The Monday Report

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World Overnight
SPI Overnight (Jun)	5739.00	– 33.00	– 0.57%
S&P ASX 200	5788.70	– 0.10	– 0.00%
S&P500	2604.47	– 58.37	– 2.19%
Nasdaq Comp	6915.11	– 161.44	– 2.28%
DJIA	23932.76	– 572.46	– 2.34%
S&P500 VIX	21.49	+ 2.55	13.46%
US 10-year yield	2.78	– 0.06	– 2.01%
USD Index	90.13	– 0.31	– 0.34%
FTSE100	7183.64	– 15.86	– 0.22%
DAX30	12241.27	– 63.92	– 0.52%

By Greg Peel

Standing Back

Several years ago it would have seemed incongruous that the Dow could rally 240 points and the ASX200 do nothing in response. But these days 200 points in the Dow is a smallish move and right now the Australian market is doing its best to try to stay out of the melee of US-China trade argy-bargy.

To that end the local market closed flat on Friday. Anything could happen on Friday night and over the weekend, sending Wall Street in either direction, with the trade war ongoing and a US jobs number due.

As we now know, something did happen – Trump doubled down by announcing yet another list of Chinese exports that may attract tariffs, and Wall Street tanked once more.

With the futures down -33 points on Saturday morning, Friday’s local session is redundant, particularly considering nothing happened. The resources and industrials sectors were stronger, offsetting weakness in healthcare and utilities. CSL ((CSL)) remains the big driver in healthcare, while AGL Energy ((AGL)) dominates utilities and is involved in its own story at present with regard the Liddell power station.

For the record, embattled Myer ((MYR)) jumped 7% on the day on rumours rival David Jones, now privately owned by Woolworths South Africa (no relation), was running an eye over the business. Myer stock is heavily shorted. Woolworths South Africa has denied there is any substance to market speculation.

Becoming more shorted each week is Afterpay Touch ((APT)), which fell -6% on Friday after the AFR published a damning article on the buy now, pay later service.

Failure to Reassure

The US added 103,000 jobs in March when 200,000-odd were expected. Wall Street largely shrugged, noting the February number had well exceeded expectations and the unemployment rate remained at 4.1%, so smooth out the noise and the positive trend remains. More jobs were added in the first quarter than in either of 2016 or 2017.

Wages rose 0.3%, taking the annual growth rate to 2.7% from 2.6%. This is a step in the right direction, without being too great as to cause another inflation scare. Once again, we can trot out poor old Goldilocks, who probably wishes she could just be left alone to eat her porridge and not be front page news every other day.

But it was not the jobs number which sent the Dow down over -750 points by mid-session.

Late on Thursday night the president announced another US$100bn in Chinese goods were under consideration for tariff imposition. If this were the US Open, I’d say we’re now at 40-30. By this week perhaps the Chinese will respond once more to take us to deuce, given they have done nothing but suggest “two can play at this game,” while also suggesting they don’t want a trade war.

Interestingly, spokespeople for Beijing have also questioned the ongoing assurances from the White House that negotiations are underway in the background. There are no negotiations the Chinese are aware of.

To that end, it was up to Treasury Secretary Mnuchin and chief economic advisor Kudlow to once again come out to calm the waters, as had been the case earlier in the week. Earlier in the week, Mnuchin had alerted Wall Street to the supposed negotiations while Kudlow had alluded to the big numbers Trump was threatening to be merely a “tactic”.

So when the two appeared again on Friday to make individual comments, Wall Street was ready for another bounce. But unfortunately, both of them blew it.

Mnuchin, when pushed, said there is “potential for a trade war”. Kudlow, this time, assured the president “is not bluffing”. The White House has indicated the president is not concerned about short term weakness on Wall Street as he pursues a longer term agenda. The message is short term pain is necessary to ensure longer term gain.

Fed Chairman Jerome Powell said on Friday that until specifics are known, there is no intention to alter current monetary policy based on trade issues.

The selling accelerated into mid-afternoon, before some late buying emerged. Every sector of the S&P500 finished in the red, with defensives the relative outperformers as the US ten-year yield fell -6 basis points to 2.77%. This was bad news for financials, while industrials and materials were the worst performers, being most exposed to trade.

Commentators were quick to point out, nonetheless, that once again volumes were low, implying a lack of buyers rather than a wall of sellers. In turn, this implies the computers were at it again as the humans stood back.

What we do know is that the assumption the whole trade thing is all just a game – lots of threats and bravado from each side ahead of a more measured outcome once negotiations are completed – no longer holds water. Or does it? Wall Street simply doesn’t know. And as history emphatically reminds us, Wall Street can always cope with bad news but cannot abide uncertainty.

Commodities 

Spot Metals,Minerals & Energy Futures
Gold (oz)	1333.30	+ 7.10	0.54%
Silver (oz)	16.35	– 0.01	– 0.06%
Copper (lb)	3.05	– 0.02	– 0.69%
Aluminium (lb)	0.92	+ 0.01	1.55%
Lead (lb)	1.09	+ 0.01	0.52%
Nickel (lb)	5.99	– 0.04	– 0.65%
Zinc (lb)	1.47	– 0.00	– 0.17%
West Texas Crude (May)	61.92	– 1.81	– 2.84%
Brent Crude (Jun)	67.07	– 1.47	– 2.14%
Iron Ore (t)	63.00	0.00	0.00%

Aluminium continued its recovery on Friday night amidst a quiet session for the other base metals.

With China again on holiday, iron ore remained unchanged.

The -0.3% dip in the US dollar index helped gold a little higher.

Oil fell once again on the back of trade war escalation.

The Aussie is 0.2% higher at US$0.7700.

The SPI Overnight closed down -33 points or -0.6%.

The Week Ahead

First quarter earnings season begins in the US at the end of this week, as the first of the big banks post their results. Forecasts are for high-teen percentage earnings growth for the S&P500 in the quarter, being the first in which the tax cuts will make an impact.

Wall Street is hanging out for the season to begin to provide some light in the current darkness. But whereas there had been much anticipation around company guidance, and just what benefits/initiatives the tax cuts might bring, now there is concern guidance will be tempered by tariff uncertainty.

More inflation data are due for the US next week, with the PPI on Tuesday and CPI on Wednesday. The minutes of the last Fed meeting are due on Wednesday and the fortnightly consumer sentiment measure on Friday.

China is back from its break, set to release inflation numbers on Wednesday and trade on Friday.

In Australia we’ll see the construction PMI today, NAB’s business confidence survey tomorrow and Westpac’s consumer confidence survey on Wednesday, ahead of housing finance numbers on Thursday. The RBA governor will speak on Wednesday and the RBA’s Financial Stability Review is due on Friday.

On the local stock front, ex-divs continue this week but they are becoming fewer in number and smaller in market cap. Adairs ((ADH)) goes ex today.

Insurance Australia Group ((IAG)) will host an investor day on Wednesday and Bank of Queensland ((BOQ)) will report earnings on Thursday.

AGM season will very quietly ramp us this week, featuring meetings for Westfield ((WFD)) on Wednesday and Cimic ((CIM)) on Friday.

Rudi will appear on Sky News Business on Tuesday morning, via Skype, at around 11.15am. On Thursday, he'll travel to Surry Hills to appear from noon till 2pm inside the Sky News Business studio. On Friday he'll repeat the Skype experience, probably around 11am.

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