The Monday Report

This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL

By Greg Peel

Back to Earth

The pressure has eased for the local banks with regard the possible need for capital raisings, analysts suggest, but that doesn’t mean valuations achieved in the post US election rally, spurred on by strong rallies for the US banks, are realistic. A slow credit growth environment in Australia continues to drag on bank earnings.

Thus local bank share prices ran too far, and hence have been pulling back in the past few sessions as analysts call for a reality check. Macquarie, for one, downgraded its bank sector call to Neutral from Outperform late last week and the Friday session was another in which a -1.2% fall for the financials sector was the influential move on the day.

The miners have also enjoyed a solid run and here, analysts have been forced to play catch-up with regard commodity price forecasts. They have not, however, caught up to spot price levels, which all agree are more likely to ease in the near term than run further. Analysts have upgraded forecasts based on commodity prices forecasts still sitting below spot.

Indonesia has also thrown a spanner in the works in the nickel sector by lifting export bans, and overall the materials sector has also seen some cooling. Friday saw materials down -1.3%.

After a big jump on Thursday, CSL ((CSL)) enjoyed another kick on Friday from the latecomers to provide the only significant sector offset to the banks and miners. Healthcare rose 1.1%.

There was no doubt an element of squaring up on Friday ahead of Trump’s inauguration, as was the case on Wall Street. The ASX200 is now close to 200 points lower than its peak at the height of Trump excitement, as reality awaits.

There was no excitement generated when China’s December quarter GDP came out at 6.8% year on year, beating 6.7% forecasts.  For 2016, GDP rose 6.7%, meeting Beijing’s target of “at least 6.5%”. Blow me down.

Industrial production rose 6.0% in 2016, compared with 6.1% in 2015, retail sales rose 10.4% (10.7%) and fixed asset investment rose 8.1% to December, down from 8.3% to November. Friday’s data dump provided no reason to be either delighted or particularly concerned.

New Era?

Day One and President Trump is already bitching about how many people the press have suggested didn’t turn up to his inauguration parade. And many of those who did were protesters. It’s going to be a turbulent four years.

Wall Street’s focus was on the inauguration ceremony but there were still earnings reports to digest. Among the Dow components, American Express missed on earnings but beat on revenue, which is actually a welcome surprise, General Electric missed on revenue and Proctor & Gamble posted a solid earnings beat.

The Dow was nevertheless around 90 points higher form the opening bell, likely suggesting the pullback from the peak of Trump euphoria had been sufficient, according to traders. Trump’s address potentially offered more upside after the pullback than downside. But as was anticipated, Trump’s address contained nothing of note on the policy front. The Dow duly dropped back again, not quite to square.

Yet the word from the new Administration is that promised policies such as tax reform will be seen to as quickly as possible. As the afternoon progressed, and Trump managed not to make a fool of himself at each step, the Dow quietly regained its mid-session losses. It is typical for Wall Street to fall on the day of any inauguration. Not this time.

Okay. That’s over and done with. Aside from ongoing earnings reports, Wall Street will remain focused on cabinet confirmations and actual movement on policies. A retest of Dow 20,000 likely depends on policy clarification and action.

The Dow closed up 94 points or 0.5% while the S&P gained 0.3% to 2271 and the Nasdaq rose 0.3%.

Commodities

Nickel was down yet another -2% in London in a mixed session that saw aluminium rise 1% and lead 2%, while copper and zinc stood still.

Iron ore fell -US30c to US$80.10/t.

The US dollar index fell -0.3% to 100.85 but gold remains relatively steady at US$1207.80/oz and the Aussie is little moved at US$0.7552.

The International Energy Agency’s December report, released on Friday morning in the US, showed OPEC production dropped by -320,000 barrels per day in the month to 33.09 million barrels. By God, they’re actually doing it. OPEC’s target ceiling is 32.5m barrels.

This news had oil prices shooting up early in the day but they soon eased off when the weekly US rig count showed an increase of 29 to 551. West Texas crude ultimately closed up US$1.05 or 2% to US$52.42/bbl.

The SPI Overnight closed up 27 points or 0.5% on Saturday morning, suggesting the local market may also see a break in the pullback today.

The Week Ahead

Aside from any news from Camp Trump this week, it will be a busy time for Wall Street at both the corporate and economic levels. A flood of earnings reports will be joined by a slew of economic data.

Tomorrow night sees existing home sales, the Richmond Fed index and a flash estimate of January manufacturing PMI. Wednesday it's FHFA house prices and Thursday brings new home sales, the trade balance, leading economic indicators, the Chicago Fed national index and a flash services PMI estimate. On Friday it’s durable goods, consumer sentiment and a first estimate of December quarter GDP. Forecasts are for 2.1%, down from September’s 3.5%.

The UK will also deliver its first estimate of December GDP on Thursday.

Holidays will dominate this week, with New Zealand off today, Australia off on Thursday, and China off on Friday for the beginning of the week-long New Year break.

The key data release for Australia this week is Wednesday’s December quarter CPI numbers.

On the local stock front, the resource sector production reports will continue to flow, with BHP Billiton ((BHP)) the highlight on Wednesday.  Northern Star Resources ((NST)) and Syrah Resources ((SYR)) are today’s reporters.

This week will also see a couple of early earnings results reports, ahead of next month’s season proper. ResMed ((RMD)) reports tomorrow and Alumina Ltd ((AWC)) on Wednesday.

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