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Month: November 2012

Morning Market Update: Bulls Run On

International equity markets finished collectively stronger overnight amid optimism that a compromise can be reached regarding the US fiscal cliff.

US Senator, Chuck Schumer, and Senate Majority Leader, Harry Reid, gave the market a boost after they mentioned that there has been progress in the budget discussions.

In Europe, the UK’s FTSE climbed 67 points (+1.2%) to settle at 5870 whilst Germany’s DAX increased 58 points (+0.8%) to settle at 7401. France’s CAC added 54 points (+1.5%) to settle at 3569.

In the US, the Dow Jones rose 37 points (+0.3%) to settle at 13022 whilst the S&P added six points (+0.4%) to settle at 1416. The Nasdaq climbed 20 points (+0.7%) to settle at 3012.

In the commodity space, crude oil for January delivery rose $1.58 to settle at $88.07 a barrel after reports showed that US GDP grew 2.7% in the third quarter—higher than the expected 2%.

Gold for February delivery advanced 0.6% to settle at $1729.50 an ounce on speculation that the Federal Reserve will buy bullion to shore up its reserves.

In the currency space, the Japanese yen fell against the euro due to concerns that opposition leader, Mr. Shinzo Abe, will be elected as the country’s Prime Minister after the elections on 16 Dec 2012.

The euro strengthened against the yen and the US dollar after Italy successfully raised six billion euros at lower borrowing costs. The US dollar fell against the euro as investors shunned safety for risk. Today will see the release of the private sector credit data (11:30am, AEDT).

Morning Market Update: Bulls Run On is a post from: Australian Stock Report Market Pulse Blog

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Morning Market Update: US Bulls Go For A Run

European and US equity markets finished in the green overnight after President Barack Obama expressed his intent to resolve budget discussions before Christmas.

The President’s statement was further augmented when House Speaker, Mr. John Boehner, essentially said that he is optimistic that a compromise can be negotiated.

In Europe, the UK’s FTSE added four points (+0.1%) to settle at 5803 whilst Germany’s DAX rose 11 points (+0.2%) to settle at 7343. France’s CAC gained 13 points (+0.4%) to settle at 3515.

In the US, the Dow Jones increased 107 points (+0.8%) to settle at 12985 whilst the S&P climbed 11 points (+0.8%) to settle at 1410. The Nasdaq gained 24 points (+0.8%) to settle at 2992.

In the commodity space, both oil and gold fell amidst concerns that the US budget discussions might fail to materialize in the given time frame. Crude oil for January delivery fell $0.69 to settle at $86.49 a barrel—a two-week low. Gold for February delivery declined 1.5% to settle at $1718.80 an ounce, its lowest in three weeks.

In the currency space, the Japanese yen traded higher against the US dollar after technical indicators showed that the former currency’s recent decline was excessive.

The euro traded higher than the US dollar amidst speculation that investors will accept Greece’s debt buy-back terms even if the offer is lower than market prices.

The US dollar fell against most of its peers as traders and investors rotated out of safety and into risk. Today will see the release of the HIA New Home Sales (tentative) and Private Capital Expenditures data (11:30am, AEDT).

Morning Market Update: US Bulls Go For A Run is a post from: Australian Stock Report Market Pulse Blog

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Aussie Economy And The Fiscal Cliff

Aftermath of the fiscal cliff

Last week we provided a background on the US fiscal cliff and discussed why it was a source of fear for the markets.

Today we will take our discussion a step further and look at what the fiscal cliff means for the Aussie economy, the stock market and how investors may their position portfolios in response.

Economic impact

We have a clear idea of what it will do to the US economy, but what about the fiscal cliff’s impact on the Aussie economy? Before we answer that question, it is useful to revisit the state of the global economy in 2009 during the immediate aftermath of the GFC.

In the chart below, we have included the trend in US exports (yellow line) and imports (white line), global GDP growth (green line), and the US investment grade five-year credit default swap index (purple line).

During the height of the economic crisis there was significant deterioration in US trade activity, represented by the big ‘dip’ in the white and yellow lines.

The purple line rose as investors became concerned about the credit worthiness of the US corporate sector – not surprising given the major slowdown in business activity during that time.

The ‘ultimate’ outcome of the crisis was the contraction in world economic growth, represented by the green line.

Fiscal Cliff Aftermath

 

For the purposes of our argument, we will use the GFC as a reference point in assessing the likely impact of the fiscal cliff.

Whilst it won’t be a direct hit, the Aussie economy will suffer collateral damage. The immediate consequence of the US careening off the cliff would be a reduction in that nation’s consumer spending and business investment.

Considering the importance of the US to the global economy, that would imply a significant fall in global trade (recall the yellow and white lines on the chart above).  And who are two of the biggest trading partners of the US?  Europe and China. We can assume those two regions would experience a noticeable downturn in exports to the US.

With China’s economy getting whacked from a slowdown in exports, commodity prices would tumble, and this would be bad news for our already beleaguered mining sector.

The bigger mining companies would respond by cutting back capital spending plans, meaning weaker job growth in the mining states of WA and Queensland.

Lower mining profits would mean lower tax revenue for the Australian government, and given Wayne Swan’s commitment to returning the budget to surplus next year, that could lead to even deeper cuts in government spending.

Aussie business and consumer confidence would be badly damaged by the global economic uncertainty, leading them to join their US counterparts in cutting back spending and investment. Our banking sector would likely be more worried about the cliff’s damage to Europe’s economy.

Data released last week showed the eurozone economy entering its second recession in four years during the previous quarter.  Imagine how bad the region’s economy would be if exports to the US dried up?

This outcome could exacerbate Europe’s debt crisis, with the resultant rise in sovereign borrowing costs leading to a credit market squeeze similar to that experienced in 2008 and 2011.

Our banks would be forced to pay more for wholesale funding, and based on recent history, they would likely pass on the higher costs to Aussie borrowers.

We can see a bit of a picture emerging here:

–       Mining weakness translating to higher joblessness, lower company profitability and tax revenue, and potentially deeper budget cuts

–       Damaged business and consumer confidence translating to reduced spending and investment

–       Higher bank funding costs translating to higher mortgage rates, further discouraging consumer spending

This snap projection shows how serious a threat the US fiscal cliff poses to our economy.

Market impact

We don’t really need to determine the likely impact of the fiscal cliff on financial markets because we have witnessed it in recent weeks. The S&P500 is down around 9% from the highs reached in September, putting it close to correction territory.  Furthermore, our market has fallen around 5% from its October peak.

The key point is that the major global indices have retreated so far in such a short space of time that it makes you wonder how dramatic the losses will be if the US actually drives off the cliff. We need only to look back at what happened in 2008 to get an idea of the potential damage to markets.

For one, the fears of a Chinese economic slowdown will trigger steep falls in commodity markets.  Secondly, a freezing of credit markets due to a worsening of Europe’s debt crisis would spark a sell-off in global bank stocks. That is not good news for the Aussie market, which is dominated by BHP, Rio Tinto and the big four banks.

Positioning portfolios

Admittedly, we have presented a worse-case scenario in assessing the impact of the fiscal cliff on our economy. Indeed, the damage may be far less than what we have described.  The fact is we – and everybody else – cannot know for certain how the fiscal cliff will affect the world economy.

There is no point making a knee-jerk decision liquidating stocks and portfolios in response to the cliff. As mentioned last week, we believe a deal will be struck by US lawmakers to stave off the deadly cocktail of tax hikes and spending cuts that makes up the fiscal cliff.

There might be some market volatility in the short-term, but the only way the fiscal cliff will deal the damage we described is if US lawmakers choose not to do anything about it – not a likely scenario in our opinion. Even if we get some short-term volatility, there is likely to be coordinated central bank action around the world to ease monetary policy.

At home, the RBA has room to cut interest rates further, which should cushion the impact of the cliff on our economy. We have argued that banks and resource stocks would bear the brunt of any fiscal cliff-related market downturn.

Other sectors would also be caught up in the sell-down, with industrials feeling the pinch from a cutback in business investment and retailers weighed down by lower consumer spending.

This could mean investors adopt a more defensive posture rather than engage in panic selling.  For example, the low interest rate environment might make high-dividend yield infrastructure and utility funds more attractive relative to the cyclical sectors.

Ultimately, the economic uncertainty may cause investors to batten down the hatches, but we will stress the importance of taking the long view and understanding that for the markets a drop off the fiscal cliff is not fatal.

Aussie Economy And The Fiscal Cliff is a post from: Australian Stock Report Market Pulse Blog

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Morning Market Update: Mixed Night

International markets were mixed overnight with modest gains in Europe countered by modest gains in the US.

A lack of progress in the US regarding the fiscal cliff weighed on investors there, counteracting the positive sentiment created by eurozone finance ministers finally reaching decision on providing aid to Greece. In Europe, ministers have agreed to cut interest rates from the previous aid received by Greece last May 2010.

They have suspended interest payments for a decade applicable to the nation’s second bailout, and mapped a debt buy-back plan for its troubled member.

UK’s FTSE gained 13 points (+0.2%) to settle at 5800 whilst Germany’s DAX added 40 points (+0.6%) to settle at 7332. France’s CAC traded flat to settle at 3502.

In the US, markets reacted negatively when Senator Majority Leader, Harry Reid, said that there hasn’t been much progress in the way of the discussions.

The Dow Jones fell 89 points (-0.7%) to settle at 12878 whilst the S&P decreased seven points (-0.5%) to settle at 1399. The Nasdaq lost nine points (-0.3%) to settle at 2968.

In the commodity space, crude oil for January delivery fell $0.56 to settle at $87.18 a barrel after reports indicated that supplies probably grew by 350,000 barrels in the past week.

Gold for December delivery fell 0.4% to settle at $1742.30 and ounce due to weaker demand from India, the biggest buyer of bullion in the past year.

In the currency space, the Japanese yen traded lower than the US dollar as investors sought the safe-haven of the latter currency. Meanwhile, the euro fell against the yen amidst concerns that the eurozone’s debt buy-back plan might not materialize.

Morning Market Update: Mixed Night is a post from: Australian Stock Report Market Pulse Blog

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Morning Market Update: Same Old Issues

International equity markets traded in the red overnight as investor sentiment was clouded by uncertainties surrounding the US fiscal cliff discussions and Greece’s debt crisis.

Eurozone finance ministers held their third meeting this month as officials try to come up with 10 billion euros to fund Greece’s financing gap. European markets finished with losses; the UK’s FTSE 100 fell 32 points (-0.6%) to settle at 5787 whilst Germany’s DAX declined 17 points (-0.2%) to settle at 7292. France’s CAC lost 28 points (-0.8%) to settle at 3501.

US markets were feeble in the first full session after the shortened Thanksgiving holiday week, with the jury still out over how strong the crucial Black Friday holiday sales went for retailers.

The Dow Jones decreased 42 points (-0.3%) to settle at 12967 whilst the S&P fell three points (-0.2%) to settle at 1406. The Nasdaq added ten points (+0.3%) to settle at 2977.

In the commodity space, both oil and gold finished tracking weakness in equity markets. Crude oil for January delivery fell $0.54 to settle at $87.74 a barrel whilst gold futures for December delivery lost 0.1% to settle at $1749.60 an ounce.

In the currency space, the yen advanced against its peers as investors sought a safe-haven amidst the aforementioned concerns. The euro and the US dollar fell against the Japanese yen for the same reasons the latter currency advanced.

There are no major local economic releases slated for today.

Morning Market Update: Same Old Issues is a post from: Australian Stock Report Market Pulse Blog

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Morning Market Analysis: Bullish Into New Week

International markets enjoyed solid gains on Friday night, with bullish sentiment accelerating between the European and US sessions.

Markets were boosted by positive data released from China, Germany, and France, and after President Obama confirmed that he is confident an agreement will be reached with the Congress.

European markets finished in the green as reports confirmed that Germany’s business climate index rose to 101.4 for the month of November, higher than the forecasted 99.5.

Meanwhile, France’s factory executives sentiment data climbed to 88 for November, higher than the median forecast of 87. In Europe, UK’s FTSE added 28 points (+0.5%) to settle at 5819 whilst Germany’s DAX climbed 64 points (+0.9%) to settle at 7309. France’s CAC gained 31 points (+0.9%) to settle at 3529.

US markets rallied with the Dow Jones rising 173 points (+1.4%) to settle at 13010 whilst the S&P climbed 18 points (+1.3%) to settle at 1409. The Nasdaq added 40 points (+1.4%) to settle at 2967.

In the commodity space, both gold and oil traded higher due to a spill-over of bullish sentiment in equity markets. Gold futures for December delivery increased 1.3% to settle at $1751.40 and ounce whilst oil for January delivery added 1% to settle at $88.28 a barrel, the highest since 12 October 2012.

In the currency space, the Japanese yen traded lower against its peers once again after opposition leader, Mr. Shinzo Abe, pushed for more aggressive monetary policies.

The euro traded higher than its counterparts due to the positive reports aforementioned. The US dollar fell against other currencies as market optimism saw investors seek out risk rather than the safe haven of the greenback.

There are no major local economic releases slated for today.

Morning Market Analysis: Bullish Into New Week is a post from: Australian Stock Report Market Pulse Blog

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Morning Market Update: Euro Markets Higher

US markets were closed overnight due to the Thanksgiving Day holiday.

European markets traded in the green overnight following positive manufacturing data from China coupled with the ceasefire agreement between Hamas and Israel.

The UK’s FTSE climbed 39 points (+0.7%) to settle at 5791 whilst Germany’s DAX added 60 points (+0.8%) to settle at 7245. France’s CAC rose 21 points (+0.6%) to settle at 3498.

In the commodity space, gold for December delivery increased 0.1% to settle at $1729.50 an ounce as Central Banks increased their reserves.

Elsewhere, crude oil for January delivery decreased 0.1% to settle at $87.28 a barrel after the ceasefire between Israel and Hamas continued to ease supply concerns.

In the currency space, the Japanese yen traded flat amidst weak economic data and the probable likelihood that opposition leader, Mr. Shinzo Abe, will be elected as prime minister.

The euro strengthened and Greek bonds rose for a 10th day as the region’s leaders prepared to hold budget talks. There is no major local economic data slated for release today.

Morning Market Update: Euro Markets Higher is a post from: Australian Stock Report Market Pulse Blog

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Morning Market Analysis: Modest Gains Overnight

International markets finished in the green overnight as a cease-fire was agreed upon by Hamas and Israel, indicating that tensions in the Middle East may dissipate.

Elsewhere, eurozone finance ministers decided to meet again next week to discuss bailout funds for Greece. UK’s FTSE added four points (+0.1%) to settle at 5752 as the eurozone’s failure to reach an agreement was overcome by a rally in the utility sector.

Germany’s DAX gained 12 points (+0.2%) to settle at 7185 whilst France’s CAC increased 15 points (+0.4%) to settle at 3477. In the US, equities were positively affected by data showing that jobless claims fell 9%, to 410,000 last week.

The Dow Jones increased 48 points (+0.4%) to settle at 12837 whilst the S&P gained three points (+0.2%) to settle at 1391. The Nasdaq rose 10 points (+0.3%) to settle at 2927.

In the commodity space, crude oil traded higher after the Energy Department announced that US inventories declined by 1.47 million barrels to 374.5 million barrels.

Crude oil for January delivery added $0.63 (+0.7%) to settle at $87.38 a barrel. Gold also finished higher due to an increase in bullion purchases by banks; gold for December delivery added 0.3% to settle at $1728.20 an ounce.

In the currency space, the Japanese yen fell against its most traded peers amidst reports that the country’s exports fell 6.5% in October compared to the prior corresponding period.

The euro advanced against its counterparts as euro area finance ministers come closer to making a decision for bailout funds. The US dollar traded higher than the yen but declined against its peers due to relative market optimism.

There will be no relevant data released today.

Morning Market Analysis: Modest Gains Overnight is a post from: Australian Stock Report Market Pulse Blog

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Morning Market Update: Soft Leads

International markets finished mostly in the green overnight as euro finance ministers come closer to a decision on Greece’s bailout funds and positive housing starts data from the US. US housing starts in October rose 3.6%, the highest it’s been in four years.

In Europe, UK’s FTSE climbed 10 points (+0.2%) to settle at 5748 due in large part to Xstrata shareholders approving the $31 billion the merger with Glencore.

Germany’s DAX added 49 points (+0.7%) to settle at 7173 whilst France’s CAC gained 22 points (+0.7%) to settle at 3462.

In the US, equities were affected by the US data and Fed Chairman Mr. Bernanke’s statement that the Fed doesn’t have all the tools to staunch the effects of the fiscal cliff.

The Dow Jones lost seven points (-0.1%) to settle at 12789 whilst the S&P inched one point (+0.1%) higher to settle at 1388. The Nasdaq traded flat to settle at 2917.

In the commodity space, crude oil for January delivery fell $2.53 to settle at $86.75/barrel after Hamas said that a draft for a cease-fire agreement is being prepared. Meanwhile, gold futures for December delivery fell 0.6% to settle at $1723.60/oz as investors flocked towards the US dollar.

In the currency space, the yen fell against the greenback even after BoJ Governor, Masaaki Shirakawa, said that the opposition’s stand on more aggressive monetary stimulus is not realistic.

The euro was little changed due to uncertainty with regards to the eurozone debt crisis. The US dollar advanced against most of its peers for the same reasons the euro traded flat.

Today will see the release of the MI leading index m/m (10:30am, AEDT)

Morning Market Update: Soft Leads is a post from: Australian Stock Report Market Pulse Blog

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Morning Market Update: Positive News

International markets rallied overnight as positive news flooded the markets and whet investor risk appetites.

Markets were significantly affected by two factors; President Obama stating his confidence that a compromise may be struck to avoid the fiscal cliff; and Statistical data showing sales of previously owned US homes in October climbing to 4.79 million, close to a two year high.

In the US, the Dow Jones added 208 points (+1.7%) to settle at 12796 whilst the S&P gained 27 points (+2%) to settle at 1387. The Nasdaq increased 63 points (+2.2%) to settle at 2916.

In Europe, the UK’s FTSE rose by 132 points (+2.4%) to settle at 5738 whilst Germany’s DAX climbed 173 points (+2.5%) to settle at 7124. France’s CAC added 98 points (+2.9%) to settle at 3440.

In the commodity space, crude oil advanced due to concerns that the geopolitical unrest in the Middle East may negatively impact supply levels. Crude oil for January delivery traded to its highest since last month as the commodity increased by $2.36 (+2.7%) to settle at $89.28.

Gold also rallied due to a weaker US dollar. Bullion futures for December delivery increased 1.1% to settle at $1734.40 an ounce. In the currency space, the Japanese yen fell against its peers after opposition leader, Mr. Shinzo Abe, reiterated his intentions to pursue more aggressive monetary policies.

The euro gained against the US dollar due to speculation that Greece will soon receive financial aid. Finally, the US dollar did not fare well against its counterparts as investors sought riskier alternatives.

Today will see the release of the CB Leading Index m/m (10:00am, AEDT), and RBA Gov. Stevens speech (6:00pm, AEDT).

Morning Market Update: Positive News is a post from: Australian Stock Report Market Pulse Blog

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