Summary: Caution was the order of the night with northern hemisphere markets turning down as investors await the US non-farm payrolls on Friday (given their key is determining the timing of Fed tapering) and key central bank meetings in the UK and Europe on Thursday, which culminated in listless trading overnight. The MSCI World Index was fractionally lower (-0.2%) with gains in Asia (+0.7%) outweighed by losses in the US (-0.1%) and Europe (-0.6%). In other financial markets 10-year government bond yields were mostly lower (US treasuries at 2.47%, UK at 2.37%, but Japan rose to 0.89%) as were high beta currencies (AUD -1.1% to 91.41 and the Euro -0.7% to 129.78), whereas commodities were mixed: Iron ore +1.7% to USD118.20 per metric tonne. oil +1.4% to USD99.35 per barrel. base metals were mostly higher (with zinc, nickel, tin and aluminium posting gains). Dr copper -0.7% at USC313.45 per pound. gold -1.0% to USD1,243 per troy ounce. The SPI suggests that the Australian market will open -25 points lower (-0.5%) at 10am AEST. Market news Asia – Asian sharemarkets rose for a fifth consecutive session with investors encouraged by supportive PMI results overnight in Europe and the US, although sentiment remained in check as concerns persisted about China’s growth outlook. The overall MSCI Asia Index posted solid gains (+0.7%) with regional increases led by Japan (+1.8%), Singapore (+1.0%), China (+0.6%) and Taiwan (+0.3%), with Korea (-0.04%), India (-0.6%) Hong Kong (-0.7%) closing in negative territory. In the local sharemarket, the S&P/ASX 300 Index rose 122 points (+2.6% to 4,791, which was its highest daily rise in 19 months) and led the pace of regional gains, with double century rises in all sectors other than telcos (+1.6%), with materials (+3.7%), energy (+3.4%) and consumer discretionary (+2.9%) leading the score sheet in a great day for investors. Europe – After several days of strong gains, the EuroStoxx Index fell back overnight (-0.6%) as investors became concerned about a recent tightening of financial conditions with the UK (-0.1%), France (-0.7%) and Germany (-0.9%) all lower. Similarly, periphery markets were universally lower with declines smallest in Ireland (-0.03%), Spain (-0.3%) and Italy (-0.6%) who outperformed most of the majors, whereas Portugal (-1.3%) and Greece (-3.2%) closed the session at the bottom of the field. US – on Wall Street, the Dow Jones Industrial Average closed down -43 points (-0.3% to 14,932) with the S&P 500 (-0.1% to 1,614) and the NASDAQ (-0.03% to 3,433) outperforming as six market sectors posting gains led by telcos (+0.5%), energy (+0.2%) and consumer discretionary (+0.2%), although materials (-0.3%), healthcare (-0.3%) and industrials (-1.1%) weighed on the Index. Economic news Australia/Asia – As widely expected, the Reserve Bank of Australia left official interest rates unchanged at 2.75% at its July Board meeting, with the accompanying statement little changed from last month given the lack of new top tier data. The Bank did note the change in the currency saying that it would help rebalance growth (from mining to non-mining), but suggested that it ‘remains at a high level’, highlighting their hope that it will gravitate closer towards its average of 74 US cents since 1983. Financial conditions have eased from end-2012 and there are some signs that this is flowing through the economy, but to date this is well below that seen during previous cycles. The Bank maintained its easing bias by stating that there was more scope for lower interest rates if inflation remains contained (which it is), which boosted market sentiment. Europe – no major releases. US –US factory orders rose strongly in May (+2.1% fractionally ahead of street estimates of +2.0% with the April result revised higher) helped by a third straight month of strong business investment, which suggests that US manufacturing activity may be picking up as the de-stocking process comes to an end. Most of the May rise was due to a big pickup in the volatile commercial aircraft demand, with orders ex-aircraft and defense up +1.5%, which was a further improvement on solid results in previous months. Company news Europe Shares in London were fairly flat, but a leak from a US Federal Government website revealed that outsources Serco (+6.5%) had been awarded a lucrative contract to enrol Medicare and Medicade patients worth up to USD1.25 billion over five years. The company did not confirm the deal and said it would file an update at an appropriate time. Similarly, retailers Burberry rose (+2.9%) on the back of an upgrade from HSBC which stated that the company’s heavy investment in recent years in its retail division as well as its focus on emerging markets and higher margins accessory ranges was providing a clear path to earnings delivery. Meanwhile, pharmaceutical company Shire rose (+1.6%) amid speculation of acquisition activity, with rumours circulating that it had knocked back a takeover form Bristol-Myers Squibb earlier in FY13. Meanwhile, house builders were lower led by Persimmon (-1.3%) which declined after management confirmed the importance of government mortgage subsidies in supporting the earnings environment. US US REITs did better overnight as stability in the US 10-year government rate provided some much needed respite with the subsector putting on +1.1%, with Simon Property Group (+1.8%), Kimco Reality (+2.0%), HCP (+2.5%) beating their peers and the broader market. Similarly, shares in US car maker General Motors (+0.2%) came in well above expectations, which prompted large gains in Ford (+2.6%). Meanwhile, tech stocks continued their recent strong run with game-maker Zynga (+6.5%) performing strongly as it poached former head of Microsoft’s Xbox division as its new CEO. Data releases Australia/Asia Economics – May Australian trade balance (Apr: AUS28 million, exp: AUD53 million), May Australian retail trade (Apr: +0.2%, exp: +0.3%) and June China services sector PMI (May: 54.3). Equities – May Eurozone retail sales (Apr: -0.5%, exp: +0.3%), Eurozone final service sector PMI (Jun (prelim): 48.6, exp: 48.6), with individual readings for Germany (51.3, exp: 51.3), France (Jun (prelim): 46.5, exp: 46.5), Italy (May: 46.5, exp: 47.0) and the UK (May: 54.9, exp: 54.5). Europe/US Europe – no major releases. US – May US trade balance (Apr: -USD40.3 billion, exp: -USD40.2 billion), June services sector PMI (May: 53.7, exp: 54.0). What is the key investment message overnight? The old adage is don’t fight the Fed and investors will have to accept that they are now investing in a rising interest rate environment. The macro outlook hasn’t changed, nor has the earnings outlook, but over the past month the markets have changed from riding the wave with the US Fed, to now trying to get ahead of their next move. With elevated valuations relative to recent years, investors need to decipher what part of each stock’s price is due to its earnings and which is due to US Fed policy. This is not an easy task and if there is one thing for sure, there is no safety in the Index – the best safety (as always) is in strong balance sheets and solid earnings. They are the easiest and by far the best forms of risk management in what remains a positive growth environment.
Posted on: Wed, 03 Jul 2013 00:31:10 +0000
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