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The Monday Report

Daily Market Reports | Sep 18 2017

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

By Greg Peel

Valid, but Wrong

When North Korea fired a long range missile through Japan’s airspace last month, the Dow fell over two hundred points in response. It was therefore a valid assumption that yet another such test, in defiance of all diplomatic efforts and increased sanctions, would illicit a similar response.

It didn’t, but the local market didn’t know that on Friday.

The sell-off on Friday was relatively market-wide on geopolitical fears, with a couple of exceptions. Consumer discretionary managed a 0.2% gain, IT stood out with a 0.8% gain, and telcos were relatively flat. Among falls in the other sectors, sector-specific stories were also at play, missiles notwithstanding.

Materials saw the biggest fall (-1.9%) as the metal price pullback continues, and iron ore particular took a bit of a dive. The banks (-0.8%) are now faced with the money laundering issue spreading through all of the Big Four. Utilities (-1.7%) are being rotated out of as global interest rates threaten to rise, and the US yield in particular has bounced back from its lows.

The flipside of rising US rates is the benefits it bestows upon Computershare ((CPU)), which led the IT sector to its gain, and on insurance companies with offshore exposure. QBE Insurance ((QBE)) did actually close down on Friday but only slightly. There are more hurricanes brewing in the Gulf.

The ASX200 was down over -52 points at lunchtime, but this took us down to near support at 5680. A slight rebound from that level tempered the fall by the close.

The futures are suggesting a 16 points gain this morning, following on from a lack of negative reaction on Wall Street on Friday night. Interestingly, on Friday night the US ambassador to the UN stated that seeking a diplomatic solution to North Korea was still the intention, but that military options may yet have to be considered. The news this morning is that the ambassador believes all diplomatic avenues have been exhausted. The issue has now been passed to the Pentagon.

Wall Street shrugged off the missile test on Friday night. Will news that the only path from here is a military one make any difference to sentiment tonight?

Unbreakable

When the Dow fell over two hundred points the last time a missile flew over Japan, it very quickly bounced back. Wall Street has very quickly bounced back from any notable move into negative territory all year because there are just too many buyers hoping to exploit more realistic valuations. So was there any point in selling on Friday night because of yet another missile launch?

Not only did the Dow fall in response to that earlier test, all markets shifted into safety trade mode. Gold hit a new high for the year, the US ten-year bond yield fell to a new low for the year, and the VIX volatility index spiked. So what response did this second missile invoke?

The Dow closed up 64 points or 0.3% to new record high, the S&P rose 0.2% to close at 2500 for the first time in history, and the Nasdaq gained 0.3% for, yes, another record. Gold fell almost ten dollars, the US ten-year yield rose, and the VIX fell back to 10.

What a difference a couple of weeks makes.

Many suggestions have been touted as to why, all of a sudden, Wall Street doesn’t care. The first is the aforementioned queue of willing buyers at lower levels. Then there’s the fact North Korea has been launching missiles for decades and no one has yet been nuked. Then there’s the belief that despite all talk of a military option, there is no military option. At least, not one that doesn’t include the death of many innocent people inside and out of North Korea.

It was a very high volume session on the US exchanges on Friday night but that was because it was quadruple witching expiry of quarterly derivatives. The volume largely matched out, hence the expiry did not result in any notable volatility.

The morning’s major economic data releases did not provide any cause for concern either. US retail sales unexpectedly fell -0.2% in August. Industrial production marked its first drop in seven months in falling -0.9%. But there was no concern because it can all be put down to Harvey.

Which means September numbers will probably include a reflection of Irma.

Oh and if you’ve met Harvey, Irma and Jose, now meet Lee, Maria, Norma and Otis. The Gulf will be lucky to make it through the 2017 season without running out of alphabet. The fringes of Jose are expected to impact on the US Atlantic coast right up to New York, and of the other three, Maria has now been upgraded from tropical storm to hurricane and is threatening the same Caribbean islands all over again.

Commodities

Base metal prices settled somewhat on Friday night, except for lead which bounced 2%. The other metals traded smallish ups and downs.

Iron ore fell -US$2.50 to US$70.90/t.

The US dollar index fell -0.2% on the back of the weak data but gold fell -US$9.60 to US$1319.20/oz. So often in past years have we seen gold failing to live up to its safety trade status, spiking initially but not going on with it.

West Texas crude rose US11c to US$49.83/bbl.

The Aussie is flat at US$0.8001.

The SPI Overnight closed up 16 points or 0.3%.

The Week Ahead

What will the Pentagon do?

Otherwise, all attention now turns to the Fed meeting and press conference on Wednesday night. No rate hike is expected but what is widely expected is the announcement of a timetable for the unwinding of the Fed’s balance sheet. As has been the case with everything to do with Yellen’s Fed to date, any unwinding is expected to be gradual.

In other central bank news, the minutes of the September RBA meeting are out tomorrow and the governor will speak on Thursday. The Bank of Japan holds a policy meeting on Thursday.

Japanese markets are closed today.

New Zealand releases its June quarter GDP result on Thursday.

The US will see housing sentiment tonight, housing starts on Tuesday and existing home sales on Wednesday. Thursday it’s the Philadelphia Fed activity index and Friday brings a flash estimate of September manufacturing PMI.

The eurozone will also flash.

On the local stock front, TPG Telecom ((TPM)) releases its earnings result tomorrow and APA Group ((APA)) does the same on Friday.

There is another substantial number of stocks going ex this week, including Cochlear ((COH)), Newcrest Mining ((NCM)), Carsales ((CAR)) and Crown ((CWN)).

Suncorp ((SUN)) holds its AGM on Thursday.

Rudi will appear on Sky Business on Tuesday, via Skype, around 11.15am to discuss broker calls. He'll appear in the studio twice on Thursday; at noon and again between 7-8pm for the Switzer Report. On Friday, he'll repeat the Skype connection, probably around 11.15am.
 

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CHARTS

APA CAR COH CPU NCM QBE SUN

For more info SHARE ANALYSIS: APA - APA GROUP

For more info SHARE ANALYSIS: CAR - CAR GROUP LIMITED

For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: CPU - COMPUTERSHARE LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED

For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED