The Monday Report

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

By Greg Peel

Four Month High

It took less than ten minutes for the ASX200 to jump through 5800 from the open on Friday, reaching 5821 half an hour later. But inevitably the technical trades kicked in – something traders might have considered a safe bet given the number of times since May the index has bounced off its lows before subsequently peaking out at 5800.

Near midday the index was back at 5793 and it appeared yet another attempted topside break-out had failed. But the buyers rallied troops, and a steady path to a close of 5814 followed.

The remarkable thing about closing at a four month high above 5800 – we won’t call it a breakout just yet, but the futures are up 12 points pre-open – is that just about every other week over that period technical analysts have warned of a break down through support to 5500 as the index continued to fall back to the bottom of the range. Fundamentally, it was easy to make the case.

Iron ore prices falling. Banks in turmoil over the money laundering scandal. Telstra cut its dividend. Global interest rates rising, housing market threatening to tip over. Household debt dangerously high. Wage growth stagnant. Retail sector soon to be wiped out by Amazon. Government completely dysfunctional.

So what can we look to to justify why, instead of breaking down, we may now be breaking up after all this time?

Base metal, gold and oil prices are strong. Money laundering is fading as a headline and the banks still offer hefty yields. Despite the cut, Telstra’s yield is still attractive. RBA sees the economy as healthy but sees no rate rise in sight. Housing stall likely, but not a crash. Jobs growth strong. Business conditions very positive and confidence rising. Consumer confidence rebounding. Amazon fear subsiding. Unfortunately, the government remains completely dysfunctional.

Suffice to say all sectors of the index finished in the green to varying degrees, bar one, on Friday. The one was the small IT sector, impacted by the froth settling for IPH Ltd ((IPH)). Throughout the saw-tooth sideways move we’ve seen since May, sector rotation has featured heavily, in and out. But this recent push towards the top end has been largely a market-wide move. No particular sector has led.

This time it’s different? Well, that remains to be seen. The index has rallied back from the bottom of the range to the top on low volume. On Friday, the three leasing sectors, all with gains of around 0.7%, were the defensives of telcos, utilities and consumer staples.

But on Friday night we saw gold up, oil up, nickel up and iron ore up strongly. Wall Street was looking like it might just be ready to tip over but it headed north once more. The futures are pointing upward this morning. All is looking good.

But it is October.

Noisy Data

The US CPI reading for September showed a 0.5% gain – the biggest in eight months – to take the annual rate of inflation to 2.2% from 1.7%. Retail sales jumped 1.6% in September, to mark the highest reading in two and half years. But these results were largely as predicted, and overwhelmed by the spike in energy prices caused by the hurricanes.

The core CPI, ex food and energy, rose only 0.1% to remain at 1.7% for the fifth month in a row. The core CPI is tracking pretty much in line with the Fed’s preferred PCE measure of inflation, and neither look like reaching the 2% target anytime soon.

The Fed does not expect such, but this will not prevent a rate hike in December if deemed appropriate. So said Janet Yellen last night.

The latest news out of Washington is that Trump is threatening to scrap Obama’s nuclear deal with Iran, implying the potential for reimposition of sanctions. This includes Iranian oil exports, so oil prices rose 1.5% on Friday night.

If Iranian oil is cut off once more, OPEC/non-OPEC would have an excuse to ease production cuts and/or US shale production will step up to fill the gap so ultimately the price impact is unlikely to be significant while the world remains in oil surplus. But suffice to say a geopolitical premium can creep into the oil price once more.

After looking a little wobbly as the week progressed, Wall Street turned back around on Friday night. The Dow closed up 30 points or 0.1%, the S&P rose 0.1% to 2553 and the Nasdaq gained 0.2% to post another new high.

On Thursday night we saw JP Morgan (Dow) and Citigroup post earnings beats and suffer slight sell-offs. On Friday night Bank of America posted a beat and suffered the same fate. Wells Fargo posted a miss and saw its shares fall -3% but it was mostly about the cost of the bank’s fictitious accounts scandal.

At elevated valuations, it appears, at this very early stage, US earnings are going to have to be very good to prompt further price increases and meets or misses will likely trigger sharp drops. But we shall see. This week we’ll see results from the likes of Goldman Sachs (Dow), Morgan Stanley, and a few of the Dow stalwarts such as J&J and GE.

It’s also a relatively busy week for US data, leading up to Friday’s 30^th anniversary of the ’87 crash.

Commodities

Iron ore rose US$2.60 to US$60.00/t.

The US dollar index was steady at 93.09 but gold jumped US$10.60 to US$1303.30/oz, likely reflecting geopolitics vis a vis Iran, assuming the headline inflation blip was dismissed for what it was.

Nickel jumped 2.5% in London, with other metals posting smaller mixed moves.

West Texas crude rose US75c to US$51.41/bbl.

The greenback was steady but the Aussie is up 0.8% at US$0.7883. The RBA’s Financial Stability Report was on the positive side.

The SPI Overnight closed up 12 points or 0.2% on Saturday morning.

The Week Ahead

China will release September inflation data today. Thursday sees September industrial production, retail sales and fixed asset investment, and the September quarter GDP.

The US will see the Empire State activity index tonight, industrial production and housing sentiment tomorrow, and housing starts and the Fed beige Book on Wednesday. Thursday it’s the Philadelphia Fed index and Friday existing home sales.

The US earnings season ramp up in earnest this week.

In Australia we’ll see the minutes of the RBA meeting tomorrow and the jobs numbers on Thursday, along with September quarter business confidence and housing affordability.

On the local stock front we’re now heading into AGM season proper, along with September quarter production reports from the resource sectors and quarterly updates from other companies deigning to do so.

Today features quarterlies from Evolution Mining ((EVN)) and OZ Minerals ((OZL)).

Rudi will appear on Sky Business on Tuesday, via Skype, to discuss broker calls at around 11.15am. On Thursday he's scheduled to appear twice in the studios at Macuarie Park. First from 1-2pm and again between 7-8pm for the Switzer Report. On Friday, he should repeat the Skype experience, probably around 11.15am.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

For further global economic release dates and local company events please refer to the FNArena Calendar.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms