For all the nervousness in western markets, especially Australia, about oil and other energy shares, the market to increasingly keep a close eye on is China, where the volatility we told you about last week, shows no sign of ending.
But before we get to China’s trade data, the local market will have to withstand what will be an adverse reaction to the final report of the Financial System Inquiry with its critical comments on capital gains exemptions, tax breaks for super and shares, dividend imputation and negative gearing.
Those, along with a recommendation for banks to boost capital and for the Federal government to end the seven year limited exemption for super funds to borrow in some circumstances, could spark a sell off this morning as some investors panic.
Instead of the market opening with a solid 20 to 30 point gain, the inquiry’s recommendations could see shares sold off in financial, property and funds management sectors.
Some of the recommendations – on dividend imputation and negative gearing for instance, won’t be changed by any government nervous about the backlash, but talk of possible changes from high powered inquiries always brings a bit of fear and loathing among small investors.
These will be flicked to the tax white paper and won’t see the light of day as recommendations.
After wild swings on Friday, Chinese shares ended the day with a small gain of around 1.33% for the Shanghai exchange, but more importantly the market jumped more than 9% over last week, thanks to the growing influence of foreign buyers, but domestic investors are mad for shares – domestic and offshore.
In fact the 9.5% surge in China was by far the biggest move of any market last week – US shares could only manage a 0.4% rise, European shares gained 1.1% and Japanese shares rose 2.6% as the yen fell.
This week’s release of November’s economic data could damage the bullishness in China – but given the way investors have ignored quite a few bits of bad news in the past three months or so, bad news this week could very well be again overlooked.
China’s economy has definitely slowed in the past four months, but in roughly the same time the market is up close to 40% – that worrying news on the economy and housing especially, just isn’t having an impact.
Australian shares gained 0.4% over the week, despite the 0.6% fall on Friday, which completely missed the boat insofar as what happened later in the night when the US jobs market roared into life with a massive gain in November.
The local market is looking at a solid start after a rise in the overnight futures trading on Saturday morning ended 27 points higher.
Attention will focus on the banks and insurance companies after the Murray report on the financial system was released yesterday.
Looking at it, there seems to have been few real surprises, with most of the ‘bad’ news for banks and fund managers well leaked.
The US economy created 321,000 new jobs in November, way above the 230,000 estimated, while the unemployment rate held steady at 5.8%, a six-year low.
And revisions to past months added another 44,000 jobs. Revisions for most months this year have added over 100,000 extra jobs.
The jobs report saw the US dollar rise, and that pushed the Aussie dollar to new four year lows around 83.15/16 USc.
Gold fell $US15 to $US1,193 an ounce and oil prices in London and New York dipped lower to new four year lows.
The Fed’s Open Market Committee meets next week on December 16 and 17 and the jobs report has now put greater pressure on the bank to clarify its intentions as to when interest rates could start rising next year.
The Financial Times points out that “Crucially for the Fed, there was a jump in wages and hours worked: if that is confirmed by other data, it will mark the moment when the US labour market shifted out of recovery mode and returned to a normal state of health”.
The Dow rose 58.69 points or 0.33% on Friday night to end the week at 17,958.79, the S&P 500 added 3.45 points or 0.17% to 2,075.37 and the Nasdaq added 11.32 points or 0.24% to 4,780.76.
For the week, the Dow rose 0.7% and the S&P rose 0.4%. It was the seventh straight weekly gain, a streak not seen in a year for both, according to Reuters.
The Financial Times said, "The S&P 500 notched its 49th record closing high of the year on Friday, as the benchmark index climbed 0.2 per cent to 2,075.55. The gain takes the number of record closes above those set in 1929, fuelled in part by a blow out payrolls report that far exceeded Wall Street expectations.”
“With 17 trading days left this year, the S&P 500 will nonetheless fall short of the 77 record closes clinched in 1995,” the FT said.
The Nasdaq fell 0.2% over the week.
Looking at China though, the strength of demand from domestic investors is the big driver.
The AMP’s Dr Shane Oliver wrote at the weekend: “Chinese shares spring back to life, but there is more to go.”
"After a four year bear market that started in August 2009 and took them down 44%, Chinese shares have sprung back to life big time since July and are now up 39% year to date, making them one of the world’s strongest markets this year.
“The upturn looks to have caught many by surprise but it’s typical of the way the Chinese share market – which remains very retail driven and speculative – works.
“Recent gains are now leading to a surge in new share market account openings in China as investors swing back from property to shares.
"Inevitably it will go too far but right now we are a long way from that as the forward PE is just 10 times and the historic PE around 12 times which are both low against their own history and globally. So we remain overweight Chinese mainland shares."
Analysts pointed out that the flow of money through the Stock Connect link between the Hong Kong and Shanghai markets had turned around to the point where by the close of business on December 3, foreign investors had taken money out of China instead of being net investors.
That would indicate they are selling to local investors and don’t believe the sustainability of the current rally.
Our market finished 0.42% lower on Friday, staging a mid-week rebound after panicky 2% slump on Monday and Friday’s fall. Energy shares were the worst performers, with the sector dropping 5.3% over the week.
The broader All Ordinaries Index closed 0.60% lower on Friday at 5313.60. The ASX200 closed 0.62% on Friday at 5336.70.
And Ten Network shares ended the week at 20c, down more than 18%.
Will that bid happen, as a conventional offer, or as some sort of deal that tries to limit the cost to the possible buyers of Ten being an even bigger investment basket case?
