(TUESDAY 21ST JUNE - 08.02 - JAMES GERRISH)...The US market closed higher last night following European assurances that a solution would be found to spare Greece from default. Yesterday, the ASX 200 had a very bearish session which was actually very similar to Fridays trade. The index opened higher with a degree of short covering prompting a short sharp rally. A lack of confidence then becomes obvious and sellers dominate into the close. We closed down -33 yesterday after being up as much at +35. On our close, the US Futures market was pricing in a drop of more than -70pts when that market kicked off so we should see a good recovery on our market this morning. (FUTURES +35)
At close of trade, the DOW JONES was up +76 points while the S&P 500 added +0.54%. This is the third straight day of gains in the States which is in stark contrast to our local market. I was up for UK session last night and it was pretty mundane until the US came online. Once again, any short term rallies where sold before they really got off the ground and until we got news about Greece, it seemed no one was interested. European markets closed down however well up from session lows. There some appetite for risk late in the session with the EUR bid higher while commodities found support.
The chart of the commodity index above is a bearish setup however a sell has not yet been triggered - a break below support (333) would need to happen and for this, the USD will need to track higher which actually looks quite likely if the chart pattern is anything to go by. Higher lows are encouraging and could signal the start of a new uptrend if we break above the previous swing highs (around 76.5). I think this will eventually happen given the current global uncertainty, what appears to be reluctance from the US Fed for another round of stimulus and concern about the demand dynamics (China slowing) in the commodity markets.
However, I think its important not to second guess these moves and wait for confirmation in price action. Its not all bad news either. A rise in the USD may be a negative for commodities but its also a negative for the AUD (currently trading around 105c). A lower AUD will be good for the economy particularly exporters. We've written a lot about the under performance of the local market however in USD terms, the ASX 200 is actually up 16% in the last year. If the trend changes and we get AUD depreciation then this could be supportive of equities medium term and actually lead to a rally in our commodity producers (who have been robbed the value of higher commodity prices due to the strength of the Aussie)
We said last week that our belief is the Aussie will track back to the bottom of its range - its now at the mid point of that range.
GREEK UPDATE
Greece is still dominating the headlines and like it or not, is driving markets. The move yesterday by the Euro Group finance ministers to postpone a decision on whether Greece would be given the final 12 billion Euro from the first bailout package was enough to send Asian markets south and create headwinds for Europe and the US. Basically, the Group are trying to force Greece to pass legislation that cuts expenditure, lifts taxes and allows for privatization to occur before any more cash is dolled out. They have 2 weeks to achieve this and a reshuffled parliament may assist here (Greece actually said this would be done by 28th June). The first hurdle is a vote of confidence today but when all is said and done, I'm of the view that Greece will get the funds, which will put them out of the headlines (for a while at least) and the market will rally as a result.
In relation to Banks with exposure to Greece, its important to note that Australian banks have no investments in Greece. This compares with $56.7 billion owned by French Banks (explains France's push for IMF/EU bailout). According to an article in Bloomberg sighting the bank of international settlements, Greek Govt Bonds held by banks totaled $54.2 billion - 96% of this was owned by European Lenders including BNP Paribas SA & Societe Generale SA + Credit Agricole SA.
INTERESTING VIEW...
I was reading an interesting article from Alan Kohler in the Business Spectator this morning, below is a exert. (Source www.businessspectator.com.au).
Australia's economic wagon is hitched to China, but its markets are hitched to Wall Street; as a result we will see economic growth - albeit multi-speed - combined with flat markets for a while yet.
The global bear market is far from over but China is undergoing the greatest industrialisation the world has ever seen. Australia is going to get very rich indeed but the investment markets will underperform.
And then sometime in the next 12 months, Australians will wake up to the greatest buying opportunity they have ever seen because the world will realise what we have, and so will we. The cash that has been on the sidelines for two years will flood back into assets.
RBA
The RBA board minutes are released today and I'd be expecting some relaxation in the rhetoric of raising rates - albeit only a very subtle change. In his last speech, Governor Stevens has been very much focused on the size of the coming mining investment boom and I'd expect this to continue - however we'll be looking for more reference to weaker domestic and global data since their meeting in May - See May's minutes here - At this stage, we retain the view that the RBA will hold fire for longer. Probably not as long as the futures market is suggesting (12 months) but we won't see any action before November.
AUSTRALIAN DUAL LISTED STOCKS
In New York, News Corp rose by US$0.13 to US$16.89, equivalent to A$15.96, A$0.13 above its last close on the ASX.
ResMed rose by US$0.26 to US$31.28, equivalent to A$2.96, unchanged since its last close on the ASX.
In London, Rio Tinto rose 10.0 pence to £40.95, A$0.15 higher in Australian currency terms.
BHP-Billiton fell 5.5 pence to £22.59, A$0.08 lower in Australian currency terms.
Henderson Group Plc rose 0.6 pence to £1.42, A$0.01 higher in Australian currency terms.
