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The Monday Report (On Tuesday)

Daily Market Reports | Jun 11 2019

World Overnight
SPI Overnight (Jun) 6502.00 + 21.00 0.32%
S&P ASX 200 6443.90 + 60.90 0.95%
S&P500 2886.73 + 13.39 0.47%
Nasdaq Comp 7823.17 + 81.07 1.05%
DJIA 26062.68 + 78.74 0.30%
S&P500 VIX 15.94 – 0.36 – 2.21%
US 10-year yield 2.14 + 0.06 2.83%
USD Index 96.77 + 0.05 0.05%
FTSE100 7375.54 + 43.60 0.59%
DAX30 12045.38 + 92.24 0.77%

By Greg Peel


On Wednesday and Thursday, the ASX200 opened strongly in line with Wall Street but faded away to lesser gains in the afternoon. The focus was largely on defensive stocks, suggesting investors were rather tentative about Wall Street’s turnaround.

Not so on Friday. Friday was more of a “risk on” affair, given all sectors bar one closed in the green on reasonably uniform gains. Defensives were still being sought but so too were cyclicals, suggesting market-wide buying.

The one exception was consumer staples (-0.2%), which would normally be expected to participate in a “risk on” rally.

Ord Minnett downgraded both JB Hi-Fi ((JBH)) and Super Retail ((SUL)) to Hold on Friday, not because of any issue with company performance but simply because the broker deems the stocks to have rallied too far, particularly since the election.

Weakness was also seen in Flight Centre ((FLT)), possibly because the currency is weighing on outbound tourism, albeit supporting inbound tourism, and Wesfarmers ((WES)), possibly because investors are unsure which path the ex-Coles conglomerate is planning to head down.

Moves back up in iron ore and oil prices saw materials (+1.4%) and energy (+1.2%) among the best performers, while consumer staples (+1.3%) were buoyed by a table-topping 5.8% rally for Graincorp ((GNC)) after the company finally signed a long-awaited deal with its insurers to smooth out grain price volatility via a derivative instrument.

The banks (+0.8%) were buoyed by April home loan data. The value of all home loans rose by 0.2% in the month, reducing year on year declines to -17.3% from a peak decline of -20.3% in January – numbers which are consistent with recent house price data. April numbers are of course pre-election, pre APRA’s easing of restrictions and pre the RBA rate cut.

Chinese trade data released on Friday showed exports rose 1.1% year on year in May when economists had expected a second, tariff-related, drop following a fall in April. Imports fell by a greater than expected -8.5%. Imports from the US specifically fell -26.8%.

The surprise export result is likely attributable to Chinese exporters trying to get their goods out ahead of Trump’s final tranche of tariffs. The weak numbers overall bolster expectations of further stimulus from Beijing.

The ASX200 closed up 0.7% for the week, recovering early falls from Trump’s sudden threat to hit Mexico with tariffs. On Thursday night it appeared those tariffs might be delayed, and by Friday night the story became even more bizarre. More on that below.

Suffice to say yet another rally on Wall Street on Friday night sent our futures up 32 points By Saturday morning.

Friday Night

Trump’s original threat to place escalating tariffs on Mexican exports came out of the blue, particularly given progress was being made in Congress to ratify the new USMCA trade agreement, commonly known as Nafta 2.0. But the real surprise was the reason for the tariffs, being Mexico’s failure to stop the tide of illegal immigrants.

Suddenly Trump was using tariffs as a political weapon beyond trade.

A Mexican delegation rushed to Washington and by Thursday night the story was that the tariffs may be delayed as an agreement is reached. On Friday night Trump tweeted that tariffs may not need to be imposed if Mexico agrees to buy more US agricultural products and farm equipment.

Hang on. One minute a trade tariff is being used as leverage against immigration and the next we’re back to trade again. How does one keep up?

Either way Wall Street took the news as progress, but the real reason US stock rallied further on Friday night was the jobs report.

The Dow rose 263 points or 1.0% while the S&P gained 1.0% to 2873 and the Nasdaq added 1.7%.

The US added only 75,000 jobs in May when 185,000 were forecast. Gains in March and April were revised down by a net -75,000. The three-month rolling average of new jobs has fallen to 151,000 from 245,000 in January.

The unemployment rate nevertheless remained steady at 3.6%. One wonders why, when the unemployment rate is at an historical low, economists are surprised at a slowing rate of jobs growth. But a big “miss” on jobs is music to Wall Street’s ears. It means the Fed is now under even more pressure to cut rates.

The result was enough to send the US dollar index down another -0.3% and the US ten-year bond yield down another -4 basis points to 2.08%. Dollar weakness, and hope tariffs on Mexico will be averted, meant oil prices jumped back another 2.5%. Two sessions earlier they had fallen by more than -20%.

Not only has Wall Street recovered all of the losses triggered by the initial Mexico tariff announcement, which saw the S&P500 break down through its 200-day moving average, it has surged ahead to be close to square from a month ago.

Meanwhile, the governor of the People’s Bank of China told Bloomberg on Friday that the central bank has “tremendous room” to use monetary policy to stimulate the Chinese economy.

Trade deal at the G20? Not a chance.

Commodities Friday Night

While oil markets may have welcomed the news on Mexican tariffs on Friday night – Mexico being a big exporter of oil to the US – there was no such relief for base metals prices even as the US dollar fell on the jobs numbers.

A rebound during the week for lead was clipped by a -2.7% fall, after which all other metals continued to slide gradually lower. It was the eighth straight down-week for copper.

Gold is currently in limbo after surging through the US$1300/oz mark, waiting to see what happens next.

The Aussie was up 0.3% at US$0.6994 on Friday night.

The SPI Overnight closed up 32 points on Saturday morning.

Monday Night

Mexico agreed on the weekend to take “strong measures” to stem the tide of illegal immigrants to the US, pledging to deploy its National Guard to its own southern border with Guatemala. Trump has thus suspended the tariffs for now.

There is no mention of Mexican purchases of US agricultural products and farm equipment.

Trump has warned nonetheless that there needs to be signs of progress on the matter to avoid the tariffs going back on. Critics have noted that Mexico had previously agreed to deploy its National Guard to the Guatemalan border, and thus are asking: what’s new?

The G20 finance ministers met over the weekend and in a sideline meeting, talks with the governor of the PBoC were described as “candid” and “constructive” by the US Treasury Secretary.

Wall Street took this as a positive, despite the PBoC governor hinting on Friday night the central bank has the capacity to help China weather a trade war.

While Washington insists a sideline meeting between presidents Trump and Xi will go ahead at the G20 leaders’ meeting at the end of the month, Beijing is yet to confirm such a hook-up. Commentators suggest that if there is any possibility Trump might do a “walk-away” from negotiations in Tokyo, as was the case with Kim Jong-un, Xi will not agree to meet.

The Dow was up over two hundred points once more during Monday night’s session on all of the “positives” above but faded away in the afternoon to a more modest gain. Many believe the rebound rally, which included solid sessions every day last week, has now overshot. Critical to caution is a belief Wall Street is jumping the gun in its Fed rate cut assumptions, particularly on the timing.

The US ten-year bond yield rebounded on Monday night, rising 6 basis points to 2.14%. Bonds, too, have been considered overbought, and the rebound helped US financials to lead the day’s rally.

Commodities Monday Night

Spot Metals,Minerals & Energy Futures
Gold (oz) 1327.40 – 7.20 – 0.54%
Silver (oz) 14.67 – 0.27 – 1.81%
Copper (lb) 2.63 + 0.01 0.25%
Aluminium (lb) 0.79 – 0.00 – 0.27%
Lead (lb) 0.86 + 0.02 2.46%
Nickel (lb) 5.26 – 0.02 – 0.31%
Zinc (lb) 1.18 – 0.00 – 0.19%
West Texas Crude 53.42 – 1.05 – 1.93%
Brent Crude 62.39 – 1.36 – 2.13%
Iron Ore (t) futures 100.40 + 2.05 2.08%

The suspension of tariffs on Mexico should have provided a boost for oil prices, but realistically that boost came on Friday night. Last night traders were worrying about forecasts of yet another big build of US crude inventories to be revealed in this week’s data, and worried that Russia has yet to agree to extensions of its agreement with OPEC to keep a lid on production.

That’s another meeting for the end of the month.

Meanwhile gold fell back, likely as there was no escalation on the tariff front, and despite the US dollar being relatively steady.

As for base metals, lead continues to fly around but the others appear stuck in a realm of uncertainty.

A -0.5% drop for the Aussie to US$0.6958 seems rather substantial against a steady greenback, and despite iron ore trading back over the ton.

The SPI Overnight closed up 21 points this morning, taking the two day gain from the last ASX close to a net 53 points.

The Week Ahead

We have more Chinese data ahead this week in the form of inflation numbers today and industrial production, retail sales and fixed asset investment numbers on Friday.

The US will see PPI numbers tonight, CPI on Wednesday and retail sales on Friday.

In Australia, suddenly the monthly jobs numbers have become very critical given the RBA’s specific focus. The May numbers are out on Thursday.

Ahead of that we’ll see the NAB business confidence survey today and Westpac consumer confidence survey tomorrow.

Charter Hall ((CHC)) will host an investor day today and UR Westfield ((URW)) holds its AGM. UR Westfield then hosts an investor day on Thursday as does Challenger ((CGF)), and Wesfarmers will host a strategy day.

On Friday, S&P/ASX will announce pending quarterly changes to index components, which will go into effect the following Friday.

The Australian share market over the past thirty days…

AZJ AURIZON HOLDINGS Upgrade to Buy from Hold Deutsche Bank
CMA CENTURIA METROPOLITAN REIT Downgrade to Hold from Add Morgans
DCN DACIAN GOLD Downgrade to Neutral from Buy Citi
GNX GENEX POWER Upgrade to Add from Speculative Buy Morgans
JBH JB HI-FI Downgrade to Hold from Accumulate Ord Minnett
STO SANTOS Upgrade to Neutral from Underperform Credit Suisse
SUL SUPER RETAIL Downgrade to Hold from Accumulate Ord Minnett
VVR VIVA ENERGY REIT Downgrade to Hold from Add Morgans
WOR WORLEYPARSONS Upgrade to Buy from Neutral UBS

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

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