Greece Is Still The Word

They say a week is a long time in politics and the Greek talks are certainly making this week seem interminable. Manufacturing PMI form the beleaguered country continues to paint a fairly dire picture for the Greek economy with the May print the 9th successive sub-50 reading.

Growing doubts continue to surround the ability of Greece to meet its debt obligations now and talks at the moment appear to be in a deadlock with many expecting to see some sort of ultimatum from either side at some stage this week.

European indices appear to trading in lock step, unable to recapture the highs seen in April while the uncertainty prevails and seem for now to be providing the shorter term trader with rally-selling opportunities.

British American Tobacco (LONDON:BATS) is on the bottom rung of the FTSE, shedding 1.68% following a court judgement that awarded hefty damages to smokers in Quebec.

By contrast, Wolseley (LONDON:WOS), often seen as a barometer on the health of the UK housing and construction market is leading the UK benchmark gainers owing to strong demand for its plumbing services. Construction output in the UK also came in better than expected at 55.9 giving a marginal boost to the pound against the greenback.

The basic resource sector is also underwater with only Antofagasta (LONDON:ANTO) registering small gains on the day. (See note on RBA below)

Eurozone CPI will be in focus today. The flash estimate is expected to show a rise of 0.2% on the year. Core CPI, stripped off the food, energy, alcohol and tobacco is likely to show a gain of 0.7% y/y. This would be the first positive headline inflation in 6 months so we could expect to see a small bounce higher in the euro should the print beat expectations.

We expect the Dow to open sub 18,000, down 50 points from yesterday’s close. With little of note on the macro calendar besides factory orders for April – expected to be flat, we can likely expect another headline driven market today.

RBA’s strategic silence is good for business

The RBA kept the bank rate unchanged at 2% as expected; yet refrained from giving guidance on a future policy action. Governor Stevens said “monetary policy needs to be accommodative”. Following – and despite – the 4.4% contraction in private capital expenditures in the first quarter and anticipation for further disinvestment due to waning mining sector. On the other hand, the historically low rates drive capital toward the housing market, which is not bad news per se given the efforts to shift labour from mining to housing sector. However, the RBA should be cautious on a potential of low-rate-induced real estate bubble to avoid any accident on course of this structural transformation.

Expectations for an RBA rate cut over the next twelve months faded below 25 basis points, practically signalling less probability for lower than 2% bank rate in Australia. Metal and mining sector wrote-off 2.27%, led by BHP Billiton (LONDON:BLT) and Rio Tinto (LONDON:RIO), and construction material companies have been the heaviest losers on lack of dovish bias in future policy outlook and also choked by the post-RBA bounce in the Aussie complex. Strategically refraining from revealing more detail on its policy intentions, the RBA evades creating a delay in investments. In this context, the ASX index should remain well bid at 5570/5590 (Fibonacci 50% on Dec’14 – Feb’15 rally / 200 DMA).

The first quarter GDP read is due tomorrow; slight acceleration from 0.5% to 0.7% on quarter, as expected, should lend further support to Aussie against the euro, the kiwi and the US dollar. AUD/EUR rebounded from 200 DMA (0.6971) and should sit back above 0.70 (Fib 61.8% on Dec’14 – Apr’15 rise), AUD/NZD is back on track for retesting 1.10 after 6 months dive toward the parity, while the 80 cents will be back on the table against the US dollar should Friday’s US nonfarm payrolls report fail to support the idea that a Fed rate hike will, as Yellen hinted, happen before the year end. The carry interest remains both on short and long end of sovereign curves, the spread between 1-year AU/US yields remain at 8 year lows; 10-year spread has narrowed to tightest since January 2001. The daily positive momentum in AUD/USD should soon challenge the 200 HMA (0.7750) before 0.7815 (Fibonacci 38.2% on May 14 – June 1st depreciation).