The Monday Report

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Wrap of events affecting the market on Friday night and the weekend and a preview of the week ahead.

By Greg Peel

Testing Support

For the last three weeks, which have been dominated by result season, the ASX200 has traded largely sideways. On a couple of occasions the index has had a good look at the 5500 support level on the downside but quickly recovered back into the range.

After two consecutive sessions on the weaker side, the index is now sitting at 5515 with the futures showing down 4 points this morning, suggesting, today’s earnings reports notwithstanding, that 5500 level is chance of coming into play. A breach would be short- term bearish.

The 26 point fall for the index on Friday was mostly to do with the banks. Over the last couple of weeks the big banks have seen some buying, despite three of them not participating in the August round of August reports, and late last week they were sold again, taking the financials index down 0.8% on Friday. Investors possibly decided it best to take profits in case Janet Yellen confirmed a rate hike at Jackson Hole on Friday night.

Yet we didn’t see the same reaction in the other yield sectors, with utilities flat and telcos actually the best performer on the day, rising 0.7%. Meanwhile, industrials posted the biggest percentage fall of the session in dropping 1.0%.

Among the stocks reporting on Friday, the biggest winner was Super Retail ((SUL)) with a 6% jump while Coca-Cola Amatil ((CCL)) featured on the downside with a 4% fall and Select Harvests ((SHV)) was the biggest loser on the day with a 7% drop. Otherwise, the tables of biggest gainers and decliners were dominated by moves in stocks that had already reported over the week.

It reminds us that reporting season is not just a one day picnic for reporting companies.

With 250 of the 300-odd August reporting stocks covered by FNArena database brokers now having reported, it is notable that the percentage of beats (on FNArena’s assessment) has slipped back to 31% from having run at a consistent 36% ahead of last week. Misses remain fairly stable on 25%.

We also note that recommendation upgrades from brokers have made up a little bit of ground against downgrades, with the up/down ratio slipping to 1.7 from above 2.0 a week ago.

There are three more days to go in the season, but we are very much in wind-down mode such that the volume of companies reporting drops way down from the dramatic peaks of late last week. We’ve also seen almost all of the bigger names now done and dusted.

As the week progresses, economic data will again begin to take centre stage.

Fisching

Fed chair Janet Yellen declared in Jackson Hole on Friday night the case for a Fed rate hike is “strengthening”. As such, a move to normalisation would be “appropriate” but any move would be “gradual” and, of course, dependent on the data.

Wall Street yawned. Nothing new here, as expected. There might be a rate hike in December. But then…

Speaking in a TV interview following Yellen’s speech, Fed vice chair Stanley Fischer suggested Yellen’s remarks were consistent with the chance of two rate hikes this year, in September and December.

Nobody saw that coming. In response, the US dollar index shot up 0.8% and the US ten-year bond yield jumped 6 basis points to 1.63%, leaving behind the range in the 1.50s it’s held for about a month. The Dow closed down 53 points or 0.3% and the S&P -0.2% to 2169 while the Nasdaq rose 0.1%.

Not that anyone really believes Stanley Fischer. The prevailing view is that it’s better to talk up a rate hike to ensure Wall Street is prepared for one when it comes, even if that’s not until December. There remains a lot of talk in the market about there not being a rate hike in 2016 at all, and that’s even the view of at least one rogue FOMC member.

But it’s jobs week in the US this week. On the strength of Fischer’s comments, if Friday night’s non-farm payroll number proves to be a solid or better than expected result, Wall Street will likely prepare for a September rate hike just in case.

Interestingly, Fischer’s comments were also made in the context of the first revision of US June quarter GDP, released on Friday night, which showed a dip to 1.1% from an initial 1.2% estimate. If the Fed is data-dependent… But in the same interview, Fischer dismissed the June quarter GDP as being too long ago to be relevant.

Commodities

An 0.8% jump in the US dollar index to 95.48 was always going to be a big headwind for commodity prices on Friday night, and the prospect of two rate hikes a more medium term breeze. But as it was, commodity prices fell by very little.

West Texas crude fell US9c to US$47.29/bbl.

Base metal prices were mostly weaker, but not by much.

Iron ore did fall US$2.00 to US$59.10/t, but iron ore tends to play its own game.

The interesting one is gold, which only fell a dollar to US$1320.50/oz. By rights it should have fallen a lot more, but watch gold tonight. It has a habit of waiting an extra day to respond.

The Aussie’s fall of 0.7% to US$0.7560 matched the greenback’s gain.

The SPI Overnight closed down 4 points on Saturday morning.

The Week Ahead

It will be a big week in the US for a data dependent Fed.

Tonight sees personal income & spending, and the Fed’s preferred PCE measure of inflation. Tuesday it’s house prices and consumer confidence, Wednesday the Chicago PMI, pending home sales and the private sector jobs report, and Thursday sees construction spending, chain store sales, vehicle sales and the manufacturing PMI.

Friday it’s that all-important jobs number, alongside factory orders and trade. There follows the Labor Day long weekend in the US, unofficially signalling the end of the summer holidays.

Thursday is the first of the month so it’s manufacturing PMI day across the globe, as well as both manufacturing and the services PMI from China.

In Australia we’ll see building approvals tomorrow and private sector credit On Wednesday. On Thursday, June quarter private sector capex will have the RBA’s attention alongside retail sales, house prices and the manufacturing PMI.

On Friday S&P/ASX will announce pending quarterly changes to the components of the ASX200 and other indices, ahead of the changes becoming effective two weeks hence.

In the last three days of result season, numbers are due from the likes of Beach Energy ((BPT)), Macquarie Atlas ((MQA)), Ramsay Health Care ((RHC)) and Adelaide Brighton ((ABC)) amidst many more small names.

Investors should otherwise be aware we will now hit a heavy period of stocks going ex-dividend, and that index handicap will extend all the way through September.

Wesfarmers ((WES)) and Woodside Petroleum ((WPL)) will go ex today and BHP Billiton ((BHP)) on Thursday, alongside many more this week.

Rudi will appear on Sky Business on Tuesday morning 11.15am, via Skype-link, to discuss broker calls. He'll re-appear on Thursday between 12.30pm-2.30pm and again on Friday, via Skype-link, at around 11.05am.
 

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