The Monday Report

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

Profit-Taking

It was no great surprise that on a Friday at the end of a stellar week for the ASX200 some profit-taking would emerge. On lower volume, the index dropped back -0.3% but still managed to close up 3.5% for the week.

The three big themes of the week were the Royal Commission, iron ore and the RBA. The RC report kicked things off on Tuesday and sent bank shares soaring. Friday’s session was mixed, with buying in Commonwealth Bank ((CBA)) ahead of its dividend offsetting selling in National Bank ((NAB)) in the wake of its management crisis. Financials closed down -0.1%.

The iron ore price flew to moon last week due to Vale’s forced production shutdowns and indeed rose another 4% on Friday to be closing in on US$100/t. The Chinese are back today so it will be interesting to see how they react. Local iron ore stocks enjoyed the rise all week, particularly pure-play Fortescue ((FMG)), but profit-taking was the order of Friday as materials fell -1.3%.

Oil prices have also been strong of late, and thus oil & gas stocks, but a dip in the oil price on Thursday night sparked a similar profit-taking stampede, with the energy sector down -2.6% and Beach Energy ((BPT)) alone down -10%.

The RBA made no change to its cash rate on Tuesday and the governor announced on Wednesday the central bank has shifted to a neutral stance. Economist consensus is now that the next move will be down. The RBA’s Statement on Monetary Policy, released on Friday, featured a cut in 2019 GDP forecast to 2.5% from 3.25% and in inflation to 1.25% from 2%. These are substantial moves.

Reason? Housing market weakness. The Aussie fell out of bed once more and is back under 71, down -0.3%.

The local housing market is not being helpful to REA Group ((REA)), which released its earnings result on Friday. The result was good, but not so good was a write-down of the Asian business and a warning of weakness to come locally given the housing market and upcoming NSW and federal elections. REA shares fell -5.0%. Domain Group ((DHG)) fell -6.3% in sympathy.

It was thus a pretty good result from News Corp ((NWS)), which also reported on Friday. Its subsequent 2.7% gain put it at the top of the ASX200 leaders’ board for the session. News is a major shareholder in REA, and typically the only thing driving a positive News Corp result is a positive REA result. This time News has done it all on its own.

We enter the new week with the world worried about slowing global growth, US-China trade negotiations and Brexit. But we also enter the first truly busy week of the local results season, so we have plenty on both the macro and micro fronts to drive us through the rest of this month.

Wall Street closed flat on Friday night. Our futures are down -4.

Trade Uncertainty

Weakness in European markets was again evident on Friday night as the continent continued to reel from a surprisingly weak German industrial production number and a sombre tone from the ECB. The German market fell another -1% and sentiment carried into Wall Street, as is often the case, such that the Dow was down over -250 points by the European close.

But as is, again, so often the case, once Europe closed, Wall Street recovered. The Dow still closed down -63 but the S&P and Nasdaq closed slightly positive.

US-China trade was the focus. Wall Street’s sharp rally back from its Christmas depths lends a lot to a more dovish Fed but also optimism on a trade deal being reached. Yet last week saw chief economic advisor Larry Kudlow admitting a deal was a long way off and President Trump admitting it was unlikely he would meet with President Xi ahead of the March 1 deadline, implying negotiations were not yet at a sufficient point.

However, CNBC suggested on Friday night that the March 1 deadline, which sees tariffs on a tranche of goods now at 10% rise to 25% and has already been extended once, may be extended again.

The bottom line is there is about as much certainty around US-China trade as there is around Brexit.

A largely better than expected US earnings season has most recently maintained buoyancy for Wall Street but the season now heads into its long tail, with results fewer and further between. The S&P500 almost but not quite returned to its 200-day moving average last week before dipping back. A break-up through that level would signal another leg higher but some good news will no doubt be required, otherwise further consolidation is most likely.

There was also a suggestion on Friday the White House and the Democrats are close to reaching a deal that would avoid another government shutdown. This is mildly positive news for Wall Street, which didn’t really pay much attention the first time around. A second shutdown at a time Wall Street is a little nervous may nonetheless have more impact.

Commodities

The Chinese are back today. How will they respond to moves in metal prices over last week? Iron ore rose another 4% on Friday to US$94.20/t.

Base metal markets featured what was probably profit-taking in zinc and particularly nickel, the latter having popped last week given Vale produces nickel as well as iron ore.

The oils are largely holding up despite signs of slowing global growth, with Venezuela the most recent point of focus.

The Aussie is down -0.3% at US$0.7085 with the US dollar a little stronger.

The SPI Overnight closed down -4 points on Saturday morning.

The Week Ahead

Local earnings reports, and lots of them. Too many to highlight for the full week. Today sees Aurizon ((AZJ)), Amcor ((AMC)), Bendigo & Adelaide Bank ((BEN)) and JB Hi-Fi ((JBH)), among others. Note that JB Hi-Fi is one of the most shorted stocks on the ASX.

As the earnings reports begin to flow in earnest, the ex-divs start to follow. CBA goes ex on Wednesday.

Local data this week include housing finance tomorrow along with the NAB business confidence survey, and the Westpac consumer confidence survey on Wednesday.

China will release trade data on Thursday and inflation numbers on Friday.

The UK will release its December quarter GDP result tonight and Japan will follow suit on Thursday.

The RBNZ meets on Wednesday.

The US earnings season continues this week but the number of reporting companies is now thinning. US scheduled data releases this week include the CPI on Wednesday, PPI on Thursday and industrial production and retail sales on Friday.

There will also be more catch-up data releases this week that were due in the shutdown.

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

The Australian share market over the past thirty days…

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