The Monday Report

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

By Greg Peel

Commodity Drag

Falls in base and bulk metal prices overnight were enough to fuel an unsurprising pullback for the ASX200 on Friday morning, following weakness on Wall Street due to rising tax reform concerns. The materials sector closed the day down -1.4% to be the biggest loser.

The oil price did not fall but the energy sector posted a -1.0% drop, largely thanks to Santos ((STO)) guiding to flat FY18 production and increased capex. The market didn’t like the numbers but analysts had no qualms, despite a couple of ratings downgrades. The stock had simply run too hard and fell -3.4% on Friday.

After the sharp run up to 6050 it was always on the cards the index would need to pull back to the 6000 break-out level but late morning the tide turned and once again we were looking at 6050. An upbeat Statement on Monetary Policy from the RBA likely helped.

The central bank declared the outlook for the Australian economy remains positive, with business investment looking more positive than it has for some time. Dwelling investment appears to have peaked earlier than expected but that is what the RBA wanted to see to relieve the risk of a housing bubble. With inflation low, there is no need for the RBA to raise anytime soon and risk a refuelling of the housing market.

The pop back up to 6050 was short-lived and quickly the index was back in the red, losing -20 points to still be well clear of 6000 on what could have been a classic profit-taking Friday.

Consumer discretionary (+0.3) was the only sector not to finish in the green, aided by some individual stock moves including a well-received quarterly result from News Corp ((NWS)).

The banks posted mixed moves to keep the financials sector relatively steady.

That sector will nevertheless be one to watch today. John Alexander’s resignation over the weekend means the government is in minority, for now, until more foreigners are exposed. The latest poll shows Labor ahead 55/45% on a 2PP basis. If this citizenship farce ultimately leads to an early election, which it might, then a bank Royal Commission is firmly back in the frame.

And today both ANZ and Westpac go ex.

On Saturday morning the futures closed down -1 point, as Wall Street broke its weekly winning streak on a lower oil price and lingering tax doubts. There’s quite a bit of data to absorb this week including a monthly dump from China, US inflation and the local monthly confidence surveys, jobs numbers, and the September quarter wage price index.

We also have the postponement of the TPP over the weekend to consider, following Canada’s bizarre capitulation, but on the other hand we had the online retail spree that is Singles Day in China on Friday, in which Australia was high on the leader’s board of sought after foreign products. Baby formula and dietary supplements, one presumes.

It could be an interesting session today.

Down Week

Having risen for eight straight weeks, the Dow and S&P500 posted a down-week last week. The Nasdaq broke a six-week run. On Friday night the Dow closed down -39 points or -0.2% while the S&P fell -0.1% to 2582 and the Nasdaq was flat.

Energy was the weakest sector in the session given a half percent drop in the oil price. But it wasn’t the price dip per se that worried the market, it was the cause.

When WTI cracked US$50/bbl once more, driven by OPEC-Russia sticking assiduously to production cuts, it was assumed it would only be a matter of time before US shale was reincentivised to provide the offset. But it appeared once-bitten US producers were not going to jump straight back in until they were more certain of price stability. The US rig count remained steady.

Along came new Middle East tensions, driven by Saudi Arabia, and WTI climbed steadily higher towards US$60/bbl. Last week’s numbers showed the US rig count increasing by nine. The total is thus 738, which makes nine seem a bit trivial, but it’s the implication. Year on year the count is up by 286.

Other than energy, Wall Street continued to feel uneasy about tax reform on Friday – not panicked, but not prepared to push the stock market ever higher despite tail-end earnings results maintaining a positive theme. Even the bricks & mortar retailers were posting earnings beats on Friday, and enjoying solid rallies as a result. Mind you, they have fallen so far in a year even a 14% pop for JC Penney amounts to pocket change.

The opposite is true for Nvidia, chip-maker to both the gaming and crypto-currency sectors, which rose 5% following its earnings beat. That stock is up over 200% year to date.

It’s another reason for Wall Street to be nervous. Following stellar runs in 2017, technology stocks now make up a full 25% of the S&P500 on a cap-weight basis. That puts FANG in the same class of influence as the banks in Australia. For just how long can these stocks keep rising?

And will the corporate tax cut be put off for a year? Wall Street waits anxiously.

Commodities

West Texas crude fell -US27c to US$56.86/bbl.

Nickel fell another -2% in London, balanced by a 1.5% gain for zinc and 0.5% for aluminium.

Iron ore rose US10c to US$62.00/t.

The US ten-year yield surprised with a 7 basis point jump to 2.40% on Friday night, reflecting jumps in European yields after a period of weakness. This triggered selling in gold, which fell -US$11.20 to US$1275.20/oz despite the US dollar index falling -0.1% to 94.38.

The Aussie is down -0.3% at US$0.7660.

The SPI Overnight closed down -1 point on Saturday morning.

The Week Ahead

China releases October industrial production, retail sales and fixed asset investment numbers tomorrow.

The US will see the PPI tomorrow and CPI on Wednesday along with retail sales and the Empire State index.  Thursday it's housing sentiment, industrial production and the Philadelphia Fed index, and Friday housing starts.

In Australia we have the NAB business confidence survey out tomorrow and Westpac consumer confidence on Wednesday, along with the September quarter wage price index. Thursday it’s the October jobs numbers.

On the local stock front, Incitec Pivot ((IPL)) reports earnings tomorrow, followed by DuluxGroup ((DLX)) and Ausnet ((AST)) on Wednesday.

The next two weeks are the busiest in the AGM season calendar. Today’s meetings include those of Breville Group ((BRG)) and Nine Entertainment ((NEC)).

As noted, both ANZ Bank ((ANZ)) and Westpac ((WBC)) both go ex today.

Rudi will only appear on Sky Business once this week (on Friday morning, via Skype) as he's about to travel to Adelaide where he will present to the local chapter of the Australian Investors' Association (AIA) on Tuesday night. See calendar attached to Rudi's Views on the website for more details. There will be no Weekly Insights this week.

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