The Monday Report (On Tuesday)

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By Greg Peel

Friday

It was a pretty dull old day on the local market on Friday as might be expected, being ahead of a long weekend and ahead of a number of meetings next week with geopolitical or monetary policy implications. We did nevertheless see a typical early computer sell-off followed by a swift human recovery, before the ASX200 traded sideways through the rest of the session.

Otherwise dominating Friday’s actions were the announced quarterly changes to S&P/ASX stock indices. Here are the changes:

ASX20: AMP ((AMP)) out; Amcor ((AMC)) in.

ASX50 : Incitec Pivot ((IPL)) out; Cochlear ((COH)) in.

ASX100: Graincorp ((GNC)) out; Whitehaven Coal ((WHC)) in.

ASX200: Asaleo Care ((AHY)), Iron Mountain ((INM)), Retail Food Group ((RFG)) out; Appen ((APX)), Afterpay Touch ((APT)), Inghams Group ((ING)) in.

The changes meant buying in the “ins” and selling in the “outs” as index-tracking fund managers began to make obligatory adjustments. They have one week before the changes become effective, so it may not just be a one day wonder.

The consumer sectors and energy posted modest gains on the session, while all other sectors fell. The mixed bag that is industrials posted the worst performance (-1.0%) and notably, telcos (-0.5%) were back in selling mode.

Chinese data released on Friday showed exports up 12.6% year on year in May, slightly lower than April, while imports surged 26% year on year due to higher prices for oil and other commodities. While this has led to a shrinking of China’s enormous global trade surplus, its direct surplus with the US actually rose.

The president will not be pleased. While US-China trade talks remain ongoing in a state of “truce”, without as yet any resolution, Beijing has promised to import more US goods. The total trade surplus in May was US$24.9bn. The surplus with the US was US$24.6bn.

Friday Night

The Europeans seemed more nervous about the weekend’s G7 meeting in Canada and subsequent trade talks than the Americans on Friday night. European stock markets were sold off and US markets opened lower, until European markets closed for the weekend. The US indices then turned around.

The path of least resistance for Wall Street is currently up, hence ahead of the weekend’s and next week’s meeting US stock indices drifted higher in quiet trade.

The Dow closed up 75 points or 0.3% to mark 2.8% for the week – its best since March. The S&P500 gained 0.3% to 2779 and the Nasdaq rose 0.1%.

G7 meetings, or any Gx meetings, are not typically market moving events. If anything manifest is to come out of subsequent joint communiques, we’d know about it beforehand.

Moreover, Wall Street has learned not to jump at every new trade announcement, or threat, given Trump is playing a tactical game and all can be reversed just as quickly. Only when such threats become reality, if that is to be, will Wall Street respond accordingly.

This was the way Wall Street viewed the upcoming meeting on Friday night, and as it was, nothing transpired. Trade remains in stand-off as Trump left early on the excuse of having someone else to meet across the other side of the globe. He departed without any intention of signing the joint communique. No one expected he would.

Commodity markets were also relatively quiet on Friday night. Moves in base metal prices were largely unremarkable, except for lead (-2.6%), which has become the volatile metal du jour.

Oil prices came off a bit, but again not markedly. WTI is marking time in a tight range at present as traders await the outcome of the OPEC meeting later in the month.

The US dollar index rose 0.1% and the Aussie fell -0.3% to just under US76c.

If markets were seen to largely ignore the G7 meeting, and the suggestion is the Kim-Trump meeting may also be a fizzer in financial terms, it is the week’s central bank meetings that have Wall Street’s attention.

Monday Night

It was a similar theme last night on Wall Street, if not quieter still. The major indices rallied somewhat initially before drifting off to the close. Of note, the S&P mid-cap index is the latest to hit a new all-time high, joining the Russell small cap and Nasdaq.

There was some consternation over the vindictive exchange of words between the Canadian prime minister and Donald Trump in the wake of the G7, given all seemed so amicable during the photo-ops. There is still dismay on both sides of the border as to why Trump is intent on alienating America’s geographically and diplomatically closest ally.

But the games go on.

Otherwise, all focus is on Singapore, and just how much footage can be shown of aeroplanes, landing, blacked out limousines riding through streets and leaders walking through rooms. It’s all exciting stuff, but meaningless until after the meeting itself, which begins 11am Sydney time, is actually over and Trump’s press conference is held, which won’t be until this evening Sydney time.

The suggestion is that only if something surprisingly positive comes out of this initial meeting will global financial markets take notice. Otherwise it is assumed this will be the first of many before any real resolution can be reached, if ever.

Once it’s over, we can get on with worrying about central banks.

Commodities

Commodity markets were even quieter last night than on Friday night. Oil came back to net out what was lost on Friday.

Iron ore is up a net US55c over two sessions.

The US dollar is steady and the Aussie is up 0.1% to just above US76c.

The SPI Overnight is up a hefty 27 points, having closed up 10 points on Saturday morning. Futures traders seem more enthused by the potential outcome of the summit than offshore markets.

The Week Ahead

Once the meeting is over today, Wall Street will focus on the latest CPI data tonight and PPI on Wednesday night ahead of the Fed statement and press conference. Rate hike expected.

On Thursday it’s retail sales and on Friday industrial production, consumer sentiment and the Empire State index. It’s also the quarterly “quadruple witching” expiry of equity derivatives.

All eyes will be on the ECB on Thursday night as it meets to determine a timetable for the winding back of QE, or so it has been flagged.

If the Fed hikes and the ECB makes this expected announcement, the pressure will be on the Bank of Japan on Friday as the last major central bank yet to make any move towards normalisation.

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

In Australia we’ll see housing finance data today and the NAB business confidence survey. Tomorrow it’s Westpac’s consumer confidence survey and on Thursday the May jobs numbers.

REA Group ((REA)) holds its AGM today while Challenger ((CGF)) and Link Administration ((LNK)) host investor days tomorrow and Goodman Group ((GMG)) on Thursday.

On Friday the changes to the S&P/ASX indices, noted above, become effective.

Rudi will appear on Sky Business on Tuesday via Skype around 11.15am; again on Thursday from midday 'til 2pm; and again on Friday via Skype, probably around 11am.

The Australian share market over the past thirty days…

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