(TUESDAY 12TH JULY - 08.51 - JAMES GERRISH)....A combination of weak macro news flow unsettled the markets overnight with concern back on the Greek debt issue and now talk of trouble in Italy. This combined with continuing negotiation around the US debt ceiling (with no agreement reached) and we also saw more news flow surrounding Chinese inflation that ticked higher over the weekend. On the Domestic front, the Carbon Tax was centre stage yesterday and instead of reducing uncertainty, all it seemed to do was create new issues for investors to fret over. On the session overnight, the DOW JONES lost -151 points while the S&P 500 fell -1.8%. The FUTURES market is pricing a drop of -39 pts when trading kicks off this morning.
OVERNIGHT ACTION
Clearly, there was a move out of risk with equities, commodities and risk based currencies getting the boot. Last week, we highlighted chart of the EUR v the USD flagging a contracting wedge formation. This gave way to the downside overnight and this is a clear negative for equities.
Its also worth monitoring the US Dollar Index which rallied overnight. We continue to track the 76.5 level and this would be a bullish technical setup for the dollar (which is bearish for equities). If it breaks this level, we'll be looking to ad some USD exposure in the portfolio's. We'll do this through the USD ETF that's listed in Australia. This will offer sowehat of a hedge to the portfolio;s given the negative correlation between the S&P/ASX 200 v US Dollar.
EUROPEAN DEBT ISSUES
Contagion fears spiked overnight with Italian 2 year bonds surging a massive 70basis points and are up 120bp in the last 5 days. Portuguese yields also rallied. This main issue now is that fears of contagion become a self fore filling event. Increased concern = higher yields for European debt and counties like Italy, Portugal and Greece that are carrying debt to GDP of 119, 93 & 142 respectively (incidentally US Debt to GDP currently sits at 93) cannot afford to raise debt in a high yield environment. They then require EU/IMF assistance and we get this phenomenon of contagion.
This is the biggest issue in the market over the next 24-48 hours and we need some resolution here. If we get this, the market should rally.
CARBON TAX
The details of the Carbon Tax were released on Sunday night and if the markets reaction was anything to go by yesterday, was a complete disappointment. We thought the release would settle some of the questions but it seemed more were created. Obviously with any new tax, there will be winners and losers and we'll run through these now. In aggregate however, it does seem that the impact on the Carbon Tax on Earnings Per Share (EPS) growth will be small however its the perception that pushing new tax initiatives in a time when global markets remain unstable that seems to be the real issue. With the MRRT + the Carbon Tax + the High Aussie Dollar + Chinese tightening policy which has an impact on commodities and we can see why international investors are a little bit weary of investing in Australia, which is why the Aussie Equity market has underperformed.
On a sector specific level, the steel producers have been in the spot light. They've yelled the loudest leading into the release and probably got the best short term result with a $300 million support package - but there will be structural; issues for the sector when the support runs out.
Coal producers have been singled out given they're responsible for the worlds most heavily polluting power source. Stocks in this sector include MaCarthur Coal (MCC) which has just been subject to a $4.79 billion bid. Other stocks in the sector include WHC, GCL, COK.
The freight/travel industry is also in the spotlight and we saw Allan Joyce on the front page of the FIN REVIEW this morning confirming that passengers will pay for the added costs. This is obviously the line that will be pushed but we all know how competitive the airline industry is so i'm sure they'll be some impact to the bottom line of VBA + QAN. Toll Holdings (TOL) also a net loser here.
Obviously the winners have been in the renewable energy space with companies like Geodynamcs (GDY), Infigen Energy (IFN) & Carnegie Wave Energy (CWE) benefiting from the $10 billion spent through the Clean Energy Finance Corporation.
LNG has been a major talking point and there are still a lot of questions about the impact for this sector. To me, it remains the logical power source that can be scaled over time. Woodside (WPL) is still the big fish here.
US DEBT CEILING
An agreement is needed in the next 10 days for the US to avoid default. They've raised the debt ceiling more than 60 times in recent history so this time should be no different. Obama seems to be complicating the process by trying to structure a larger, more inclusive package that is coming up against some resistance. It may be the case where we get a smaller, shorter term fix while a larger package is negotiated over time.
ALCOA
Kicked off the reporting season last night and without going into detail, came in line with expectations. Important to note however expectations have been ratcheted back in the last few weeks so I think this will taken somewhat as a negative. AWC may come under some pressure today.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp fell by US$1.23 to US$16.10, equivalent to A$15.11, A$0.81 below its last close on the ASX.
ResMed fell by US$0.45 to US$30.19, equivalent to A$2.83, A$0.01 below its last close on the ASX.
In London, Rio Tinto fell 51.5 pence to £44.50, A$0.77 lower in Australian currency terms.
BHP-Billiton fell 17.0 pence to £24.37, A$0.25 lower in Australian currency terms.
Henderson Group Plc rose 1.8 pence to £1.59, A$0.03 higher in Australian currency terms.
