The Monday Report

This story features JAMES HARDIE INDUSTRIES PLC, and other companies. For more info SHARE ANALYSIS: JHX

By Greg Peel

Don’t Worry, Be Happy

Last week the Australian market closed up a net 1.2%, which seems like a good result. A lot of that represented relief on Wall Street, with a big post-midterm rally adding to what appears, for now, to be the end of the correction.

But underneath the surface signs of a still very nervous market are evident. Last week in particular was notable as the AGM and quarterly update season rolls on. Provide a positive update, and you might get a bit of a share price boost. Provide a negative update, and you’re toast.

James Hardie ((JHX)) and Domino’s Pizza ((DMP)) were two companies on the wrong side of investor sentiment last week, posting big one-day falls. On Friday it was the turn of Lend Lease ((LLC)), which announced it would need to take a provision to account for underperformance in its engineering division. The share price dropped -18.3% to mark the company’s biggest one-day fall since 2009.

This announcement rather spooked a market that was not doing much up to late morning. The ASX200 was roughly square around 11.30am and two hours later was down -32 points, only to be saved by a sharp rally in the last half hour.

Adding to nervousness were data from China. China’s producer price index showed 3.3% year on year growth in October, down from 3.6% in September and missing 3.4% forecasts. It doesn’t seem like much of a miss, but in the context it is another indication China’s economy is slowing in the face of the trade war.

Chinese auto sales dropped -13.2% year on year in October to mark a fifth consecutive month of declines. In the year to October, sales fell by -2.5%. The last time China saw a year in which auto sales fell was 28 years ago.

Sources suggest a soon to be published report will show that 22% of China’s urban housing stock remains unoccupied.

On the sector front, energy was the worst performer on Friday, falling -1.3% as the oil price continues to slide. IT (-0.8%) followed down the Nasdaq while materials (-0.3%) succumbed to commodity price weakness and some profit-taking among the lithium miners.

Utilities (+1.5%) posted a little bit of a comeback on news APA Group’s ((APA)) suitors may have a takeover plan that would appease the Treasurer. Consumer discretionary (-0.7%) is currently being led around by the ups and downs of Corporate Travel Management ((CTD)), whose -8.4% fall on the day swamped an 11.3% gain from comeback kid G8 Education ((GEM)).

But while investors suffer sleepless nights, the call from the central bank is that everything’s coming up roses. The Australian economy is performing well, the RBA’s Statement on Monetary Policy, released on Friday suggested, reaching 3% growth earlier than expected. The RBA increased its forecasts for 2018 and 2019 growth to 3.5%, ahead of, it believes, a stabilisation in commodity prices at higher levels. Here we must specifically be talking iron ore and coal.

All of which points to a rate hike, if only it were not for a lack of wage growth and a collapsing housing market.

The Oil Indicator

The thing about oil is that strong oil prices are good for energy companies, but not good for anyone else. The WTI price fell another -1.2% on Friday night, to be down -20.6% from its peak only a bit over a month ago. A tenth successive down-day was marked on Friday and that has never happened before in the history of the Nymex.

So everyone, bar energy companies, should be happy, right? Wrong. Oil is also seen as a barometer of global economic strength, being the largest globally traded commodity by a margin.

The problem is the US is adding more oil than global demand growth can absorb. The WTI peak in October largely reflected the expected loss of Iranian barrels, which will now not be lost. Not immediately anyway. Once the US sorts out its pipeline bottlenecks, even more oil will be available for export.

The good news is OPEC/non-OPEC met on the weekend and the Saudis have pledged to reduce shipments in December. The Saudis had previously upped production to balance out the expectation of lost Iranian barrels. The Saudi move is now intended to balance out excess US production, which is not necessarily what Wall Street expected on Friday night. But the Saudis cannot balance their budget on US$40/bbl oil, and nor can Russia.

On Friday night Wall Street was also looking at China’s weaker than expected PPI result, and comparing it to the US result. The US PPI rose 0.6% in October to be up 2.9% for the year, or 2.6% on the core rate. An increase of 0.2% was forecast. This is the biggest monthly PPI move in six years, and rising wage costs have been touted as the main concern.

As margins are squeezed, companies will need to look at increasing prices, which will flow through to what has up to now been manageable CPI inflation. The Fed is already in tightening mode and hinted last week that a December hike is all but certain, making Wall Street anxious. This PPI number only adds to the anxiety.

Add it all up and Wall Street turned south again on Friday, with tech once more leading the way down.

Ironically, the US ten-year yield fell -4 basis points to 3.19% when the PPI suggests going the other way, but such a move reflects another flight to safety amidst growing recession fears.

The US dollar index nevertheless jumped 0.3%.

Commodities

And that wasn’t good for commodity prices. The supposed hedge against inflation – gold – fell -US$13/oz.

Aluminium, copper and nickel had weak sessions, which they typically do anytime China data look soft. Iron ore, however, just keeps hanging in there.

The Aussie is down -0.6% at US$0.7212.

Another dip on Wall Street, and lower oil, gold and base metal prices were never going to encourage a nervous Australian market. The SPI Overnight closed down -37 points on Saturday morning, or -0.6%.

The Week Ahead

The US CPI for October is out on Wednesday night, followed by retail sales and the Philadelphia Fed index on Thursday and industrial production on Friday.

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

In Australia we’ll see the monthly NAB business confidence survey tomorrow, followed by the Westpac consumer equivalent on Wednesday and jobs numbers on Thursday.

It’s another big week in the local AGM calendar, with too many on the list to highlight here.

The week will also see a raft of earnings results, including those of Elders ((ELD)), Incitec Pivot ((IPL)), AusNet Services ((AST)), DuluxGroup ((DLX)) and Graincorp ((GNC)).

MYOB ((MYO)) will hold an investor day on Thursday.

Note that today both ANZ Bank ((ANZ)) and Macquarie Group ((MQG)) go ex-dividend, along with Orica ((ORI)).

Rudi will appear on Your Money today, 1-2pm.

The Australian share market over the past thirty days…

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