The stage looks to have been set for a solid start to the trading week. For this we can thank Chinese data on Friday showing still solid growth. In particular, retail spending is growing at double digit rates (13.7 per cent y/y) and industrial production isn’t too far behind (9.5 per cent y/y). What got less attention was the fact that Italy had a hugely successful three year auction Friday night – despite the best efforts of Moody's.
Moody's had downgraded Italy just before the auction, with some seriously questionable analytics and to say nothing of the timing. The Italian government said that the decision was "completely unjustified and misleading” and I have to say I agree. Italy runs a primary budget surplus after all and has held high debt for the best part of the last 30 years. Where were the ratings agencies then? Oh that’s right, busy assigning triple A status to CDO’s so the ‘muppets’ (that’s investors) would buy them.
That’s not to say that the Italians don’t need to get this debt down, they do, but in rational world they’d have some time on their hands. It is only rising funding costs that threaten this balance and from what I can gather, the main reason for the downgrade was rising funding costs due to fragile market confidence. But there’s the circularity just there. The very fact that they made the downgrade, makes is less likely that funding costs will come down. Ratings do matter and the lower they go the less likely it is that some funds can buy. So lower ratings do shrink the pool of possible investors. It’s ridiculous. For Friday’s auction Moody's actions didn’t seem to matter though and the Italians auctioned off €5.25 billion of three years bonds with strong demand. Indeed yields fell sharply to 4.65 per cent from 5.3 per cent with the bid to cover at 1.73. For what it’s worth the Italian government is toying with the idea of selling some pubic assets with the intention of cutting public debt by 20 per cent over five years.
Anyway, the point is that all of this good news might mean a good session today for the All Ords ( 0.8 per cent according to the SPI). As to how long it lasts though? Well I’m not hopeful it’ll last the week. For a start, the US earnings season kicks off this week with some big names like Johnson & Johnson, GE, Microsoft, Citi, Goldmans and Bank of America – all reporting. Investors are nervous about this earnings season and any disappointment will add to the global growth worries that have infected the market. As will the IMF’s new forecasts out this week. We already know they’re going to revise down their growth forecasts and I’m sure the accompanying rhetoric will provide ample bearish fodder for the press. As most likely will Bernanke’s testimony to Congress this week (kicks off Tuesday night).
Unfortunately the data that is out probably has limited scope to provide upside surprise. I’m firmly of the view that the data will turn, as it has in other years, but this normally occurs over a few months. So even if we see an improvement in some of the indicators the chances are it's unlikely to be of a sufficient magnitude to shake markets out of the rut. Then of course if it disappoints, which is the greater risk given current trends, well, it’s not going to be pretty is it. We’ll get a sense of things tonight, so we don’t have to wait long, with US retail spending and the Empire manufacturing index. Other big data worth watching this week includes inflation and industrial production on Tuesday night, housing starts Wednesday night and the Beige Book Thursday morning.
For Australia, there are only a few pieces worth noting. We get the RBA’s minutes to the July meeting on Tuesday at 1130 and everyone will be dissecting it for hints. I think with all the news flow and following on from the one month fall in jobs, if CPI is on the weaker side the Bank will most likely cut rates. Again I don’t think there is an economic case to cut – the latest indicators show growth is very strong - but the Board are being influenced by other factors and unfortunately for the market the signs posts are very unclear. Calls of this nature can only be made on the ‘feel of things’ and things feel bad – the news flow has turned and the rate cut call is out again as a result.
Otherwise for Australia, car sales are out at the same time as the RBA’s minutes (sales are very strong – cut rates!!) and then we see trade prices on Friday.
Finally for Europe, it’s worth keeping an eye on CPI and trade tonight, the German ZEW survey tomorrow and German producer prices on Friday.
Have a great week.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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