The Monday Report

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By Greg Peel

Underperformance

Hello, happy New Year.

Forgive me if I am not yet clued in completely to what’s been going on in markets over the past month – the point of an annual break is not to be. However I can make some observations.

The ASX200 closed on the Friday before Christmas at 6069, and last Friday at 6005. The index did stumble its way up to 6135 earlier in January on holiday-light volumes led by stronger commodities prices but has since stumbled its way back down again, with a stronger Aussie no doubt a factor.

The S&P500 is 4.7% higher over the same period and the Dow has rallied over 1300 points, taking out both the 25,000 and 26,000 milestones in quick succession. Most regions across the globe have enjoyed stronger markets.

The WTI oil price is 9% higher over the period. Gold is up 4%, iron ore is up 6% and all base metals are stronger bar copper, ranging from 2.5% for aluminium and 6% for nickel. Copper is net -1% lower.

So why are we so pathetic?

Well, there’s that Aussie, which is up 3.6% on the back of the US dollar index falling -3% in the period. Commentators are struggling to justify how the greenback can keep on falling when the US economy appears to be firing, corporate earnings are again looking strong and the Fed is leading the world in post-GFC policy normalisation. All they can come up with is a general loss of faith in Trump’s America.

The stronger Aussie offsets local gains from stronger commodity prices and despite China coming in with a 6.9% 2017 GDP growth rate, a little better than feared, the expectation is that the run in commodity prices may not hold for much longer.

Otherwise, there’s the summer holiday factor. Economic data releases and corporate news is pretty scarce over the couple of weeks after Christmas and only begins to start trickling in again later in January, as do market participants back to their offices after their breaks. It’s not a given that the Australian market does little over this time – thin volumes can lead to heightened volatility and a year ago we were surging on the Trump rally, but if disinterest is going to be a factor at all, this is the time of the year.

Friday’s session looked pretty dull on the local market – an -8 point drop for the index, but it did come about via some steeper moves in sectors in opposite directions. Energy lost -0.7% and materials -0.6% on lower commodity prices and telcos dropped -1.2% (there’s some 2017 déjà vu). Utilities were down -0.6% and may be in for a tough year.

Healthcare rose 0.6%, while consumer staples led the charge with a 0.9% gain.

The index is back at 6000, which will no doubt prove a robust support level. We spent all of November trying to break through that level and all of December trying to meaningfully move higher, but to no ultimate avail. The futures closed up 30 points on Saturday morning which is interesting given the US government shutdown at midnight on Friday night. As Wall Street closed higher on Friday’s session, it was on expectation Trump and the Democrats were close to averting such an outcome.

Shutdown

Wall Street largely went into a holding pattern in Friday night’s session with all eyes on Washington and budget negotiations. Promising signs that there would not be a shutdown led the indices higher by the close. The Dow closed up 53 points or 0.2%, the S&P rose 0.4% to 2810 and the Nasdaq gained 0.6%.

The S&P, Nasdaq and the Russel small cap index all posted new record highs. The S&P500 has now posted 395 sessions without a correction of -5%, which has never happened before.

Could the shutdown finally provide a trigger?

Unlikely. While Wall Street may have entered 2017 on a euphoric note and then become very concerned about every little issue in Washington, as the year progressed the market became more and more inured to the indiscretions of the Trump regime and all that went with it. The shutdown comes on the anniversary of the Trump presidency and pretty much the anniversary of calls for his impeachment. Meanwhile, Wall Street has gone from strength to strength.

And while much has been made of Trump’s understated success in reducing regulation, US corporate earnings have been the primary driver of Wall Street strength. The farce that is the Trump administration has not managed to upset that apple cart. And 2018 brings the tax cuts, which, in one fell swoop, provide a boost to earnings forecasts and a subsequent drop in forward PEs, meaning US stocks are not as comparatively expensive as they appeared late in 2017.

So the shutdown? Wall Street will likely take that in its stride, particularly as it is occurring right at the height of the December quarter results season. The last shutdown was in 2013, under Obama, and while there was a sharp negative reaction on Wall Street back then, it lasted about five minutes. At the end of the day a shutdown crimps US economic growth for the period, but that is picked up again as soon as the shutdown is over. And they always end, otherwise US public servants start dying in the street.

The focus will be on earnings.

Commodities

Iron ore rose US$2.00 to US$78.20/t.

Aluminium, copper and lead all fell -0.5-1% in London while zinc rose 1% and nickel 2%.

Gold is up US$4.70 at US$1330.60/oz.

West Texas crude is off -US44c at US$63.51/bbl.

The Aussie is steady at US$0.7993 with the US dollar index steady at 90.57.

The SPI Overnight closed up 30 points or 0.5%.

The Week Ahead

US economic data series are provided either by private organisations or by government departments. In the latter case, a government shutdown means no data releases as scheduled.

The Fed counts as non-government, I believe, so we should get tonight’s Chicago Fed national activity index and tomorrow night’s Richmond Fed index. A flash estimate of January manufacturing PMI is safe on Wednesday but I’m not sure on FHFA house prices or existing home sales.

Ditto new home sales on Thursday but I’m assuming no trade balance on Thursday and no durable goods numbers on Friday, assuming the government remains closed, and no first estimate of December quarter GDP.

Of more importance, thus, will be policy meetings from both the Bank of Japan tomorrow and ECB on Thursday. With the greenback sinking like a stone, neither central bank will be keen to talk up normalisation.

New Zealand is closed today.

There are no local economic releases of import this week as we head towards Friday’s Australia Day public holiday.

Macquarie Atlas Roads ((MQA)) provides a quarterly report today and ResMed ((RMD)) releases its quarterly result tomorrow night. Australian Pharmaceutical Industries ((API)) holds its AGM on Wednesday.

World
DJIA	26071.72	+ 53.91	0.21%
S&P500	2810.30	+ 12.27	0.44%
Nasdaq Comp	7336.38	+ 40.33	0.55%
S&P500 VIX	11.27	– 0.95	– 7.77%
US 10-year yield	2.64	+ 0.03	1.07%
USD Index	90.57	+ 0.02	0.02%
FTSE100	7730.79	+ 29.83	0.39%
DAX30	13434.45	+ 153.02	1.15%

Spot Metals,Minerals & Energy Future
Gold (oz)	1330.60	+ 4.70	0.35%
Silver (oz)	16.99	+ 0.07	0.41%
Copper (lb)	3.18	– 0.02	– 0.53%
Aluminium (lb)	1.01	– 0.01	– 0.61%
Lead (lb)	1.17	– 0.01	– 0.91%
Nickel (lb)	5.75	+ 0.12	2.08%
Zinc (lb)	1.57	+ 0.02	1.12%
West Texas Crude (Jan)	63.51	– 0.44	– 0.69%

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