The Monday Report

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World Overnight
SPI Overnight (Sep)	6180.00	+ 6.00	0.10%
S&P ASX 200	6165.30	+ 36.60	0.60%
S&P500	2904.98	+ 0.80	0.03%
Nasdaq Comp	8010.04	– 3.67	– 0.05%
DJIA	26154.67	+ 8.68	0.03%
S&P500 VIX	12.07	– 0.30	– 2.43%
US 10-year yield	2.99	+ 0.03	1.05%
USD Index	94.93	+ 0.39	0.41%
FTSE100	7304.04	+ 22.47	0.31%
DAX30	12124.33	+ 68.78	0.57%

By Greg Peel

Risk On

Friday’s trade suggests numbers approaching the 6100 level for the ASX200 are considered sufficient as re-entry levels for bargain hunters. After the big falls earlier in the month we saw the index trade down to 6107 before a risk-on counter-rally ensued. On Thursday last week we fell to 6128 and Friday saw another counter-rally.

Friday’s was the first session of last week in which we couldn’t point to any big name stocks going ex-dividend and thus handicapping the market from the outset.

The consumer sectors failed to fire on Friday and utilities stood still, leaving the likes of the banks, materials, energy, healthcare and IT to lead a “risk on” bounce.

There was no new news from bank land. Metal prices had ticked up on Thursday night but oil fell -2%. The Aussie jumped 0.3% but healthcare proved the best performing sector. IT followed the Nasdaq. Daily fundamentals gave way to a more general valuation call.

The index rallied from the open and then appeared to gain an extra leg following the release of monthly Chinese data.

Chinese retail sales rose 9.0% year on year in August when 8.8% was expected. Industrial production rose 6.1% when 6.0% was expected. It’s not shoot-the-lights-out stuff, but recent months have seen forecast misses.

The one downer was fixed asset investment, which at 5.2% year to date growth marked a record low. Beijing has been delicately tightening the screws on excess debt, and the impact is evident.

The problem with assessing Chinese economic data at present is that the numbers are cum-tariff, to the extent Trump is ready to place tariffs on at least another US$200bn of Chinese exports with a further US$267bn lined up after that. Given that the threat of tariffs would prompt relevant industries into doing what they can before the tariffs are imposed, the numbers are no doubt distorted.

The same can be said with regard US June quarter GDP growth of 4.2%. How much of that growth reflects getting in before the tariffs hit?

It is what ultimately transpires with trade that will determine the direction of the Australian market for the rest of the year. Not to discount domestic issues, but if China sneezes…

Yes or No?

Wall Street entered last week expecting the White House to kick off the next tranche of tariffs on China, but nothing happened. Discussions with Canada had a deadline of the Friday before last. Still no news.

Mid last week Wall Street was boosted by news the White House had invited the Chinese back to Washington in coming weeks to reignite trade talks. The scuttlebutt was that Beijing was beginning to waver. The US stock market enjoyed the news. Did this mean that US$200bn is now on hold, pending further talks?

On Friday night the Dow was up around 50 points mid-session – grinding higher once again along the “line of least resistance” for the only surging economy on the planet – when news broke the president had instructed staff to get that tranche ready to go. The Dow fell a hundred points in a heartbeat.

And then it grinded back up again through the afternoon to close flat.

The session had begun with the release of retail sales numbers for August, which at 0.1% growth disappointed compared to 0.3% expectation. But the July number was revised up to provide some offset, and a 0.4% gain for industrial production – marking a third month of gains – was another positive.

Again all numbers have to be considered as cum-tariffs, with businesses both retail and industrial simply stuck in a state of limbo, unable to make definitive decisions. The two further tranches lined up have a much greater focus on consumer goods.

The White House issued a very vague statement last on Friday after Reuters had broken the tariff news, so still no one knows.

It is interesting to note that while Wall Street may have become somewhat inured to the ups and downs of tariff talk, and this year inured to the legal goings on behind the scenes that could end with Trump’s impeachment, the latest shrug from traders is that of hurricane impact.

As the frequency of hurricane events in the US has appeared to pick up in recent years, the typical impact on the US economy and thus on Wall Street has become well known. The economy will take an initial hit from the impact of a hurricane, taking some toll on GDP, but the following quarter will see that given back as the rebuilding phase boosts activity.

While Hurricane Florence has been all over the business channels as well as mainstream channels, there has been no stock market reaction whatsoever. Indeed, the S&P posted five positive sessions over the week, albeit some rather incremental, including Friday. The January highs are again in the sights of the major indices.

And this is without any help from the banks. On Friday night the US ten-year yield once again hit 3.0%, which has typically been a trigger for the banks to perform well. But the two to ten year yield spread fell to a mere 21 basis points.

Given the Fed remains intent to push up interest rates further, including later this month, this implies a risk the US yield curve might invert in the coming months. An inverted yield curve suggests bank net interest margins are squeezed, as the short term borrowing cost exceeds the yield on longer dated debt, such as mortgages.

An inverted yield curve portends a recession in 12-18 months. Only this time, it’s different. And that’s a whole other debate.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1193.10	– 7.80	– 0.65%
Silver (oz)	14.03	– 0.11	– 0.78%
Copper (lb)	2.68	– 0.02	– 0.82%
Aluminium (lb)	0.91	– 0.01	– 1.08%
Lead (lb)	0.91	– 0.00	– 0.21%
Nickel (lb)	5.68	– 0.04	– 0.69%
Zinc (lb)	1.05	– 0.01	– 1.35%
Iron Ore (t) futures	68.43	+ 0.12	0.18%

The US dollar index jumped on the renewed trade threat on Friday night, by 0.4%. Base metal prices all fell and gold yet again failed to hold above 1200.

The oils did nothing much, but greater forces are at work here than just the currency.

Trade war fear drives up the US dollar and drives down the Aussie. The Aussie is down -0.5% at US$0.7154.

The SPI Overnight closed up 6 points on Saturday morning.

The Week Ahead

Wall Street will spend the week waiting for any sort of news on the trade front. Commentators cannot agree whether the imposition of tariffs on this next US$200bn tranche will spark a sell-off or not.

US data releases this week include the Empire State activity index tonight, housing market sentiment tomorrow, housing starts on Wednesday, existing home sales and the Philadelphia Fed index on Thursday, and a flash estimate of the September manufacturing PMI on Friday.

Japan and the eurozone will also flash. Japan is closed today. The Bank of Japan holds a policy meeting on Wednesday.

New Zealand’s June quarter GDP result is due on Thursday.

Not much on the Australian economic calendar this week. June quarter house prices are out tomorrow along with the minutes of the August RBA meeting, which will probably be another photocopy.

On the local stock front, the ex-dividend season rolls on but the volume of ex-div stocks is now beginning to diminish. There are still a few biggies on the list nonetheless, including Cochlear ((COH)) today.

TPG Telecom ((TPM)) will report earnings tomorrow, but all anyone will want to hear about is the merger. Synlait Milk ((SM1)) reports on Wednesday.

Suncorp ((SUN)) holds its AGM on Thursday, and Navitas ((NVT)) hosts an investor day on Friday.

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

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BSL	BLUESCOPE STEEL	Downgrade to Sell from Buy	Citi
MYR	MYER	Upgrade to Hold from Lighten	Ord Minnett
		Upgrade to Neutral from Sell	UBS

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