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The Monday Report

Daily Market Reports | Dec 03 2018

World Overnight
SPI Overnight (Dec) 5699.00 + 25.00 0.44%
S&P ASX 200 5667.20 – 91.20 – 1.58%
S&P500 2760.17 + 22.41 0.82%
Nasdaq Comp 7330.54 + 57.45 0.79%
DJIA 25538.46 + 199.62 0.79%
S&P500 VIX 18.07 – 0.72 – 3.83%
US 10-year yield 3.01 – 0.02 – 0.72%
USD Index 97.27 + 0.45 0.46%
FTSE100 6980.24 – 58.71 – 0.83%
DAX30 11257.24 – 40.99 – 0.36%

By Greg Peel

Trumped

President Trump has agreed to hold off on raising existing tariffs on Chinese goods to 25% from 10% for 90 days, which was previously to occur on January 1, and not to impose any further tariffs for now to allow time for trade negotiations to proceed.

In return, President Xi has pledged to purchase what Washington has described as “a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other products from the United States to reduce the trade imbalance between our two countries”.

Both sides also pledged to "immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft".

The “truce” was agreed upon on Saturday night. As Friday night’s trade on Wall Street was coming to a close, one trader suggested that were Saturday night to bring a “truce”, US stock markets would “explode” on Monday night. Another commentator suggested that one better than a truce would be if China were commit to buy US goods. Positive rhetoric ahead of the meeting had Wall Street buoyant in anticipation.

So what the hell happened on Bridge Street on Friday?

To sell our market down -1.6% ahead of a meeting that could well lead to the outcome above is a strange call. But from the open, the sellers were keen. The real plunge nevertheless came between 11 and 11.30am, when the index fell from -36 points to -82 in that short period. An attempt to rebound then failed and the index ultimately closed down -91.

We could single out two potentially influential factors. Firstly, China’s manufacturing PMI was expected to hold steady at 50.2 in November from October but it fell to a 28-month low 50.0, implying manufacturing growth in China has completely stalled. Chinese manufacturers consume a lot of rocks, and we sell most most of them.

But the materials sector was actually an “outperformer” on the day in falling only -0.7%. Energy (LNG exports) fell only -0.8%. Big falls elsewhere suggest China was not a major influence and besides, one might have read a weak PMI as proving some impetus for Xi to give some ground in Buenos Aires.

Secondly, Coca-Cola Amatil ((CCL)) revealed on Friday in a trading update that the fizz has gone. As volumes remain soft, the company will again throw large amounts of money at the issue meaning 2019 will be yet another “transitional” year. Into what is unclear. Coke shares fell -14.5%.

Last week saw analysts lining up to initiate coverage of the newly spun-off Coles ((COL)). Of the eight FNArena database brokers, only one (Citi) initiated with a Buy rating. The grocer otherwise received five Holds and two Sells, with consensus suggesting the stock is overvalued in comparison to its main rival.

Coles fell -5.5% on Friday so add that in with Coke and consumer staples fell a market-leading -4.1%.

Aristocrat Leisure ((ALL)) continued to be hammered following its disappointing update and fell -7.0%. Discretionary fell -1.7%.

In market cap terms, the biggest falls were provided by the banks and healthcare, with the telcos also chiming in with the team on this occasion. The banks had proven a contrarian play all week as they rose quietly both against and with the tide over the week but on Friday banks were sold down -1.6%, seemingly out of the blue, with the RC investigation phase now completed.

We could point to weak housing credit numbers released on Friday, but they were a bit of a no-brainer.

Bargain hunting had also begun to appear in the big healthcare names, but not on Friday. That sector fell -1.6%.

Every sector closed in the red, suggesting a Sell Australia trade which could have come from either inside or outside the country. It was also the last day of the month, which can often provide for enhanced volatility, and was probably the reason an afternoon attempt to rally on Friday was shut down and the market closed on its lows.

But what will today bring? The futures closed up 25 points on Saturday morning thanks to aforementioned Wall Street buoyancy, and that was before The Meeting.

Strap in.

Explode?

The mood on Wall Street going into Friday night was one of quiet confidence that something good might happen in Buenos Aires. But despite the sharp rally back over the course of the week, traders believed that a “no result” from the Trump-Xi meeting was a base case that had mostly been priced in. “No result” would likely prompt selling, but not another major leg down.

Any positive sign, on the other hand, would send the market soaring, traders believed. Wall Street was not looking for an end to tariffs altogether – that would be pie in the sky – but some sort of “truce” would be seen as very positive.

Throughout the session there was only one topic of discussion, and as the day progressed the signs were largely promising. These included comments from US trade representative Robert Lighthizer, the increasingly notorious “unnamed Chinese official”, and President Trump. There’s no point in dwelling as we now know the result, which incidentally is exactly what the Wall Street Journal suggested on Friday might be the outcome.

In closing 0.8% higher, as confidence grew over the session, the S&P500 enjoyed its best week in seven years. All major indices finished the tumultuous month of November in the green.

One other “positive” in the session was the fact oil ultimately closed lower but not before falling below US$50/bbl for the second time in the week and again finding buying support at that level. The energy sector was nevertheless alone on the day in closing in the red.

The leading sector on the day was utilities, likely reflecting the apparent change in Fed tone earlier in the week.

So according to traders, Wall Street should “explode” tonight. We’ll see.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1222.10 – 1.50 – 0.12%
Silver (oz) 14.15 – 0.15 – 1.05%
Copper (lb) 2.82 – 0.02 – 0.57%
Aluminium (lb) 0.88 + 0.01 0.62%
Lead (lb) 0.88 + 0.02 2.09%
Nickel (lb) 4.98 + 0.04 0.76%
Zinc (lb) 1.20 + 0.05 4.34%
West Texas Crude (Jan) 50.70 – 0.73 – 1.42%
Brent Crude (Jan) 58.71 – 0.78 – 1.31%
Iron Ore (t) futures 64.8 -1.00 -1.52%

Inventories recorded by the London Metals Exchange have fallen to a ten-year low, it was revealed on Friday night. Hence zinc jumped 4% when the other major metals remained largely on hold ahead of The Meeting.

As noted, the oils were weak but could have been weaker. We’ve now ticked two boxes – the Fed and trade. Box three comes later this week when OPEC meets.

In an extraordinary response to the weekend’s news this morning we see the Aussie up 0.8%, at US$0.7379, when the US dollar index was up 0.5%. Told you they were all short.

The SPI Overnight closed up 25 points or 0.4% ahead of The Meeting.

The Week Ahead

December is set to begin with a more positive tone. Is Santa revving up the sleigh?

OPEC will meet on Thursday night to discuss production cuts.

The first trading day of the month brings manufacturing PMIs from across the globe.

It’s jobs week in the US. Non-farm payroll data are out on Friday following private sector numbers on Wednesday. Other US data this week include the manufacturing PMI tonight, services PMI on Wednesday along with the Fed Beige Book, and factory orders and trade on Thursday.

It’s GDP week in Australia. Today we’ll see September quarter numbers for company profits and inventories and tomorrow brings the current account, including the terms of trade, ahead of Wednesday’s final analysis. Expectation is for 3.3% year on year growth, down from 3.4% in June.

Monthly data this week include ANZ job ads, building approvals and house prices today, and retail sales and the trade balance on Thursday. The RBA meets tomorrow.

Metcash ((MTS)) will release its earnings result today.

There is a handful of AGMs left on the calendar, and a couple of EGMs, which I will highlight daily.

Telstra ((TLS)) provides a 5G update on Wednesday and Origin Energy ((ORG)) hosts an investor day on Friday.

Rudi will appear on Your Money twice today; first from noon till 2pm, and again with Peter Switzer, 7.30-8pm.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AHG AUTOMOTIVE HOLDINGS Downgrade to Hold from Accumulate Ord Minnett
ALQ ALS LIMITED Upgrade to Accumulate from Hold Ord Minnett
CCL COCA-COLA AMATIL Downgrade to Sell from Neutral Citi
CSR CSR Downgrade to Underweight from Equal-weight Morgan Stanley
HRL HRL HOLDINGS Downgrade to Hold from Add Morgans
LNK LINK ADMINISTRATION Upgrade to Outperform from Neutral Credit Suisse
MIL MILLENNIUM SERVICES Downgrade to Hold from Buy Ord Minnett
NEC NINE ENTERTAINMENT Upgrade to Neutral from Sell Citi
ORA ORORA Upgrade to Buy from Neutral UBS
QAN QANTAS AIRWAYS Upgrade to Buy from Hold Deutsche Bank
SAR SARACEN MINERAL Downgrade to Neutral from Outperform Macquarie
SOM SOMNOMED Upgrade to Add from Hold Morgans
SYD SYDNEY AIRPORT Upgrade to Neutral from Underperform Credit Suisse
WES WESFARMERS Downgrade to Lighten from Hold Ord Minnett

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

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CHARTS

ALL CCL COL MTS ORG TLS