(TUESDAY 6TH JULY - 08.28 - JAMES GERRISH)...US stocks were uninspiring last night with the DOW JONES down -12 pts while the S&P 500 was off -0.13%. Commodity markets were actually higher with the CRB Index up more than 1% on the back of strong buying in Oil, Gold and Copper + Softs were mostly better. This was despite a rise in the USD which has bounced up from support.
We spoke about this chart in Stockwatch Monday.
More concern surrounding European Debt emerged last night as Portugal's debt copped a downgrade to junk status - however this didn't really have an impact on Equity markets. It was more noticeable in the currencies with the Euro pulling back against the Greenback.
The Euro is being torn between a number of unprecedented factors at the moment. On one hand Germany is surging ahead putting upward pressure on prices (inflation) and prompting the ECB to raise rates when they meet this Thursday (almost a certainty). However we've obviously got Greece + Portugal + Ireland etc that are struggling. The chart of the Euro is an interesting one, forming a contracting wedge formation. Essentially this means the trading range contracts like a spring and we often get a break either side with a large move. If the Euro breaks up, it means the USD was fall which is a positive for risk assets (stocks + commodities) - so its actually a good chart to keep an eye on at the moment.
RATINGS AGENCIES
We've been hearing a lot about the rating agencies lately and they seem intent on undermining confidence. Its probably warranted, but they seem unusually active in recent times.
Effectively, a rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings .In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.
The ratings agencies have felt the brunt of much skepticism in the wake of the GFC after giving what we now know were toxic securities, AAA credit ratings. This meant more risk averse investors like local councils + Govts etc could purchase the securities, that have lost much of their value and the underlying assets (mortgages) failed to perform.
In the days following the Greek Parliaments decision to pass the reform package, we've seen the ratings agencies state that any rollover - no matter whether voluntary or not - would constitute a default. They also warned about Chinese local government debt yesterday, and of course Portugal was downgraded. All in the space of a few days. One might think they're trying to justify their importance after being so far behind the curve during the GFC.
SHOULD HAVE SOLD OFF OVERNIGHT....
A rally in the US market last week of more than 5.5% (best week in more than 2 years) and a flow of negative releases should have prompted selling overnight. This didn't happen which I'm viewing as a positive - The old concept that markets staying resilient in the face a poor news is a good indication of strength - played out overnight. The Portugal downgrade was a pretty big event particularly given the recent turmoil around Greece while we also saw Factory orders in the US slightly below expectations (up 0.8% in May to be 14.8% higher annually) against 1% consensus.
The main number this week will be Non-Farm Payrolls which are due out on Friday (expectations +100,000). One of the reasons for such a savage sell off in recent months has been concern that the weakness in economic data is the first indication that we're heading for double dip. The market is obviously mixed here but there are certainly a large proportion advocating a double dip scenario. I'm not in that camp!. There is no denying that last months employment data was weak however there's a real chance that if we see a rebound this month (above expectations) this will put to rest double dip concerns - and the shackles will come off this market.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.11 to US$18.54, equivalent to A$17.35, A$0.34 above its last close on the ASX.
ResMed rose by US$0.01 to US$31.03, equivalent to A$2.90, A$0.02 above its last close on the ASX.
In London, Rio Tinto fell 58.5 pence to £44.78, A$0.88 lower in Australian currency terms.
BHP-Billiton fell 12.0 pence to £24.61, A$0.18 lower in Australian currency terms.
Henderson Group Plc rose 1.8 pence to £1.55, A$0.03 higher in Australian currency terms.
US ECONOMIC ACTION
Jul-05 - Factory Orders (For: May , F/Cast: 1.0%, Prior: -1.2%)
Jul-06 - MBA Mortgage Index (For: Feb-11, F/Cast: NA , Prior: -2.7%)
Jul-06 - Challenger Job Cuts (For: Jun , F/Cast: NA , Prior: -4.3%)
Jul-06 - ISM Services (For: Jun , F/Cast: 54.0, Prior: 54.6)
Jul-07 - ADP Employment Change (For: Jun , F/Cast: 60K , Prior: 38K )
Jul-07 - Initial Claims (For: Feb-11, F/Cast: 425K , Prior: 428K
Jul-07 - Continuing Claims (For: Jun-25, F/Cast: 3700K , Prior: 3702K )
Jul-07 - Crude Inventories (For: 7-Feb, F/Cast: NA , Prior: -4.375M )
Jul-08 - Nonfarm Payrolls (For: Jun , F/Cast: 80K , Prior: 54K )
Jul-08 - Nonfarm Private Payrolls (For: Jun , F/Cast: 110K , Prior: 83K )
Jul-08 - Unemployment Rate (For: Jun , F/Cast: 9.1%, Prior: 9.1%)
Jul-08 - Average Workweek (For: Jun , F/Cast: 34.4, Prior: 34.4)
Jul-08 - Hourly Earnings (For: Jun , F/Cast: 0.2%, Prior: 0.3%)
Jul-08 - Wholesale Inventories (For: May , F/Cast: 0.9%, Prior: 0.8%)
Jul-08 - Consumer Credit (For: May , F/Cast: $3.5B , Prior: $6.5B )
