Daily Market Reports | Sep 19 2016
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By Greg Peel
The local market decided on Friday that the Fed was not going to hike this week or, if it does, relevant stocks have been sold down far enough to take that into account. With the FOMC meeting now only three days away, no US data releases with the power to make a difference in the meantime, and Fedheads “blacked out” from making comments, nothing will change from here.
But that doesn’t mean we know what the Fed is going to do. The odds still favour no hike, however there’s a lot of “But I wouldn’t be surprised if…” going around. Anyway, soon we’ll know.
We may not get much action between now and Wednesday, when the Bank of Japan meets, and Wednesday night, when the Fed statement is delivered, and to underscore that likelihood, the SPI futures closed unchanged on Saturday morning. Japan is closed today and there are no local data releases of note.
The RBA will release the minutes of the September meeting tomorrow but they are unlikely to tell us anything new.
It was a strong session on the local bourse on Friday nonetheless. Having been the biggest loser over the last couple of weeks, utilities finally bounced back with a market-leading 2.3% gain. Telcos (+1.6%) and the banks (+1.1%) joined in the yield stock recovery but the rally was market-wide. Materials did little and staples struggled to 0.5% but otherwise other sectors posted around 1-1.5% gains.
Energy posted a 1.2% gain but that could change today. The oil price was up on Thursday night and down on Friday night and energy stocks have returned to their earlier bad habit of flying up and down on every little swing in oil prices, usually to go nowhere much.
Otherwise we’re in for another week of central bank watching.
The US CPI rose 0.2% in August when 0.1% was expected, taking annual headline inflation to 1.1%. The core CPI, which in particular excludes weak oil prices, rose 0.3% to 2.3%.
Once upon a time, Ben Bernanke’s targets to trigger the normalisation of US rates were 5% unemployment and 2% inflation. Unemployment is at 4.9% and inflation is at 2.3%. By rights, we should be having a rate hike.
But it’s not that simple. For starters, the Fed prefers the PCE measure of inflation over the CPI and that’s still under 2%. And does it make sense to ignore oil prices as if they have no impact? On the labour front, the 4.9% unemployment rate masks a record low participation rate and a high percentage of Americans without a job who don’t even bother trying, suggesting there remains plenty of slack in the labour market.
This is why there is no cut and dry expectation on Fed policy.
Wall Street has adjusted just in case. Two Fridays ago Wall Street tumbled as Fedheads made the case for a rate hike in September. From that new base, last week saw the S&P500 climb back ten points. Seven of those ten points are entirely attributable to the 12% rally in Apple shares. So ex-Apple, Wall Street has still very much adjusted for the elevated chance of a rate hike.
Does this mean, therefore, that if the Fed doesn’t hike this week, and Janet Yellen does not say anything definite enough that would lock in a December hike, that Wall Street will rally hard?
Maybe, but again, we’ll just have to wait and see. And the BoJ meets first.
Friday night’s session on Wall Street may have been a little better but for another dip in oil prices, courtesy of another increase in the US rig count, and a US$14bn fine slapped on Deutsche Bank which dates back to mortgage lending pre-GFC. Deutsche shares plunged 9%.
Banks in general were sold down in sympathy, largely because of regulatory fears and not because of Fed speculation.
Thus the Dow closed down 88 points or 0.5%, the S&P lost 0.4% to 2139 and the Nasdaq dropped 0.1%. On Friday night Apple shares finally gave back 0.5%, just as the iPhone7 actually hit the stores.
West Texas crude fell US54c to US$43.17/bbl.
Base metal moves in London were mixed, with no price moving more than 1%.
With China on a holiday, iron ore remained unchanged at US$55.50/t.
The interesting thing about these smallish moves in commodity prices is that the US dollar index was up a solid 0.8% on Friday night at 96.04. This was attributed to the bigger than expected gain in the CPI, which in theory strengthens the odds of a Fed rate hike.
It was enough to see gold down US$4.10 to US$1310.00/oz but the US ten-year bond rate remained unmoved at 1.70%.
The Aussie is down 0.3% at US$0.7489.
The SPI Overnight, as noted closed unchanged.
The Week Ahead
The Fed statement will be released on Wednesday night, Janet Yellen will hold a press conference thereafter, and updated FOMC forecasts will be published.
The Bank of Japan will meet on Wednesday. Japanese markets are closed today and Thursday.
US data this week include housing sentiment tonight, housing starts on Tuesday, house prices, existing home sales, leading economic indicators and the Chicago Fed national activity index on Thursday, and a flash estimate of September manufacturing PMI on Friday.
The eurozone and Japan will also flash PMIs on Friday.
In Australia we’ll see June quarter house prices tomorrow along with the RBA minutes. On Thursday RBA governor Phillip Lowe will make his inaugural testimony before the House of Reps economic committee.
On the local stock front, Orocobre ((ORE)) will report earnings today, TPG Telecom ((TPM)) tomorrow, Kathmandu ((KMD)) and Nufarm ((NUF)) on Wednesday and Brickworks ((BKW)) and Premier Investments ((PMV)) on Thursday.
There are still a few ex-divs to work through, particularly on Thursday.
Rudi will appear on Sky Business on Tuesday, through Skype-link, to discuss broker calls at 11.15am. On Thursday he'll return in the studio from 12.30-2.30pm and again between 7-8pm for the Switzer Report. On Friday, he'll repeat the Skype-link up to discuss broker calls at around 11.05am.
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