The Monday Report

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By Greg Peel

Subdued

The local market appears to have lost interest in pushing higher at present. It’s now been three weeks since the last push towards the 5800 level that since May has been targeted numerous times. Indeed right now it seems former support at 5700 has swung to resistance.

Not only has the result season ended, and a tepid season at that, but the stream of ex-dividends stemming from the season continues to handicap the index. Friday saw a subdued session that reflected more lack of buying than committed selling, as well as ex-divs.

The banks led the index down with a -0.7% fall, following the path of banks in the US. Telcos fell -0.5% as a bounce for Telstra ((TLS)), following an analyst upgrade, again proved fleeting. Energy and materials were lower on dips in commodity prices. On the buy side, the on-again, off-again defensive sector of utilities posted the best performance with a 1.0% gain, probably because it was Friday and there’s much going on in the world at present.

China’s July trade data offered little in the way of support. While Chinese imports rose 13.3% when 10.0% was expected, exports rose 5.5% when 6.0% was expected. Notably, imports of copper were flat for the month, not stronger as the market had been anticipating.

This sparked a profit-taking sell off in copper in London overnight with all base metals following suit.

Irma

Last week in the US was all about the safety trade. The US dollar index has fallen to a new low for the year, as has the US ten-year yield. Gold has risen to a new high. The concern reflected in such moves is mostly to do with North Korea.

It was not a good weekend to go home with a risky position, and a good weekend to play it safe. The major risk was that of North Korea launching another missile to commemorate the national holiday, as this is a popular day for the regime to show off its military might. It didn’t happen, but it was not far from anyone’s thoughts on Friday night.

Front of mind was nevertheless Irma. As the hurricane continued on its path towards Florida, Wall Street was in no mood to make big market plays and instead mostly sat on the sidelines. Coming so soon in the wake of Harvey, the destruction that Irma may bring was all anyone much could talk about.

The Dow closed up 13 points while the S&P fell -0.2% and the Nasdaq lost -0.6%.

Interestingly, leading the Dow up was insurance company Travelers. This seems incongruous with potentially the biggest storm in US history approaching but Travelers had already been hard hit first due to Harvey, and then due to the possibility of Irma hitting Florida as a Category 5. On Friday night that prediction was downgraded to Category 4, which was enough to spark some bargain hunting.

Weekly oil inventory data showed that refining capacity on the Gulf Coast is taking longer to come back on line than was assumed. The price of crude initially dropped when refineries in Texas were forced to close, suggesting a back-log of crude supply, but bounced once more on news those refineries had begun to reopen.

At the same time as the US lost over -20% of its refining capacity, it lost around -8% of crude production in the Gulf due to Harvey, but the downstream outweighed the upstream. With refineries returning to production, and Gulf rigs still abandoned due to Irma and other storms, the upstream remained the issue and WTI pushed back over US$49/bbl.

Now that it seems those refineries are coming back at a slower pace than expected…well… WTI fell -3% on Friday night.

The US bond yield fell as low as 2.01% before rebounding back to be flat at 2.06% on profit-taking. The trend remains south nonetheless, and thus so are US banks continuing to fall. It was the banks that led Wall Street up in what was once known as the Trump Rally, but now they are the biggest weight on Wall Street.

For other Dow companies, it comes down to just what the net impact of the storms is going to be. Travelers is a case in point but so is Home Depot. As the Bunnings of the US, Home Depot has seen sales surge as Americans in affected states rush to board up properties and buy jerry cans and generators ahead of the storms, and no doubt Home Depot will be busy supplying the ultimate rebuild.

But at the same time, many Home Depot stores have been forced to close. Therein lies the trade-off. The same is the case for Wal-Mart for example, which has been doing a bumper trade in water and canned food but, again, has had to shut down many stores.

The reality is Wall Street can do little more than see what transpires. Hence there was not a lot of action on Friday night.

Commodities

There was nevertheless plenty of action on the LME.

Analysts have been warning of late that the recent surge in base metal prices has been overdone. Prices had certainly been due a bounce after having wallowed for so long, and signs of improvement in China’s economic growth on the one hand, and the constraint in production in China forced by the government for environmental and other reasons on the other hand, conspired to spark a scramble.

To that end, as noted above, the metals market was expecting a lot out of China’s July trade data and was disappointed. Profit-takers moved into copper, and soon all metals were copping the brunt. Aluminium managed to fall only -0.5%, but copper, lead and zinc all fell -3% and nickel fell -4.5%.

Iron ore fell -US$2.20 to US$73.70/t.

West Texas crude fell -US$1.58 to US$47.54/bbl.

The US dollar index fell another -0.2% to 91.33 but gold dipped a little to US$1346.00/oz.

The Aussie was flat at US$0.8051.

The SPI Overnight fell -2 points.

The Week Ahead

The ex-dividends will continue to flow thick and fast this week in the local market. Investor days will be hosted by Boral ((BLD)) tomorrow and Orica ((ORI)) on Thursday while Myer ((MYR)) will release its earnings result on Thursday.

On Friday, ASX index rebalancing will come into effect.

Data-wise the local market will see the monthly NAB business confidence survey tomorrow and Westpac’s consumer confidence survey on Wednesday. Thursday it’s the August jobs numbers.

It’s a slow start to data in the US and a busy end to the week. The PPI is due on Wednesday and the CPI on Thursday before Friday brings retail sales, industrial production, consumer sentiment and the Empire State activity index.

Friday night is the quadruple witching expiry of equity derivatives in the US.

The Bank of England will hold a policy meeting on Thursday.

Ahead of that, China will release retail sales, industrial production and fixed asset investment numbers.

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

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