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The Monday Report

Daily Market Reports | Nov 20 2017

This story features TABCORP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: TAH

By Greg Peel

Limbo

The ASX200 shot out of the blocks on Friday for an immediate 35 point gain, excited that Wall Street was excited about the House passing its US tax reform bill. But the excitement lasted for all but a blink as the question was asked: What, exactly, is there to be excited about?

The Dow futures soon followed down the same path, on the reality that the passage of the bill through the House by no means meant US tax reform is nigh. Having pulled back to a more modest gain, the local market then bungled along largely sideways for the rest of the session, on low volume and lack of interest. It was Friday.

Sector moves were mixed, with healthcare (+0.7%) posting the biggest gain and utilities (-0.5%) the biggest loss. Telcos (+0.5%) had an up-day and the banks (+0.4%) saw some buying but in a rare occurrence, both resources sectors were dead flat. There might be some investor whiplash to recover from.

There were no stand-out moves among individual ASX200 stocks.

Biggest gainer on the day was Tabcorp ((TAH)), which received second-time-round merger approval from the Competition Tribunal following an initial objection from the ACCC. A divestment of Tabcorp’s Queensland Odyssey Gaming Services business should seal the deal with the regulator, the Tribunal suggested. Tabcorp shares rose 4.8%.

Green grocer Costa Group ((CGC)) was the biggest loser with a -3.4% fall after brokers chorused their belief the share price had run well above fair value, despite all agreeing the business is in rude health.

The ultimate 14 point gain on the session took the ASX200 to close of 5964, which is a limbo level somewhere between support at 5900 and the prior break-out level of 6000. Wall Street did indeed rethink the impact of the House bill’s passage on Friday night and fell back again, and having already taken this into account, the SPI futures closed down -4 points on Saturday morning.

Whether 5900 or 6000 is the next target will depend on what happens next. The Woodside sale last week rather took the wind out of the sails of what was shaping up as a blue sky rally, and after running up 7% in about six weeks, the index was due some consolidation anyway.

Reality Check

The Dow ran up close to 200 points on Thursday night and on Friday night gave half of that back. The fact the House had passed its tax reform bill without having to go back and rejig was a positive, but on Friday Wall Street applied a 50% risk discount.

There are several hurdles to overcome as yet before US tax cuts become law. Firstly, the Senate must pass its own bill. Then the two houses have to get together and nut out a compromise bill that satisfies both. Then that bill has to pass through both houses and be signed into law by the president.

At this stage it appears the Senate bill, as is, will have difficulty passing. Certain senators have issues and some of those issues are in contradiction. If a Senate bill does ultimately pass, it will still look very different to the House bill, and thus a compromise bill between the two will be a tough achievement. If such a compromise involves too much of a watering-down for the president’s liking, he’ll send it back and tell Congress to have another go.

That’s how the healthcare reform attempt played out, and to date there is no healthcare reform.

On that reality, the Dow closed -100 points or -0.4% on Friday night, the S&P lost -0.3% to 2578 and the Nasdaq fell -0.2%. Interestingly, the Russell small cap index went the other way and added 0.4%, despite leaping 1.4% on Thursday night’s news. Small caps stand to be the biggest beneficiaries of a corporate tax cut.

The Russell had underperformed over recent months as a tax reform bill looked like being pushed further into time, so perhaps there’s some catch-up going on.

And we can’t forget that in the background, we still have Robert Mueller’s Russia probe going on. As every day passes in this lengthy process, Mueller appears to move closer to the president.

The other feature of Wall Street trade on Friday night was a run of retail companies posting earnings beats, leading to some pretty substantial share price jumps. These are the retailers most heavily Amazon-ed over 2017, leading, apparently, to analysts becoming a bit too pessimistic in their forecasts and to shorters being a bit too enthusiastic in their blood lust.

The fact remains, most US bricks & mortar retailers have spent all year watching their share prices plummet as the US stock market as a whole continued to track into blue sky. Some of Friday night’s share price rebounds look substantial in percentage terms, but not so exciting in dollar terms.

In other news, the revelation that Twentieth Century Fox had been in talks with Disney regarding selling off some content assets, but that those talks had stalled, had both Comcast and Verizon individually on the phone to Rupert offering their own deals. The response from market watchers is one of surprise that Murdoch, who made his fortune by expanding his empire, should now want to shrink it.

Is Rupert looking for his Alan Bond?

Commodities

Nickel rebounded 2% in London on Friday night. Lead and zinc rose 1% and copper 0.5% in a positive session all round for the base metals.

Iron ore rose US30c to US$61.50/t.

After falling all week on demand/supply concerns, West Texas crude bounced back US$1.50 to US$56.63/bbl on Friday night. It was still WTI’s first down-week in six.

The US dollar index fell -0.3% to 93.67.

Gold traders weighed up the likelihood of tax reform still being some time off, and of the Russia probe moving ever closer to the top, in jumping US$15.50 to US$1293.50/oz.

The Aussie fell -0.4% to US$0.7560.

The SPI Overnight closed down -4 points on Saturday morning.

The Week Ahead

Thursday in the US is Thanksgiving, meaning all US markets are closed. On Friday the NYSE closes early. On Wednesday the NYSE stays open to 4pm but everyone disappears at lunchtime.

Given Wall Street effectively turns Thanksgiving into a four-day long weekend, we can expect a lot of book-squaring and winding back of positions over the next three sessions.

Crammed into those three days will be data for US leading indicators tonight, the Chicago Fed national activity index and existing home sales tomorrow, and durable goods and consumer sentiment on Wednesday. Friday is famously “Black”, meaning the biggest day of the retail year.

Janet Yellen will speak on Tuesday night and the minutes of the last Fed meeting are due on Wednesday.

The minutes of the November RBA meeting are due tomorrow, and Philip Lowe will also speak.

On Wednesday we see Australia’s September quarter construction work done numbers.

ALS Ltd ((ALQ)) will report earnings today, CYBG ((CYB)), Technology One ((TNE)) and Graincorp ((GNC)) tomorrow and Programmed Maintenance ((PRG)) on Wednesday.

It’s another huge week for AGMs. Ardent Leisure ((AAD)) and Baby Bunting ((BBN)) offer today’s highlights.

Rudi will appear on Sky Business on Tuesday, via Skype, to discuss broker views and upgrades/downgrades at around 11.15am. On Thursday he'll appear inside the studio at noon (until 2pm). He'll repeat the Skype connection on Friday, probably around 11.15am again.

Rudi will also host An Evening With Rudi in Paddington on Wednesday, but that event has sold out.

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