The Monday Report (on Tuesday)

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By Greg Peel

Thursday

Wall Street may have provided a soft lead on Wednesday night but it was more a case of individual sector stories impacting on the large caps that sent the ASX200 down -0.7% on Thursday.

With smokescreen of the BHP Billiton ((BHP)) restructure story now cleared, investors finally woke up to the fact the iron ore price has dropped over 30% from its high. Coal’s moment in the sun, or should that be the rain, will also prove fleeting. And base metals were also weak on Thursday night.

Hence the materials sector dropped -2.9% on Thursday, and it would have been worse if not for the counterbalance of gold stock buying. Fortescue Metals ((FMG)) and Whitehaven Coal ((WHC)) did not help their causes by revealing a fall in March quarter shipments.

On a lower oil price, energy fell -1.5%.

For the banks, it’s been a solid run up so it makes sense that profit-taking would be on the cards, but the strongest warning yet from the RBA, within the central bank’s Financial Stability Review, that runaway debt-fuelled property speculation would amplify financial stocks and impact on the entire economy had investors fearing further regulation tightening and possible increased capital requirements.

Hence financials fell -0.5%. It did not help that Debbie introduced her Kiwi cousin, Cook, who caused equivalent damage across The Dutch, putting more pressure on insurance company catastrophe reserves.

TPG Telecom ((TPM)) remains in a trading halt pending its raising to fund the building of a new mobile network, but the ramifications continue for Telstra ((TLS)). The telcos sector fell another -1.5%.

They were the big movers on the day, with other sectors less impacted. Both the consumer sectors managed small gain, thanks to the “surprise” jobs report.

My cynicism relates to the fact every monthly jobs result differs wildly from economist forecasts, but even battle-hardened economists looked askance when the March number came in at 60,900, up from a revised gain of 2,800 in February, when a gain of 20,000 was forecast. As one respected economist put it, “The integrity of the ABS labour force report will be called into question once again due to today’s data”.

The unemployment rate held steady at 5.9% due to a rise in participation. The 60,900 number was broken down into 74,500 new full-time jobs offset by a fall in part-time jobs – a seemingly dramatic reversal of the prior trend.

Read into it what you will.

Thursday Night

Wall Street opened a little higher on Thursday night but soon dropped when news came though the US had just dropped the Mother of All Bombs in Afghanistan. While destroying an IS bunker system is not an unpopular move, the fact the MOAB has been around since 2003 and never previously used, and that it was deployed so soon after the air strike in Syria, and at a time US warships are sitting off the Korean peninsula waiting for Kim Jong-un to let one rip, only serves to compound the unease.

It was not a case of panic stations on Wall Street, more an evaporation of buyers ahead of what was for the US a three-day weekend. The Dow closed down -138 points or -0.7% while the S&P lost -0.7% to 2328 and the Nasdaq fell -0.5%.

More notably, the US ten-year bond yield dropped -6 basis points to 2.23%, closing (in a half-session) well below the prior low and supposedly strong support level of 2.27%. One might argue that it wasn’t the bomb itself that sparked weakness in stocks, and the sudden disappearance of the once reliable dip-buyers, but rather the fall in bond yields.

Falling bond yields are not good for US banks, and the bomb story did rather draw attention away from what was meant to be the highlight of the day – the first bank earnings results. As it was, JP Morgan (Dow) and Citigroup both posted Street-beating earnings numbers while embattled Wells Fargo posted a miss on revenues, still smarting from its lending scandal.

All three ended lower on the day, dragged down by those lower yields.

Gold, which has had a strong run of late on geopolitical fears, did nothing. It was steady at US$1287.80/oz thanks to the US dollar index rallying back 0.5% to 100.58. Perhaps the yen is not so much of a safe haven when Japan is in the firing line.

West Texas crude did little, it was up slightly to US$52.92/bbl.

Copper rallied back 1% in an otherwise quiet night on the LME.

Despite the rally in the greenback, the Aussie rose 0.5% to US$0.7569.

The SPI Overnight closed down 15 points on Friday morning.

Monday

China’s March quarter GDP came in at 6.9%, up from 2016’s 6.7%, beating forecasts of 6.8% and well ahead of Beijing’s 6.5% target.

Chinese industrial production rose 7.6% year on year in the month of March, up from 6.3% in February and against expectations of a decline. Retail sales rose 10.9%, up from 9.5%, as expected. Fixed asset investment rose 9.2% year to date, up from 8.9%, when a decline was expected.

All in all, better than expected results.

Monday Night

US retail sales data, released on Friday night when Wall Street was closed, showed a fall of -0.2% in March when -0.1% was expected. February’s result, of -0.1%, which was the first dip in a year, was revised down to a -0.3% fall. Weaker auto sales are impacting on the numbers, following a record breaking 2016.

Forecasts of a strong March quarter GDP for the US are being reconsidered.

The headline CPI fell -0.3% in March following a 0.1% gain in February, to mark the biggest fall in two years. Lower energy prices were largely to blame. The core CPI, ex food & energy, fell -0.1%. US annual CPI is running at 2.4% headline and 2.0% core.

The numbers didn’t much seem to bother Wall Street when it reopened last night. Of more interest was the strong Chinese data, and in particular the failure of North Korea’s missile test.

The dip-buyers disappeared on Thursday night due to geopolitical tension in the form of the anticipated missile test, and no doubt simply because it was a long weekend and who knows what might transpire. Indeed, recent weakness on Wall Street has been mostly attributed to geopolitical tensions rising from Syria to Afghanistan and on to the Korean peninsula. For some, the weakness appeared to be getting a bit stretched.

So last night the dip-buyers reappeared in force, turning Thursday night’s -138 point fall in the Dow to a 183 point gain, or 0.9%. The S&P rose 0.9% to 2349 and the Nasdaq gained 0.9%.

The most heavily sold down sector of late has been the banks, which have come off -12% from the beginning of March compared to only -3% for the S&P500. The banks rebounded heartily last night, leading the rally. Support was provided by a 2 basis point rebound in the ten-year yield to 2.25%.

Wall Street also appeared unfazed by commentary from the Treasury Secretary that the August goal for tax reform is looking a bit too ambitious. Aside from geopolitical tensions, weakness on Wall Street has also been affected by the slow realisation Trump’s promises will indeed take time to implement. So disappointment has ebbed and reality is being accepted.

Notwithstanding, Trump is somewhat distracted with global war games at present.

The US dollar index fell -0.3% last night to 100.29 but gold also dipped, down -US$3.80 to US$1284.00/oz.

The geopolitical story that has also been a driver of the oil price lately is quietly giving way to the reality of increasing US shale production, highlighted by the Energy Information Administration last night. West Texas crude is down another -US17c at US$52.75/bbl.

The London Metals Exchange was closed last night.

Iron ore’s closing price of US$64.60/t yesterday is -US$3.30 lower since Australian markets were last open.

The Aussie is up another 0.3% at US$0.7588.

There was no SPI trading last night, thus the board still shows down -15 points. This reflects only Wall Street’s weak Thursday session, not last night’s strong session, nor the Chinese data release, failed North Korean missile test nor anything else transpiring over the weekend.

The Week Ahead

The US will release industrial production and housing starts numbers tonight. Tomorrow bring the Fed Beige Book and Thursday the Philadelphia Fed activity index. Friday sees existing home sales and a flash reading on April manufacturing PMI.

Wall Street will nevertheless be most focused on earnings results, which start to come thick and fast from here.

Japan and the eurozone will also provide flash PMI readings on Friday.

NAB will release its March quarter summary of business confidence tomorrow but the economic highlight this week locally will be today’s release of the minutes of the April RBA meeting.

On the local stock front, Thursday is the day to watch given quarterly production reports due from Rio Tinto ((RIO)) and Iluka Resources ((ILU)) and a quarterly update from Brambles ((BXB)).

Rudi is on leave this week and thus will not be making any media appearances.

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