(MONDAY 6TH FEBRUARY- 07:23- JAMES GERRISH)...The US MKT was HIGHER on Friday with the DOW JONES up +158pts while the S&P 500 added +1.48%. European mkts were higher (FTSE up +1.81%, German DAX up +1.67%, French CAC up +1.52%) while locally, the SPI FUTURES mkt is pricing a HIGHER open up +56ptS when trading kicks off here this morning.
On Friday, the ASX 200 closed DOWN -16pts or -0.39% to 4251. The Aussie Dollar hit a high of 107.93 on Friday but was trading back at 107.25 this morning.
OVERSEAS MKTS; The US jobs report provided an upside surprise on Friday and further supports our view of an improving economic situation in the US. The mkt was expecting about +150k jobs to be added in the States with the unemployment rate steady at 8.5%. Instead we got +243,000 jobs created in January sending the unemployment rate down to 8.3% (biggest gain since last April).
Clearly a good result and we're getting close to the level we need to be at. Looking at the composition of the number, the growth in jobs was broadly-based, with gains across all industries, and hours worked went up by 0.2%.
The mkts reaction was obviously positive and it also filtered through into support for commodities. It is however important that we put the number into perspective in a longer term context and the chart below does it pretty well.
Note how the number of jobs steadily increased from 1961 to 2001 (top chart). During the last economic recovery (i.e. the end of 2001 to the end of 2007), job growth was unable to get back up to its long-term trend (first time since 1961). More recently, the number of nonfarm payrolls has been working its way higher but at a pace that is not fast enough to close the gap on its 1961 to 2001 trend. In fact, the current number of US jobs is still below its 2001 peak.
The bottom chart shows the percent of gains above or below the regression line and its clear that we're still falling well short. Graphs such as this fuel the argument that we're in a period of structural change in the dynamics of the labour mkt. Put simply, it requires fewer people to produce goods based on better technology and outsourcing to lower cost centers in the developing world, hence the US will need to get used to structurally high unemployment.
Greece; The mkt may not be as optimistic as the Futures are suggesting this morning given the flow of news coming from Greece over the weekend. It remains an incredibly complex situation with dual negotiations happening in unison. Firstly, the private Greek Bond holders (who are mostly European banks) are negotiating with the Greek Govt about the haircut arrangements that will be applied and rumors are that they'll now accept a coupon of 3.6% on new 30 year paper.
Once agreed, these banks will need to consider the recapitalization of their own balance sheets and that is likely to support a massive demand for ECB money in the next auction come the end of Feb. I think the mkt is pretty much expecting a solution here and the rumblings coming from the negotiations suggest it will be soon.
Also under way is the negotiations between the Greek Govt and the Troika (which refers to the
European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB). Negotiations here seem to be a little more complex and an agreement seems less likely at the start of the week.
The ultimate deadline for Greece is the 20th March when they have bond payments to make and the Troika need to release the next round of aid for this to happen.
At the moment it seems Greece disagrees with the amount of austerity being demanded by the Troika particularly in the areas of minimum wages and holiday entitlements. From the Troika's perspective, they would certainly be annoyed about the hollow rhetoric Greece provided at the last negotiations and lack of follow through on agreed actions.
As it stands, the negotiations are at an impasse which if unresolved could be disastrous for Greece. What I think will play out is that Greece will agree to the Troika demands to ensure to payments proceed, the country will avoid default for now and then they'll be some type of negotiated implementation after the general elections which are tipped for April.
John Noonan from Thomson Reuters put it well this morning quoting Einsteins definition of insanity...Doing the same thing over and over and expecting different results... Probably serves as a good lessen in life as well!
One observation on Fridays session in the US was the continued lack of volume in stocks. It was lite and people tend to worry about this. Speaking with some mates in funds management over the weekend, they seem to think that a lot of institutional money is waiting for the Greek situation to be officially agreed upon (as in private creditors + Troika) before putting more cash back into risk assets such as equities.
Whatever your current view on the mkts, remember that mkts often rally in the face of negative news flow largely because the media is reporting the here and now while mkts price in what's likely to be happening in 6 months time.
One of interesting themes that helps me justify a more more bullish stance, is the price action following January's rally. The DOW has fallen 6 of the last 8 trading days yet the average fall was just -0.06%. So after the big January rally and when instos were back at the end of January, no one has sold the rally. We saw on Friday that investors want to latch onto positive news - they want an excuse to buy and they're getting it from the US economic data + they might get it from Europe this week.
AUSSIE MKT; Higher open this morning with miners to cop a bid. Domestic reporting season heats up this week (from tomorrow) with Bradken (which we own), Cochlear. Transurban, Ansell, BHP (which we own), Boral, RIO (which some clients hold), Stockland, Tabcorp (which come clients hold), Telstra (which we own) and Newcrest (which some clients hold).
We also get the RBA decision on interest rates out tomorrow with the mkt expecting a 0.25% cut taking the benchmark to 4%. Those expectations have come back a bit because of the good numbers from the States on Friday but I still have the opinion (hope) they'll cut.
Retail Sales + Inflation out today for the RBA to consider.
So a big week for our mkt and a lot that can drive stocks.
James Gerrish
