The Monday Report

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World Overnight
SPI Overnight (Sep)	6250.00	+ 26.00	0.42%
S&P ASX 200	6272.30	+ 56.80	0.91%
S&P500	2759.82	+ 23.21	0.85%
Nasdaq Comp	7688.39	+ 101.96	1.34%
DJIA	24456.48	+ 99.74	0.41%
S&P500 VIX	13.37	– 1.60	– 10.69%
US 10-year yield	2.83	– 0.01	– 0.32%
USD Index	93.96	– 0.44	– 0.47%
FTSE100	7617.70	+ 14.48	0.19%
DAX30	12496.17	+ 31.88	0.26%

By Greg Peel

Momentum

In the first four sessions last week, the ASX200 met each 30-ish point rise in a day with a 30-ish point loss the following day, as the market agonised over a trade war going on offshore that Australia is not directly involved in, but may end up being indirectly impacted by, depending on how things play out.

The Aussie dollar also reflected such ups and downs, conversely, and appeared to be a driver of the stock market.

When the US and Chinese tariffs came into effect late last week, the world didn’t end. This Y2K moment appeared to inspire the Australian market, even though no one really expected the world would indeed end. Bucking the trend, the futures pointed up on Friday morning, with the Aussie slightly lower.

They were right, other than in magnitude. If we look at the intraday chart for the index one can basically draw a straight 45 degree line from open up to close. Buying fed on itself throughout the session, suggesting momentum players were out in force.

And it was all about the big caps – the high beta names that represent the bulk of index points. The banks have been slammed in the past couple of months thanks to the RC, dividend fears for Telstra ((TLS)) have ensured telcos have remained a drag, and while the resource sectors started this rally initially, they have been falling back more recently on weaker commodity prices thanks to the trade war.

On Friday, the banks rose 1.2%, telcos 1.4%, energy 1.3% and materials 1.1%. That is most of the 56 point gain for the index right there. All sectors nevertheless closed in the green, with the other sectors each contributing around about 0.5%.

The only sector that did little, rising less than 1%, was IT, which had been the strongest performer for most of the week.

Friday thus smacked of index buying, but with a weighting to the big names that dominate the index. Value was sought in the previously weaker large caps while growth was overlooked.

It was a bold move overall for a Friday, with no hint of traders taking profits ahead of the weekend, which is often the case, particularly ahead of a US jobs number.

With the ASX200 now well into essentially blue sky from a technical perspective – not true blue sky but the nearest point of reference for a technical analyst is over ten years ago – there is no real resistance ahead other than psychological round numbers, and whatever the Fibonacci disciples and Elliot Wave surfers come up with.

The actual all-time high of October 2007 is 6828 – still 9% away.

With Wall Street also failing to panic on Friday night when tariffs came into effect, the local futures are up another 26 points this morning. But we do have the Aussie up 0.6% and base metals back to being mostly weaker once more.

No Place Like Home

After rallying on Thursday night, Wall Street looked set to dip on the open on Friday night on ever present trade war concerns but all was quickly forgiven when focus swung to the domestic jobs report.

The US added 213,000 new jobs in June, beating expectations of 200,000. The unemployment rate rose back to 4.0% from 3.8% in May, but due to a higher participation rate, which itself is put down to this year’s round of school leavers entering the jobs market.

Wages grew by 0.2%, which is a bit soft, but better soft than too hot as this would spark fears of the Fed becoming more aggressive, as was the case back in February. It is perhaps this number that had the US ten-year yield down a point to 2.83%, and the US dollar index down -0.5%.

Yes, the kid with the porridge had her name bandied about yet again.

Turning to domestic data did not mean the trade war was completely forgotten for a day. The clue is in the spread of index moves – the Dow was only up 0.4% when the Nasdaq was up 1.3%, with the S&P splitting the difference in rising 0.9%. The Russell small cap rose 0.9%.

The big industrials in the Dow seen as most exposed to the trade war sat out the rally. Any stock seen as not exposed, whether small cap or large, was targeted.

On a micro basis, positive test results for an Alzheimer’s drug had biotech stock Biogen up 20%, sparking widespread buying in the wider biotech sector. On a macro basis, the FANGs kept on keeping on, despite there being a mix of exposure and non-exposure within.

Amazon, Netflix and Google are not exposed. Apple and Facebook are, yet both rose and Facebook, despite all its other problems, hit a new all-time high. The US chipmakers are clearly exposed, but they, too, enjoyed a rally on an underlying growth story that’s hard to ignore.

On Friday night Donald Trump once again threatened to step-up tariffs on Chinese imports, to a level of US$500bn, which would just about take in everything that comes off a slow boat from China. You bring out a gun I’ll bring out a bazooka.

To date there has been no sign of Beijing being ready to come to the table, as is ultimately expected. Rather, it is hard not to assume that accelerated weakness in the renminbi, more so than might be expected against a stronger US dollar, has Beijing behind it.

The war currently has no sign of ending.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1254.50	– 2.80	– 0.22%
Silver (oz)	16.01	– 0.02	– 0.12%
Copper (lb)	2.85	– 0.03	– 0.91%
Aluminium (lb)	0.94	– 0.03	– 2.68%
Lead (lb)	1.06	– 0.01	– 1.26%
Nickel (lb)	6.28	– 0.13	– 2.06%
Zinc (lb)	1.26	+ 0.01	0.91%
West Texas Crude (Aug)	73.91	+ 0.92	1.26%
Brent Crude (Sep)	77.10	– 0.50	– 0.64%
Iron Ore (t)	62.65	+ 0.15	0.24%

Base metal prices paused on Thursday night but were back in trade-related selling mode on Friday night, except for zinc, despite a weaker greenback.

Gold appears to be stuck in the mud.

Domestic US inventory levels are behind yet another closing of the WTI-Brent crude price gap on Friday night, now down to almost US$3/bbl.

The Aussie is up 0.6% at US$0.7431.

The SPI Overnight closed up 26 points or 0.4%.

The Week Ahead

It’s a relatively empty economic calendar across the globe this week.

Inflation will be in focus, with China releasing its CPI and PPI tomorrow and the US releasing its PPI on Wednesday and CPI on Thursday.

Chinese June trade numbers are out on Friday.

Australia sees the NAB business confidence survey tomorrow and Westpac consumer confidence survey on Wednesday, along with housing finance.

On the local stock front, we’re in calm before the storm mode in the countdown to earnings season.

Rudi will appear on Sky Business on Tuesday via Skype around 11am; 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…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALX	ATLAS ARTERIA	Upgrade to Add from Hold	Morgans
AOG	AVEO	Downgrade to Neutral from Outperform	Macquarie
ASX	ASX	Downgrade to Sell from Neutral	Citi
DMP	DOMINO'S PIZZA	Downgrade to Sell from Neutral	Citi
		Downgrade to Underperform from Neutral	Credit Suisse
ILU	ILUKA RESOURCES	Upgrade to Buy from Neutral	Citi
ING	INGHAMS GROUP	Downgrade to Neutral from Outperform	Credit Suisse
MFG	MAGELLAN FINANCIAL GROUP	Downgrade to Underweight from Equal-weight	Morgan Stanley
NAN	NANOSONICS	Downgrade to Hold from Add	Morgans
WOW	WOOLWORTHS	Downgrade to Neutral from Buy	Citi

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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