Summary: Global sharemarkets were in retreat overnight after a poor session in Asia in response to disappointment about the lack of detail of Chinese economic reforms, with the prospect for less US monetary support also a continuing theme. It appears that the recent six week rally which taken markets up to fresh five year highs, if not all time highs, is now running out of steam as there has been no follow through on earnings growth or major improvement in the macro data. Indeed, a selection of emerging economies assets remain under price pressure also in response to US Fed expectations and the MSCI World Index was lower (-0.2%) with losses in Asia (-1.1%) and Europe (-0.5%) offset by a late rally in the US (+0.4% with 80 minutes left to trade). In other financial markets, 10-year government bond yields were either stable or lower (US Treasuries down to 2.73%, UK gilts lower at 2.64% and Japanese bonds closing steady at 0.60%), high beta currencies were all higher (AUD +0.3% to 93.23 and the Euro +0.1% to 134.48), and commodities were all lower: Iron ore -0.4% to USD133.31 per metric tonne in US futures markets. base metals were universally lower (with losses between -0.5% and -1.2%). gold -0.8% to USD1,271.20 per troy ounce. Dr copper -0.8% at USC323.40 per pound. oil -2.2% to USD93.04 per barrel. The SPI suggests that the Australian market will open -9 points lower (-0.2%) at 10am AEST. Market news Asia – Notwithstanding a modestly negative lead from Wall Street yesterday morning, Asian markets were a sea of red yesterday as speculators retreated en masse after they were disappointed that the communique from the Chinese plenary session made no mention of the pending reforms to the SOEs, which are central to the surge in irresponsible lending within the Chinese financial system. Elsewhere, Japanese investors booked some profits after a +3.5% surge so far this week and Indian data released post market close on Tuesday, which show higher inflation and weaker growth, were a headwind for regional investors. Overall, the MSCI Asia Index was lower (-1.1%) with losses led by Hong Kong (-1.9%), China (-1.8%), Korea (-1.6%), Taiwan (-1.1%), Singapore (-0.5%), India (-0.4%) and Japan (-0.1%). Australia was spared from the regional sell-off with the S&P/ASX 300 Index closing -72 points lower (-1.4% to 5,312) which was the worst one day close in six weeks with nine sectors closing lower led by banks (-1.9%), energy (-1.7%) and utilities (-1.2%), whereas IT (+0.9%) was the only sector to close higher. Europe – European sharemarkets traded broadly lower overnight with the UK weighed down by the possibility of higher UK interest rates in 2015 from the Bank of England, with several major companies going ex-dividend (BSkyB, GSK and Royal Dutch Shell) also weighing on major indices. Meanwhile, several Italian banks reporting earnings which missed expectations which combined the negative leads out of the US and Asia culminated in waning sentiment throughout the region. Overall the EuroStoxx Index (-0.5%) traded lower with losses in the major markets led by the UK (-1.4%), whereas France (-0.6%) and Germany (-0.2%) recorded more sedate declines. In the periphery markets performance was similar to the majors in relation to both the overall market direction and the size of declines which were led by Italy (-1.4%), Ireland (-0.8%), Portugal (-0.6%) and Spain (-0.4%) with Greece (+0.2%) the only market to record a gain. US – Despite negative leads from Europe and Asia, US markets are proving resilient to heightened selling pressure as markets continue to weigh mixed earnings reports and increased speculation regarding US Fed policy. On Wall Street with 80 minutes left to trade, the Dow Jones Industrial Average is +24 points higher (+0.2% to 15,774) with the S&P 500 (+0.4% to 1,775) and the NASDAQ (+0.7% to 3,949) outperforming with nine sectors rising led by consumer discretionary (+1.2%) and IT (+0.6%), whereas only telcos (-0.6%) is in the red. Economic news Australia/Asia – Australian consumer confidence (+1.9% in November) recovered most of its losses that were recorded in October (-2.1%) with household sentiment back around its highest levels in 2013, underpinned by rising house prices and resilient unemployment. While the result was a positive one overall, family finance, which seems to have the best predictive power in relation to household spending continued to decline and is now down over the past year which indicates that a pickup in consumer spending remains elusive, and this is key for the growth transition in the non-mining economy. Meanwhile, the wage cost index in Australia rose a strong +1.0% for the September quarter, which was above market expectations (of +0.7%) driven by the rise in the minimum wage in July. However, the strong quarterly result masked the weakest annual wage price inflation in the survey’s near two decade history (down to +2.7%), which is a good indicator for company margins in that Australian firms understand the weak operating environment and the need to get costs down. But it also highlights the troubles the RBA is likely to have in getting households spending more in an environment where wages growth is modest, at best, and unemployment is slowly rising. Europe – Eurozone industrial production contracted -0.5% in September which was weaker than street estimates (of -0.3%) underpinned by falling activity in Germany and France, but there was some better news in the periphery with Spain posting its first positive annual IP print in two years. The overall result suggests that economic growth is close to a standstill in the third quarter and underlines the fact that while the region has technically come out of recession, the traditional surge in activity (after a very large slump) is absent, so in many ways the recent slightly positive GDP growth in the June quarter is more of a stabilisation than a recovery. Meanwhile, the UK labour market report detailed a decline in UK unemployment to 7.6% with the Bank of England inflation report detailing their view (and mine) that the economic recovery had taken hold and that expectations is that UK rates might begin to increase in 2015. US – no major releases. Major company news Europe The UK market recorded one of its largest losses in the past six weeks with several stocks going ex-dividend weighing on index performance. Among other stocks, the declines were led by RSA Insurance (-4.8%) after investors continued to fret about last week’s profit warning with growth within areas of its European operations too slow and too fragmented after more than 60 acquisitions in the past eight years. Meanwhile, shares in the London Stock Exchange dropped (-3.1%) after the organisation delivered earnings that met expectations but did little else to excite investors who had already factored in a large increase in IPO action for next year. Elsewhere, the fallout of British Sky Broadcasting (-4.2% after trading ex-dividend) losing the broadcasting rights of the Champions League to rival BT Group continued, with one broker stating it would cost ITV (-3.5%) about -3.0% of advertising revenue losses and investors decided to send the stock down by a similar amount. US US stocks were mixed overnight with investors resisting the temptation to sell shares despite increased pressure from other regional markets. Among major stock news, shares in Starbucks (+1.0%) recovered early losses after the company stated that it would restate its fourth quarter result after showing an operating losses of USD2.1 billion to reflect damages in relation to its dispute with Kraft Foods where the company was ordered to pay USD2.76 billion after it ended the companies’ grocery deal three year ago. Mondelez (+2.7%), which was spun off from Kraft Food Group in October 2012 will receive all proceeds from the dispute settlement, which sent the stock upwards. Meanwhile, shares in department store retailer Macy’s closed higher (+9.5%) after it reported third quarter earnings much higher than expected, helped by rising sales after some large scale promotions and advertising. Elsewhere, shares in Tesla Motors (+2.2%) continued their recent recovery as its CEO said there was no need to recall all of its electric cars after fires in three of them raised safety questions and negatively impacted market sentiment towards the stock. Major data releases Australia/Asia Economics – no major releases. Equities – no major equities news. Europe/US Europe – September quarter Germany GDP (Jun qtr: +0.7%, exp: 0.3%), September quarter France GDP (Jun qtr: +0.5%, exp: 0.0%), October Eurozone CPI (Sep: -0.2%, exp: -0.1%) and October UK retail sales (Sep: +0.7%, exp: -0.1%). US – September quarter US non-farm productivity (Jun qtr: +2.3%, exp:+2.0%) and September quarter preliminary unit labour costs (Jun qtr: 0.0%, exp: +0.4%) and September US trade balance (Aug: -USD38.8 billion, exp: -USD39.0 billion). What is the key investment message overnight? The impression coming out of the recent Chinese plenary session is that there is nothing of note is happening any time soon and that the leadership is more focused on stability than on decisive action. Eventually though the Government is likely to announce that they will lower their growth target to +7.0% (from the current +7.5%) in order to enable a slowdown in lending growth which has plagued the financial system and continues to weigh on market sentiment, and this will impact its trade partners and lower their exchange rate including Australia. This will provide some support to other sectors of the domestic economy, which would be required if Australia is to successfully transition its economy to the non-mining sector.
Posted on: Thu, 14 Nov 2013 01:16:44 +0000
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