore (-2.4%) and Anglo America (-2.0%) were lower with Russian steelmaker Evraz (-5.7%) down by a larger amount as the company’s weak balance sheet weighed on investor confidence. However, there was weakness elsewhere in the market with Vodafone lower (-3.6%) as a proposed acquisition of Spanish cable company Ono (not Yoko) for €7 billion, whilst strategically sensible, does reduce the acquirer’s attractiveness to fellow predator AT&T. Elsewhere, Drug manufacturer BTG slipped (-3.2%) amid rumours that it had sourced venom from a Texas rattlesnake hunt, which wildlife officials want to ban. The company denied the rumour and stated that the ban would not affect its supply chain. US Shares in aircraft manufacturer Boeing (-3.0%) weighed on the Dow Jones Index after the company revealed that cracks has developed on the wings of some of its 787 Dreamliner planes that are in production. The company said that the problems were only in plans in production and posed no threat to the safety of passengers with the company on track to deliver 110 of the planes this year. In contrast, shares in Facebook rose (+3.0%) as UBS upgraded their target price for the stock to USD90 per share in response to expectations of higher advertising revenues following a USD100 million deal with advertising agency Omnicom. Elsewhere, equipment rental company United Rentals rose (+4.0%) after the company announced it would purchase National Pump for USD780 million, which is the company’s first move into the industrial rump rental market as chemical companies intensify their focus on harnessing US shale reserves. Major data releases Australia/Asia Economics – February Australian business confidence (Jan: 6) and February Australian business conditions (Jan: 4). Equities – BHP Billiton iron ore president Jimmy Wilson and Rio Tinto iron ore chief executive Andrew Harding are among speakers on the first day of the Global Iron Ore and Steel Forecast conference in Perth. Europe/US Europe – January trade balance (Dec: €14.2 billion) and final Italian GDP growth (Dec qtr (prelim): +0.1%) and January UK industrial production (Dec: +0.4%). US – no major releases. What is the key investment message overnight? Economic data was disappointing yesterday for China and Japan. China’s growth rate is set to moderate in the wake of slower credit growth and the constraining effect of a contraction of its working age population. Meanwhile, Japanese economic fortunes are delicately poised with the increase of its consumption tax only weeks away. Since his election in 2012, Prime Minister Abe has certainly been the first leader in decades to try to solve Japan’s economic malaise, but his Third Arrow plan seems very short of detail of exactly how the turn-around in an economy which has been in the doldrums for nearly a quarter of a century will be engineered. For an economy growing at just +0.7% annualised in the December quarter, with an export recovery not materialising despite a huge currency depreciation, it is hard to envisage how the implementation of a consumption tax will change the fortunes for Japanese policy makers. Accordingly, investors need to assure themselves that any direct or indirect exposure to Japan and China has assured funding that is backed by non-cyclical earnings growth as the favourable macro currents, which has been so instrumental to returns in recent years, are likely to prove to be less favourable in the years ahead. In this environment, a strong balance sheet and robust operating model are the easiest and by far the best form of risk management.
Posted on: Tue, 11 Mar 2014 08:54:41 +0000
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