article 3 months old

The Monday Report

Daily Market Reports | Mar 10 2014

By Greg Peel

The US added 175,000 jobs in February, ahead of consensus expectation of 140,000. That 140,000 reflected anticipation of the weather effect, hence the positive result only adds to the confusion. The unemployment rate rose to 6.7% from 6.6% but due to an increase in the participation rate, which is a positive lead indicator for hiring in the months ahead.

The good result is good, but a lack of weather impact brings into question whether recent weak US data have simply reflected the weather issue or whether the US economic recovery has actually hit a pothole early in 2014. The result of confusion was a rollercoaster market on Friday night, with the Dow being up 84 points early and down 23 points around 3.30pm. The Dow closed up 30 points or 0.2%. A one point rise in the S&P took the broad market index back to the previous high at 1878 while the Nasdaq lost 0.5%.

Tensions have continued to bubble in the Ukraine. Clashes between pro-Ukrainian and pro-Russian demonstrators in the east prompt the question as to whether Putin might attempt to extend Russian control further into the country beyond just Crimea. To do so would be to attract UN sanctions but a tit for tat response would threaten the 30% of European gas supplies which are piped in from Russia. The Ukrainian economy has no notable impact on the global economy, but a rift between the US/Europe and Russia could have significant ramifications.

The US jobs result nevertheless dominated US markets on Friday night, with there now being little doubt the Fed will continue with its tapering program as outlined unless some major shift in economic fortunes were to transpire. Despite what threat the Ukraine might represent, the US ten-year bond yield jumped 5 basis points to 2.79% and gold fell US$11.00 to US$1340.00/oz. The US dollar index rose slightly to 79.73 and the Aussie is off 0.3% to US$0.90.68.

It was left to metal markets to price in the risk. Selling on the LME quickly turned into a flood on Friday following recent strength, triggering stop-losses and technical trades. Copper was the worst hit when the dust settled, falling almost 4%, with all other base metals falling 1.5-2.5%. Spot iron ore fell US$2.70 to US$114.20/t. The selling was not all about the Ukraine, with news from China also impacting.

A report circulated on Friday that a Chinese solar panel maker had defaulted on interest payments due on its bond. If this is the case, it would represent the first ever default on a Chinese onshore bond. Previously, the government via the state-owned banks would bail out businesses in trouble, but this default might be evidence of a restructuring of Chinese debt risk such that the government allows capitalism to run its course without communist intervention as a step towards shaking out tenuous businesses and discouraging unfettered lending. If this is a step in China’s gradual financial market reform agenda, it puts copper traders squarely on the radar. Commodity stockpiles, and copper stockpiles in particular, are used as collateral to secure financing when banks are otherwise reluctant to lend.

The news did not improve from China over the weekend. February trade balance data suggested Chinese exports plunged 18.1% year on year and imports rose 10.1%, sending the trade balance into deficit for the month. Economists had expected a 6.8% rise in exports and an 8.0% rise in imports to leave a small surplus. Exports rose 10.6% in January, which at the time greatly exceeded expectation on a seasonal basis. The seasonal hand was thus played as an excuse for the February data, given every year the lunar new year break throws China’s data into disarray before, during and immediately after the holiday.

The overall assumption nevertheless is that China’s economy is slowing. Beijing has set a target of 7.5% GDP growth for 2014 following 7.7% growth in 2013, which was the weakest growth rate since the 1990s. If Beijing were to feel the need to provide fresh stimulus to the economy then a fall in the CPI to 2.0% in February from 2.6% provides scope. The PPI fell 2.0% and has now been negative for two years. With both numbers going backwards, the new fear is that China will slip into deflation. Beijing is stuck between its familiar rock and hard place, given its efforts to reform China’s debt markets and stamp out shadow banking would be compromised if more government funds hit the system.

West Texas crude rose US$1.03 to US$102.59/bbl on Friday night, driven more by the positive US jobs result than any Ukraine implications. Brent rose US28c to US$108.79/bbl.

The SPI Overnight closed on Saturday morning down 16 points or 0.3%, capturing the metal shake-out but ahead of China’s weak data releases over the weekend.

There will be more Chinese data to contend with this week. Thursday sees the monthly data dump for February of retail sales, industrial production and fixed asset investment numbers which no doubt will also reflect lunar holiday disruption.

Industrial production numbers are also due this week for the eurozone and the UK.

It’s quiet economically in the US up to Thursday when February retail sales data are released along with business inventories. Friday sees the PPI and the Michigan Uni fortnightly consumer confidence measure.

Australia’s economic week begins tomorrow with the NAB business confidence survey. Wednesday it’s the Westpac consumer confidence survey along with housing finance and investment lending data and Thursday it’s the jobs numbers.

OrotonGroup ((ORL)), Alacer Gold ((AQG)), Bandanna Energy ((BND)) and Regis Resources ((RRL)) are due to provide profit reports this week.

Today is Labour Day in Victoria, South Australia, the ACT and Tasmania. With a weak session expected on China data and metals price falls, lighter ASX volumes could exacerbate the weakness.

Rudi will appear on Sky Business today at 11.15am and on Wednesday at 5.30pm.

For further global economic release dates and local company events please refer to the FNArena Calendar.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms