The Monday Report

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By Greg Peel

Back in Vogue

Emmanuel Macron (24%) and Marine Le Penn (22%) will move through to the run-off round of the French election on May 7. Not only was this the result predicted by the polls, it was the result financial markets were looking for. Given the losing candidates were all ideologically to the middle or the left, far right Le Penn is not expected to much improve her vote in round two.

This leaves centrist Macron as a supposedly unbeatable favourite. As an ex-banker, former economy minister and pro-EU campaigner, he ticks all the boxes.

This result was as yet unknown on Friday, but the local market showed little sign of angst with regard what the outcome might be. More influential was the revival of the Trump Trade in the US on Thursday night, thanks to an order to sort out steel dumping, talk of possibly being able to take a tweaked healthcare bill to Congress this week, and announcing the first outline of the planned tax reform package will be shortly delivered.

We also saw iron ore again holding its ground overnight and base metal markets having a decent rebound. Commonwealth Bank ((CBA)) was the latest of the Big Four to announce rate increases for investor loans and FIRB announced approval of the takeover of Duet Group ((DUE)) by a Hong Kong company.

Hence we saw materials up 1.8% for the session, financials up 0.7% and utilities up 2.0%. On the flipside, the market again learned that things don’t go better with Coke. The fizzy drink dinosaur has lost a lot of money for those failing to see the times they are a-changing, with Friday’s profit warning costing the share price -10%. Consumer staples fell -0.7%.

The SPI futures closed unchanged on Saturday morning with the French election pending. But with the initial result now known, expectations are for another strong session locally today given that particular element of the current minefield of geopolitical tensions can be scratched off the list.

Having suffered a mild correction on such tensions, plunging commodity prices and flagging hopes for the Trump Administration, the ASX200 appears set to push back towards the 5900 level at which it last met resistance.

Trading today will potentially be thin, and thus volatile, given Anzac Day is tomorrow, school holidays haven’t yet ended and thus today seems like a good day to take an extra break.

Taxing Times

Wall Street had opened lower on Friday night, unsurprisingly given the solid run-up the day before and a desire to take profits ahead of the French election. The desire became more urgent early in the afternoon when news broke of the shooting of a policeman in Paris – news the market perceived as potentially boosting the vote for far right, anti-EU Le Penn.

But news out of Trump Land restored the market’s faith once more, taking the Dow to a less substantial close of down -30 points, or -0.2%. The S&P fell -0.3% to 2348 and the Nasdaq lost -0.1%.

Last week Treasury Secretary Mnuchin revealed a tax reform outline would soon be delivered. On Friday night Trump qualified by announcing a plan will be unveiled this Wednesday. And it will be “massive”.

Trump also signed another executive order on Friday night, compelling the Treasury to look into what elements of the Dodd-Frank financial regulations can be cut, including those that clamp down on tax avoidance. It’s all fuel for the Wall Street fire.

Meanwhile the US earnings season rolls on, and of the S&P500 companies reporting to date, 75% have beaten estimates. This week sees another 190 companies reporting.

This week also sees the first estimate of US March quarter GDP. Forecasts have been wound back from initial exuberance to a somewhat disappointing pace of growth, but then the past three March quarters have in each case proven to be the worst result for the year, largely due to seasonal factors. On Friday night, Fed vice chair Stanley Fischer suggested weak growth will likely be temporary and two more Fed rate hikes are still expected.

It is likely Wall Street will respond positively to the French election result tonight, ahead of a week that may bring all sorts of developments on the US domestic front.

Commodities

Iron ore appears to have seen at least a temporary bottom in its dramatic plunge, rising US$2.70 on Friday night to US$67.40/t.

Having had their moment in the sun on Thursday night, base metals all fell back on Friday night, bar copper, which was steady. Aluminium, lead and nickel fell -1% and zinc -2%.

The US dollar index was trading slightly higher at 99.98 on Friday night ahead of the election, but the subsequent 2% rally in the euro has the greenback under pressure in the interim. Gold closed slightly higher on Friday night at US$1283.90/oz.

The extension of the OPEC production cut agreement beyond the initial six months seems tentative at best at present. On Friday the weekly US rig count showed the fourteenth consecutive week of increases, by five to 688. The question is as to whether OPEC sees increasing US production as a reason to need to extend, in order to support oil prices, or as reason not to extend, as why should OPEC carry the can?

West Texas crude fell -US$1.09 on Friday night to US$49.62/bbl.

The Aussie was higher on Saturday morning but this morning is net 0.6% higher at US$0.7568 on the election result, given a weaker greenback.

As noted, the SPI Overnight closed flat but that was pre-election.

The Week Ahead

While fiscal matters will likely dominate sentiment this week in the US, economically the markets will see the Chicago Fed national activity index tonight and Case-Shiller and FHFA house prices, new home sales, Conference Board consumer confidence and the Richmond Fed index tomorrow night. Thursday it’s durable goods, pending home sales and the trade balance.

Friday sees the Michigan Uni fortnightly consumer sentiment survey, the Chicago PMI, and the aforementioned first estimate of GDP.

Both the Bank of Japan and ECB hold policy meetings on Thursday.

Australian and New Zealand markets will be closed tomorrow. On Wednesday Australia’s March quarter CPI result is due, with forecasts suggesting a 0.6% increase on the headline to 2.3% annual. The RBA governor will speak on Thursday.

Friday sees the PPI and monthly private sector credit.

On the local stock front, BHP Billiton ((BHP)) will provide its quarterly production report on Wednesday and South32 ((S32)) on Thursday. Computershare ((CPU)), Mirvac Group ((MGR)) and Stockland ((SGP)) will provide quarterly updates on Thursday, as will lend Lease ((LLC)) on Friday.

Rudi will appear on Sky Business on Thursday at noon and via Skype-link on Friday morning, around 11.15am, to discuss broker calls.

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