The Monday Report

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By Greg Peel

Determined

I suggested on Friday morning that it seems the local market just wants to go up right now, and Friday’s session rather supports the theory. The Dow was down 200 points and the ASX200 closed up 26.

Mind you, a lot of what drove Wall Street down late last week is related to the sort of tech industry Australia just does not have. Apple – America’s biggest listed company – is a case in point, and weakness in that stock was influential, alongside tech peers Microsoft (Dow), Google and Netflix, although bucking the trend were Facebook and Amazon.

These names exist in a world far removed from our humble shores, so why would Australia sell on weakness in this alien land? What we know is rocks ‘n’ stuff. And with the oil price continuing to press higher, iron ore in the mid-sixties, base metal prices looking a bit more encouraging and gold suddenly going for another run, no surprise that Friday’s 0.5% rally for the ASX200 was driven yet again by energy (1.5%) and materials (1.2%).

Beyond resources, it appears investors decided healthcare (1.1%) was due some buying, but then we drop down to consumer staples (0.5%) and the banks (0.4%) to find any other moves of note.

The question now for the Australian market is: Can it last?

WTI is now back at 45, which has been a target the US oil industry has been looking for. As OPEC production ramps up, the risk is clearly to the downside. Chinese steel demand is supporting rallies in iron ore and coal, but analysts also see seasonal risk to the downside. The banks report first half earnings this week. At least one broker is warning of dividend cuts from the lesser two. There is every chance the RBA won’t cut tomorrow. And tomorrow night’s budget is always a lottery.

But the technicals still look strong.

Should be an interesting week.

Can’t Win

Traders were struggling on Friday night to remember the last time the eurozone’s quarterly GDP result came in better than expected. At 0.6% growth, the March quarter result eclipsed 0.4% forecasts. So one would expect European stock markets were cheering.

Germany fell 2.7% and France 2.8%. European markets continued to be rattled by the week’s drop in the US dollar, courtesy of the Fed making no hints about a June rate hike, the Bank of Japan not boosting stimulus and the US GDP result coming in weak. Throw in a flash reading of eurozone April CPI at minus 0.2% when flat was expected, and the fact Europe’s quarterly corporate reporting season has been a downer, and it’s hard to find a reason to buy Europe at present.

End of Month

Europe’s mood carried over to Wall Street on Friday night. Having broken down through support at 2087 and stopped at the next level of 2075 on Thursday night, the S&P500 opened below 2075 and traded down to 2052 before the selling abated. Having fallen 200 points on Thursday, the Dow was down another 180 points at that low.

The tech sector continued to lead the weakness, despite the offset of a 10% rally for Amazon following Thursday night’s aftermarket earnings beat. But it was the last day of the trading month, which suggests some square-up. In this case, having stood aside for a couple of days, buyers returned to temper the falls by the close.

The Dow closed down 57 points or 0.3% while the S&P lost 0.5% as the Nasdaq fell 0.6%.

There was also mention made of the annual Berkshire Hathaway shareholders meeting which was held over the weekend. Buffet has a habit of firing up investors with relentless optimism and it’s not unusual for Wall Street to rally on the Monday following such meetings. By contrast, Buffet peer Carl Icahn had helped spark the sell-off on Thursday by speaking of a “day of reckoning” ahead, but the sceptics suggest he just wants a lower entry point to pick up some fresh positions.

Whatever the case, we always need take end of month sessions, and particularly end of quarter sessions, with a grain of salt. The new month now beckons and it’s May.

Oh dear.

With regard Fed-watching, April’s personal income & spending data, released on Friday, do not point to a rate rise anytime soon. While incomes rose a healthy 0.4% as expected, consumer spending rose only 0.1% and missed 0.2% expectation.

The personal consumption & expenditure (PCE) measure of inflation rose 0.1% at the headline having fallen 0.1% in March, but is up only 0.8% year on year. The core rate, which is the Fed’s pet measure, rose 0.1% to be up 1.6% for the year. That’s still well below the 2% target and with consumer confidence continuing to fade, as evidenced by Michigan Uni’s fortnightly gauge, there is little sign of that target being reached in a hurry.

June is not looking too likely.

Commodities

West Texas traded above 46 on Friday but on Saturday morning was up US11c at US$45.99/bbl. Brent was up US24c at US$48.13/bbl. Traders are beginning to call an interim top.

In combination, traders are also questioning how much further the US dollar can fall. It was down another 0.8% on its index on Saturday morning at 93.02 and recent weakness has a lot to do with commodity price strength. This is particularly the case for base metals, which were all positive on Friday night.

Lead rose 3%, copper 2%, zinc 1% and aluminium, nickel and tin 0.5%.

And don’t the gold bugs love it. Gold is up another US$26.00 at US$1292.40/oz.

Iron ore rose US$2.30 to US$65.20/t.

The Aussie was 0.3% lower on Saturday morning at US$0.7607 despite greenback weakness.

The SPI Overnight closed down 6 points.

China

China’s official April manufacturing PMI, released yesterday, came in at 50.1 and disappointed. The market was expecting an acceleration to 50.4 following on from March’s return to expansion at 50.2.

China’s service sector is in better shape at 53.5, but that is also an easing from the pace set in March of 53.8.

The Week Ahead

There are a lot of public holidays across the place this week. China and the UK are closed today and Japan is closed from Tuesday to Thursday.

As a result, April manufacturing and services PMI releases are scattered across the week.

The first week of month always brings the PMIs but also US jobs. The private sector report is out on Wednesday and non-farm payrolls on Friday.

Otherwise the US sees construction spending and the manufacturing PMI tonight, vehicle sales tomorrow, the services PMI, factory orders, trade and productivity on Wednesday and chain store sales on Thursday.

It’s one hell of a week in Australia across the monetary, fiscal and corporate spectrum.

In terms of data releases, today we have the manufacturing PMI along with house prices, the Melbourne Institute inflation gauge and NAB’s monthly business confidence survey. Tomorrow it’s building approvals, Wednesday the services PMI, Thursday retail sales, new home sales and the trade balance and Friday the construction PMI.

The RBA will release the most eagerly anticipated policy statement of the year tomorrow. The market is split on a rate cut. The RBA’s quarterly Statement on Monetary Policy is due on Friday.

Scott Morrison will bring down the Turnbull’s government’s first federal budget tomorrow night. Will he also bring down the mood?

It’s bank result week this week, with Westpac ((WBC)) reporting today, ANZ Bank ((ANZ)) tomorrow, National Bank ((NAB)) on Thursday and Macquarie Group ((MQG)) on Friday.

Quarterly reports will be issued this week by Goodman Group ((GMG)), Dexus Property ((DXS)), News Corp ((NWS)) and REA Group ((REA)) while investor days will be held by Telstra ((TLS)) today and Transurban ((TCL)) tomorrow and tomorrow also sees Woolworth’s ((WOW)) quarterly sales numbers.

A raft of AGMs will also be held across the week.

Strap in.

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