The Monday Report

This story features NEWCREST MINING LIMITED, and other companies. For more info SHARE ANALYSIS: NCM

By Greg Peel

Soggy

Weakness extended from the open of Friday’s session on the local market before a lunchtime rally brought the index back to its starting point. It was up to RBA deputy governor Guy Debelle to calm the market’s nerves following what had been an overwrought response to the RBA’s discussion of 3.5% being Australia’s “new neutral” rate setting.

Aside from the fact 3.5% was first touted some four years ago, there was no implication in the minutes of the July meeting the board was intending to begin a hiking frenzy right now – as Guy Debelle confirmed.

This was positive news for the market and for consumer discretionary in particular, which managed a 0.4% rally on the day. But a typical Friday afternoon sell-off saw all other sectors close in the red other than telcos, which closed flat.

The banks continued to pull back from their prior surge on capital requirement relief as investors returned to focusing on the current banking climate. The big miners suffered from a drop in the iron ore price and a dip in oil had energy dropping as well.

Otherwise, it just seemed no one was much interested in taking positions home for the weekend.

As the ASX200 once again sits tenuously just above 5700, and will open at the 5680 support line this morning if the futures are accurate, all we can note is that the merry-go-round has completed another revolution. Notwithstanding offshore influences, we may have to look forward to next week when the results season begins to fire up if we are ever to break out of the current range.

One issue hanging over the local market right now is the Aussie, and on Wednesday we see the June quarter CPI result.

Sell the Fact

Speaking of the problem of a strong currency, the DAX plunged -1.7% on Friday night as the German stock market finally bowed to the pressure of the ever rising euro. Despite Mario Draghi’s attempted back-pedalling, the market remains convinced the ECB will soon begin tapering QE as the European economy continues to outperform.

This was not the way it was meant to be. It is the US that should have the currency problem by now, on super-stimulatory policies rolled out by the Trump administration. But with Washington seemingly in complete stasis, and the Russia story dominating the headlines (and tweets), the US dollar continues to slip into the mire.

The earnings result story of Friday night on Wall Street was that of General Electric (Dow), which posted a drop in revenues and earnings and offered a subdued outlook. A -3% fall for GE helped drag the Dow down, and this time the tech sector offered no support for the other indices.

The Dow closed down -31 points or -0.2% while the S&P lost a point to 2472 and the Nasdaq closed very slightly weaker.

GE may have posted what was considered a weak result but the scorecard after the first full week of the US earnings season has beats running at around 75%. However, what has caught commentators’ attention is the fact the average share price movement on the day of reporting stocks to date has been -1%.

There’s a long way to go yet but what this statistic suggests is that a strong earnings season – and currently results are on trend for around 10% earnings growth – has already been priced in by the market. Given the indices have been hitting new all-time highs every other day, this is not difficult to believe. Many a commentator has called Wall Street overvalued and thus a strong earnings result provides a good opportunity to take profits.

The oil price didn’t do Wall Street any favours on Friday night either in falling -2.8%. This was in response to a report suggesting OPEC production in July will rise by 145,000 barrels per day to 33mbpd despite production quotas, given Libya and Nigeria are enjoying a rare period of uninterrupted output and are exempted from production cuts.

WTI had been lower earlier in the session until some relief was provided by the weekly US rig count, which showed a drop of one rig to 764. Oil traders will nevertheless be looking for a clear trend, given last time the count lost one rig in a week everyone piled into oil, only to see a rig increase in the following week.

Earnings results will continue to dominate Wall Street as they flood in this week and at this stage it appears there will need to be some genuinely positive surprises for indices to kick on to yet newer all-time highs.

Commodities

West Texas crude fell -US$1.32 to US$45.60/bbl.

The US dollar index fell another -0.3% to 93.97 and is providing support for commodity prices, although not in any clear trend. Base metals are having lots of ups and downs and on Friday they were mostly up, with copper, lead zinc rising around 1% but nickel falling -1%.

Iron ore fell -US20c to US$67.10/t.

Gold is the obvious winner as the dollar falls and it jumped another US$10.50 to US$1254.50/oz.

With Australia’s CPI result looming this week the Aussie lost some of its recent steam and dropped -0.6% on Friday to US$0.7911. This seems like a pivotal position for now between the prior 78 break-out level and the possible bridge-too-far at 80.

The SPI Overnight closed down -25 points on Saturday morning which, as noted, would put the ASX200 back to just above 5680.

The Week Ahead

It will be a very busy week for US earnings but it is also a busy one for economic data, culminating on Friday with the first estimate of June quarter GDP. Forecasts currently suggest 2.6% growth, up from March’s disappointing 1.4%.

Ahead of that number, the US will see existing home sales tonight along with a flash reading on July manufacturing PMI, monthly consumer confidence, both the FHFA and Case-Shiller house price measures and the Richmond Fed index on Tuesday, and new home sales on Wednesday. Thursday it’s trade, durable goods and the Chicago Fed national activity index.

The Fed policy statement will be released on Wednesday night following this week’s meeting and while no change is expected, the language will still be closely scrutinised.

Japan and the eurozone will also flash PMIs today/night.

Australia’s economic week is dominated by Wednesday’s CPI report, followed by the PPI on Friday.

On the local stock front, quarterly production reports will continue to come thick and fast this week with reporters including Newcrest ((NCM)) and Western Areas ((WSA)) today, OZ Minerals ((OZL)) tomorrow, Independence Group ((IGO)) on Wednesday and Fortescue Metals ((FMG)) on Thursday, among others.

Bank of Queensland ((BOQ)) will host an investor day today and Westpac ((WBC)) will follow suit on Friday. Macquarie Group ((MQG)) holds its AGM on Thursday.

One always knows local earnings season is just around the corner when GUD Holdings ((GUD)) brings out its gun-jumping result, as it will on Thursday.

Rudi will appear on Sky Business on Tuesday morning, 11.15am, via Skype to discuss broker calls. On Thursday he'll appear twice. First from noon till 2pm, then again between 7-8pm on Switzer TV. On Friday he'll repeat the Skype-connection, probably between 11.15am and 11.30am.
 

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