Morning market update - 8 August 2014

Morning market update - 8 August 2014

US markets 0.5% lower, German DAX futures down 10% in a month, gold remains firm, RIO’s strong earnings, ASX futures down 23 points

First let’s talk about Rio Tinto’s (RIO) great result and why a subdued response in London, our unemployment rate, and a weaker Australian currency might prevent excessive buying today. RIO finished up 0.76% yesterday in anticipation of its quarterly earnings report, which was subsequently released following yesterday’s Australian market close. The results were great, ahead of consensus expectations. Earnings were higher than expected, debt was less than expected, cost reductions were achieved earlier than expected – dividend will be raised.

RIO’s dual listing in London (RIO:xlon), however, managed to sell off into the London session close and finish around half a percent lower; in the first chart today I have shown the Australian listing (orange) versus the London listing (black) in percentage terms for the financial year to date. In addition to this, the Australian unemployment rate rose from 6% (which was expected) to a disconcerting 6.4%,which has pushed our dollar down almost one cent from US$0.9350 to US$0.9267 as I write. Due to this change in Australian dollar sentiment and an uptick in rate cut expectations, foreign buyers might think twice before buying Australian-dollar-denominated assets today, potentially muting the rewards due to Sam Walsh and his team at Rio Tinto for producing such a fantastic result for shareholders in the face of iron ore price headwinds.

The second chart, also taken from Rivkin Trader, shows the significant financial-year-to-date sell-off of Germany’s DAX index (-8.38% and closer to 10% on a rolling one month basis), which stands in stark contrast to ASX 200 performance (+2.16%) and US S&P 500 performance (-2.58%). Ongoing Russian sanctions and a lack of clarity over the future of Russia’s behaviour following a build-up of troops on the Ukrainian border is most certainly rattling European investors’ nerves, with threats to energy supply/costs looming over the heads of manufacturers, particularly those in Germany. In retaliating to sanctions set by US and Europe, Russia has imposed its own sanctions on most food imports from Europe and the US; and this game of bluff—beyond the temporary trade issues—doesn’t augur well for diplomatic resolutions to the ongoing relationship breakdown between Russia and The West.

Base metals were mostly higher overnight: aluminium +0.21%; copper +0.46%; nickel +0.93%; zinc -1.39%; iron ore +0.10%.

Overnight

  • Dow down 75.07 points/0.46%
  • S&P 500 down 10.67 points/0.56%
  • NASDAQ down 20.08 points/0.46%
  • German DAX down 91.07 points/1.00%
  • WTI and Brent crude oil higher at US$97.45 and US$105.44
  • Gold and silver steady at US$1,313.70 & US$19.97

AU Market Preview

  • AUDUSD sharply lower at US$0.9267
  • SPI 200 futures 23 points lower
  • Japanese monetary policy out at 9:50am, Chinese trade balance at 9:50am, Australian home loan data at 11:30am, Swiss unemployment out at 3:45pm, BoJ monetary policy statement at 4:30pm, Canadian employment report out at 10:30pm, all Sydney time.

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