Outlook: Aus shares set to open weaker January 14, 2011 09:21 AM

Outlook: Aus shares set to open weaker January 14, 2011 09:21 AM

Australian shares look to open weaker this morning following mixed overseas leads. Wall Street closed steady as investors took note of weak unemployment figures. Commodities eased after recent gains.

US economic news: Federal Reserve Chairman Ben Bernanke says the US economy is strengthening, with three to four per cent growth likely this year. He cautioned that despite the growth, unemployment would not reduce at a rapid rate. The Department of Labor’s weekly jobless claims report showed the number of Americans filing new unemployment claims jumped to 445,000 last week, higher than expected. The Commerce Department reported the Producer Price Index rose 1.1% in December. The trade balance was virtually unchanged at $US38.3 billion.

On Thursday, the Dow Jones Industrial Average, closed 24 points weaker to 11,732. S&P500 fell 2 points to close 1,284 and the NASDAQ down 2 points to close 2,735.

European stocks were mixed: London’s FTSE fell 27 points, Paris up 30 and Frankfurt up 6.

To Asian markets, stocks were higher: Hong Kong’s Hang Seng up 113 points, Tokyo up 77 points and China’s Shanghai Composite up 6 points.

The Australian share market finished stronger on Thursday. The S&P/ASX 200 Index lifted 71 points to close at 4,795 and on the futures market the SPI is down 13 points.

Turning to currencies and the Aussie Dollar at 8:35AM was buying 99.74 US cents, 63.02 Pence Sterling, 82.62 Yen and 74.67 Euro cents.

Company news: On Thursday shares in Rio Tinto Ltd (ASX:RIO) gained 2.18 per cent to close at $87.05. Rio Tinto Alcan says the Queensland floods are severley affecting the supply of aluminium from smelters near Gladstone. Flooding has cut road and rail access between Gladstone and Brisbane and the port is closed, preventing deliveries. Rio advises alternative arrangements are being investigated. For the year ended 30 June 2010 Rio Tinto reported a net profit $7.4 billion.

Yesterday shares in Telstra Corporation Ltd (ASX:TLS) rose 0.7 per cent to close at $2.87. The nation’s major telcos are facing a bill of more than $50 million and three months of build time to repair communication systems damaged but the Queensland floods. Tens of thousands of people have been left without mobile, landline or internet access. On Thursday Telstra’s director of service delivery said communication services in Brisbane would be back up and running within four days. Central and Western Queensland face a wait of up to 18 days without service. Telstra reported a yearly profit of $3.94 billion to June 30 2010.

To ex-dividends: There are two companies going ex-dividend today. Abacus Property Group with an 8.25 cent unfranked dividend. Viterra with a 5.14 cent unfranked dividend. Coming up next week are Euroz and Mirrabooka Investments.

To commodities: Gold is up $1.20 to $US1,387 an ounce for the February contract on Comex, silver is down $0.28 to $29.26 for March and copper is down $0.03 to $4.38 a pound. Oil is down $0.46 at $91.40 a barrel for February light crude in New York.

Daily Finance Musings and News

You can see why the ECB is becoming concerned about inflation – any sensible central bank would be, should be. This is something I’ve been warning about for some time and the unfortunate reality is, it’s all coming to pass. The global economy is recovering at a rapid clip. Food prices globally are rising fast – wheat, corn, meat, you name it. Ditto energy prices and don’t talk to me about Dr copper – just off a record. For those that pay attention to events in Asia, the Bank of Korea hiked rates yesterday in a surprise move (25bp to 2.75%) with that country very concerned about inflation. The President has declared a ‘war on inflation’ cutting tariffs (among other steps) in an effort to help keep things under control. It’s no wonder break-even inflation rates are pushing higher.

There are a number of driving factors here of course; weather related issues, rising global demand etc, near zero interest rates – blah blah – and underpinning it all is vast ocean of liquidity that central banks will have little control over. The fact is – the US can do little to shrink its balance sheet, except over a very long period of time, without a destabilising (potential surge) spike in market rates. This ensures they will fall way behind the curve and the fact they are already behind the curve only makes things worse.

Now Trichet wasn’t talking about an immediate rate hike, indeed the ECB left the cash rate at 1%. But the Bank did note upside risks to inflation over the short-term. I guess they didn’t really have a choice as inflation is already above target (as it is in the UK also). So I reckon that going into a recovery they are still being way too cautious. Especially on the medium term outlook which they see as roughly balanced.

The main risk of course is the ongoing hysteria over European debt. Who knows when this will die down. A couple of successful auctions have helped calm fears a lot – as have comforting words and support from China and Japan. So for instance Spanish (3bn 5yrs) and Italian (6bn 5 and 15yrs) debt auctions last night were both met with strong demand, although rates paid were up to 1% higher than auctions in November. In any case Germany’s finance minister seems confident that European leaders will have a comprehensive package by March that should help deal with sovereign debt issues.

The immediate market reaction, apart from a sharp drop in sovereign CDS and peripheral bond yields, was a surge in euro. As I write it is up about 2½ big figures to 1.3365. Sterling for its part rose just under a big figure to 1.5840, while AUD rose 30pips to 0.9981 just breaking though parity again earlier in the session. JPY slipped to 82.74 from 83.

Treasuries were interesting in that they had been selling off for much of the session, prior to the Treasury’s 30yr bond auction. Just prior to the auction, the NY Fed thought they should step in to intervene and bought the most ever under Qe2. The Fed took $8.4bn of Jul-16’s to Dec 17s which saw punters cover their shorts and a nice little bid develop for the auction. In the end though the auction only saw average demand. Cover at 2.67 was around last year’s rate while indirect bidders took 37.8% which was slightly above average. Questionable tactics from the Fed though for sure.

As I write the and with about an hour to go, the 10yr yield sits at 3.31% (down 7bp from 1600), the 5yr at 1.91% (also down 7bp)and the 2yr at 0.58% (down 2bp). Aussie futures were little changed on a 5 tick range. 3s are at 94.86 and 10s 94.44.

In the equity space, European stocks were generally weaker – between -0.6% and +0.1% – while in the US, the major indices were down about 0.2% with an hour or so to go (S&P500 at 1283, Dow at 11,721 and Nasdaq at 2733). Nearly all sectors were down on the S&P (except telcos) with health, basic materials and financials the key dead weights. Commodities were otherwise weaker with crude off 0.5% ($91.36), copper fell 1% and gold is down

Bits and pieces otherwise. Initial jobless claims (US) rose to 445k in the week to January 8 from 410k, although the numbers are usually very volatile over this period. Trend is still down sharply pointing to ongoing rapid improvements in the labour market. Elsewhere, US producer pries rose by 1.1% in December (above market forecasts for 0.8%) with the annual pace at 4% from 3.5%. FOMC chair Bernanke, in a panel discussion, proved yet again how little he knows about economics, arguing that his forecast growth of 3-4% in 2011 would be insufficient to lower the unemployment rate. Note that in the period from 2004-06 GDP growth averaged 2.75% and the unemployment rate fell about 1.5%pts. Seriously, sometimes I lay awake at night and I weep for this guy (do your research man!). Finally, the US trade deficit slipped to $38.3bn in November from $38.4bn in the month prior as exports rose 0.8% and imports rose 0.6%.

There is very little in Australia today or even in our protectorate, NZ. Most of the action, of course, will be in the US and here we get a pretty solid run of data. Retail sales and industrial production are the two key releases and the market is looking for solid retail spending and industrial production. We also have a couple of Fed speakers and in Europe, CPI figures for December are released.

Hope you a have a great day…