The Monday Report

This story features OZ MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: OZL

World Overnight
SPI Overnight (Mar)	6020.00	+ 57.00	0.96%
S&P ASX 200	5963.20	+ 20.30	0.34%
S&P500	2786.57	+ 47.60	1.74%
Nasdaq Comp	7560.81	+ 132.86	1.79%
DJIA	25335.74	+ 440.53	1.77%
S&P500 VIX	14.64	– 1.90	– 11.49%
US 10-year yield	2.89	+ 0.03	0.98%
USD Index	90.12	– 0.06	– 0.07%
FTSE100	7224.51	+ 21.27	0.30%
DAX30	12346.68	– 8.89	– 0.07%

By Greg Peel

More of the Same

The ASX200 kicked on with its tariff-relief rally on Friday, with sectors again putting in relatively uniform gains outside of energy and materials. The bounce in the US dollar which followed news of Trump’s trade tariff plans leaving room for exemptions had weighed on commodity prices overnight.

Energy lost -1.2% on a combination of the greenback and fears over increasing US shale production. Materials fell -1.3% as iron ore and base metal prices slid and OZ Minerals ((OZL)) went ex-dividend.

But for these moves the session would have looked very similar to the two stronger sessions which had preceded it, bringing the index back from the brink following the initial Trump tariff and trade war scare.

The index was up as much as 36 points at lunchtime before what appeared to be a large portfolio of resource stock hit the market, dampening the enthusiasm. It was also a Friday, and the US job numbers were due overnight, suggesting the potential for further volatility this week. So a good time to take some profits.

There was an interesting selection of stocks on the ASX200 top five leaders’ board on Friday. In the first four positions we saw Genworth Mortgage Insurance ((GMA)), up 7.7%, Vocus Group ((VOC)), up 5.0%, Webjet ((WEB)), up 4.4%, and the Australian Agricultural Company ((AAC)), up 4.3%. What possible connection might there be between these four disparate names: an insurer, a telco, a travel agent and a beef exporter?

Well as of last week, Genworth was over 7% shorted, Vocus 12%, Webjet over 6% and AAC over 9%.

Could be a clue there.

Just what the doctor ordered

The US added 313,000 jobs in February, well ahead of expectations of 222,000. The unemployment rate was unchanged at 4.1%. Great news, but was there a sting in the tail?

Wages grew by only 0.1%. Economists had expected 0.2%, following on from the 0.3% jump in January which triggered Wall Street’s correction. Annual wage growth fell to 2.6% from 2.9%.

Now we can all get some sleep.

The Dow closed up 440 points, after having jumped up on the open and steadily risen all session to close on its high. All three major indices rose a uniform 1.7%.

The bottom line is that the January jobs numbers, which featured a sudden spike in wages growth, led Wall Street to assume there could indeed be four Fed rate hikes in 2018 rather than three, and four is considered one too many, at last at this stage of the year. The February numbers alleviated that fear, and now we’re back once more to assuming only three hikes, the first of which is expected this month with greater than a 90% probability.

The February result rather suggests we never needed to have that correction after all, despite many having long awaited a “healthy” pullback. I would have like to have the seen the look on the face of one of the investors in the now infamous short volatility derivatives that lost the lot, when the February wage growth number printed at 0.1%.

The correction shook out a few tenuous longs, and on this year’s retail trading data, quite a few Johnny-come-lately punters watching stock prices soar without them who typically ring the bell for such a plunge.

In other news, a South Korean envoy approached Donald Trump on Friday to inform that last week’s talks between the two Koreas had indicated Kim Jong-un was “frank and sincere” in his desire to talk with the Americans about giving up his nuclear program. The North Korean leader had told the South Koreans that if the president would join him in summit, the two could produce an historic breakthrough.

Trump shocked everyone in the room, including his team of advisors, by accepting on the spot. Typically there would be lengthy discussion in the White House inner sanctum before such an unprecedented invitation be accepted, after all risks had been weighed up. But not in Trump’s White House.

It is unclear what the positive impact on Wall Street was on Friday given the overriding relief provided by the jobs numbers. But presumably for now, the much-cited “black swan” possibility of a nuclear strike is no longer an outlying consideration informing market sentiment.

More importantly for the local market, over the weekend Australia confirmed it will be exempt from US tariffs on steel and aluminium.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1323.20	+ 1.80	0.14%
Silver (oz)	16.57	+ 0.11	0.67%
Copper (lb)	3.14	+ 0.06	1.82%
Aluminium (lb)	0.95	+ 0.00	0.49%
Lead (lb)	1.08	+ 0.02	1.88%
Nickel (lb)	6.27	+ 0.27	4.54%
Zinc (lb)	1.48	+ 0.02	1.37%
West Texas Crude (Apr)	62.11	+ 1.79	2.97%
Brent Crude (May)	65.55	+ 1.65	2.58%
Iron Ore (t)	70.25	-1.75	-2.43%

It had been a tough week on the LME, as traders weighed up what impact there may be on base metal prices from Trump’s tariffs and a possible global trade war. When it then appeared there may be exemptions granted, the US dollar surged, only adding to price pressure.

The US dollar was relatively steady on Friday night but base metal and oil prices rebounded sharply. In this case, the news of a pending summit between the US and North Korean leaders did provide an impetus as geopolitical risk subsided.

In nickel’s case, LME inventory movements were the underlying river of the 4.5% jump, dragging the other metals along with it. Gold remained steady as a reflection of the little-moved dollar index. Iron ore played its own game.

Despite the steady dollar, the commodity price rebound was enough to push the Aussie up 0.8% to US$0.7849. Must have been a few shorts in that market as well.

The Week Ahead

It appears Trump’s tariff plan will now be watered down and specifically targeted to the prime offenders, not simply everyone. Wage inflation fears in the US have subsided for now. North Korea appears ready to behave itself.

The backdrop has improved for more “risk on” this week.

US data releases this week begin with the CPI on Tuesday. Friday’s jobs numbers have reduced the angst this result might engender. The PPI follows on Wednesday along with retail sales, while Thursday sees housing starts and the Empire State and Philadelphia Fed indices. Friday it’s industrial production, consumer sentiment and housing starts.

Friday is the quarterly “quadruple witching” equity derivatives expiry on Wall Street.

China will release industrial production, retail sales and fixed asset investment numbers on Wednesday.

New Zealand will release its December quarter GDP result on Thursday.

Australia will see housing finance numbers tomorrow along with the NAB business confidence survey, followed by the Westpac consumer confidence survey on Wednesday.

It will be a disruptive week on the ASX.

Firstly, it’s another big week for ex-dividends. Secondly, the local “witching” occurs on Thursday when the March futures and index options expire, leading to potential volatility. Then on Friday, the quarterly changes to the S&P/ASX indices become effective.

Note that today’s ex-dividends include APN Outdoor ((APO)), Caltex Australia ((CTX)) and Lovisa ((LOV)).

Rudi will connect with Sky News Business on Tuesday morning, 11.15am, via Skype to discuss broker calls and the share market. On Thursday, noon-2pm, he will appear in the studio and on Friday, probably around 11am, he will repeat the Skype experience.

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