The Monday Report

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By Greg Peel

Another Shot At 5800?

Early last week chartists were acknowledging the range the ASX200 has been boxed into these past couple of months and suggesting that the break, when it finally came, would most likely be to the downside. On Friday the index pushed back towards 5800 once more. Break that, definitively, and 6000 will be spoken of again.

But we still have to get to 5800. The local market followed on the coat tails of the US late last week as Janet Yellen fostered a change in sentiment. Fears of rapidly rising global interest rates abated after the Fed chair suggested a neutral setting for the US cash rate, as is the FOMC’s goal, is actually not that far away, and there is no rush to get there.

The resultant strong day on the local market on Thursday was backed up with more buying from the open on Friday, suggesting traders, most likely of the digital variety, were again eyeing off the top of the range in yet another hurry. But having run a further 42 points by late morning, the Friday effect kicked in ahead of the last weekend of the school holidays in NSW and elsewhere and the market drifted back in the afternoon on low volume.

Energy was the winning sector on the day, jumping 2.1% on a further 1.5% recovery in the oil price. The banks also had a another strong session in rising 0.8% ahead of next week’s long awaited APRA report on unquestionable strength. Materials eased off a tad, and yield paying stocks could not go on with it despite the supposed relief provided by Yellen’s testimony.

Healthcare was down again, by -0.5%, as the unquestionable strength of the Aussie begins to bite for the big players in the sector with significant US earnings.

Wall Street kicked on on Friday night to new record highs so chances are the local market will resume its push today, with the futures showing up 14. Yet again 5800 would be in sight and there, presumably, profits will again be taken. The Aussie had a big night on Friday and is beginning to become a “complication”.

The big stock story locally on Friday was that of Programmed Maintenance ((PRG)), which received a takeover bid from Japan and shot up a whopping 68%. The bid puts new light on the much criticised attempted takeover of (sort of) similar company Spotless Group ((SPO)) by contractor Downer EDI ((DOW)).

History Repeats?

Early in 2017 it appeared Wall Street had finally gotten over its “bad news is good news” theme with regard economic data vis-à-vis Fed policy, that had pervaded post-GFC, and had become unfazed about rate rises. Rate rises are reflective of a stronger economy, and The Donald was going to do all the heavy lifting with stimulatory fiscal policy.

No such fiscal policy has eventuated, yet up until last week it seemed the Fed was still determined to raise rates three times this year and on the strength of the June jobs numbers, maybe even four. But Janet Yellen hosed down creeping fears on Wednesday night, reiterated the Fed’s “gradual” plan for rate rises, and implied it will not take many hikes to get monetary policy back to a neutral setting.

Wall Street breathed a sigh and the odds of a December rate hike fell to 40%.

In isolation, Friday night was a bad one on the US corporate and economic front. But the Dow closed up 84 points or 0.4%, the S&P rose 0.5% to 2459 and the Nasdaq gained 0.6%. For the Dow and S&P, and for the Russell small caps index, it was yet another record high. The Nasdaq is now just a shade below despite the recent Big Tech sell-off.

Analysts had assumed the June quarter would not be as positive as the March quarter for the big investment banks, but they were still disappointed in the results released by JP Morgan (Dow), Wells Fargo and Citigroup before the open on Friday morning, based on various metrics beyond simple EPS. The bank sector performed poorly on the day but results aside, an easing of the assumption global rates will shoot up suggests an easing of bank strength anyway.

And how are Trump’s bank sector deregulation plans coming along, and how are we looking on tax reform?

Bank weakness was thus a wider issue than just result disappointment but bank results are typically seen as a bellwether for the rest of the economy and therefore the earnings season at large to follow. Yet beyond banks, Wall Street had another strong session.

US June retail sales fell -0.2% in June to mark the second consecutive fall and the largest in 2017. Economists had forecast a 0.1% gain. Economists had also forecast a 0.1% gain for headline CPI inflation but that came in flat. Annually the headline rate slowed to 1.6% from 1.9% in May and 2.7% five months ago.

Volatile oil prices play a major role, but there’s no doubting inflation is pretty stagnant in the US at present and consumers are not in a rush to spend.

US industrial production provided a brighter result with a 0.4% gain when 0.3% was forecast but the bottom line is the weak consumer data fully support the Fed’s approach of “gradual” tightening and only if the data is supportive.

Friday’s night’s kick-on rally was thus just that – a continuation of relief with regard Fed policy. In other words, bad news is good news once more.

Commodities

The weak data had the US ten-year bond yield down 3bps to 2.32% and the US dollar index down 0.7% to 95.11.

This lit a new fire under gold, which jumped US$11.10 to US$1228.40/oz.

West Texas crude carried on, rising US55c to US$46.68/bbl.

The US dollar impacted on base metal prices in London but various supply stories among the suite are also at play at present. Copper was up 0.5% and lead 1% while nickel shot up 4% as zinc dipped -.5%.

Iron ore fell -US20c to US$65.50/t.

US78c is seen as the resistance level for the Aussie but Friday night’s fall in the greenback and current momentum saw the Aussie leap another 1.2% to US$0.7824. The RBA will be groaning.

The SPI Overnight closed up 14 points or 0.3% on Saturday morning.

The Week Ahead

Central banks will be in focus again this week as both the Bank of Japan and the European Central Bank hold policy meetings on Thursday. All eyes will be on Mario Draghi.

The big event for the week will otherwise be the release of China’s June quarter GDP result today, along with month of June industrial production, retail sales and fixed asset investment numbers.

US data this week include the Empire State activity index tonight, housing sentiment on Tuesday, housing starts on Wednesday and the Philadelphia Fed index on Thursday.

The focus in the US will nevertheless be centred on earnings results. This week brings the flood.

Japan is closed today.

The minutes of the July RBA meeting are out tomorrow and Thursday sees the Australian June jobs numbers.

The focus for the local stock market will be on resource sector production & sales reports, of which there is a flurry this week. Highlights include Oil Search ((OSH)) and Rio Tinto ((RIO)) tomorrow, BHP ((BHP)) on Wednesday and South32 ((S32)), Evolution Mining ((EVN)), Santos ((STO)) and Woodside Petroleum ((WPL)) on Thursday.

Rudi will appear on Sky Business on Tuesday morning, via Skype, to discuss broker calls around 11.15am. He'll appear in the studio on Thursday at noon and repeat the Skype experience again on Friday, probably around 11.30am.
 

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