The Monday Report (On Tuesday)

Daily Market Reports | Jun 11 2019

By Greg Peel

Friday

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.


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