The Monday Report

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

World Overnight
SPI Overnight (Sep)	6604.00	– 30.00	– 0.45%
S&P ASX 200	6696.50	– 19.60	– 0.29%
S&P500	3013.77	+ 13.86	0.46%
Nasdaq Comp	8244.15	+ 48.10	0.59%
DJIA	27332.03	+ 243.95	0.90%
S&P500 VIX	12.39	– 0.54	– 4.18%
US 10-year yield	2.11	– 0.01	– 0.66%
USD Index	96.81	– 0.25	– 0.26%
FTSE100	7505.97	– 3.85	– 0.05%
DAX30	12323.32	– 8.80	– 0.07%

By Greg Peel

Bond Bounce

The US ten-year bond yield jumped sharply on Wednesday night after Fed chair Jerome Powell all but confirmed a July rate cut, steepening the US yield curve as recession fears ebbed and bond profits were locked in. Powell reiterated his comments again on Thursday night, but it wasn't until Friday that the Australian bond market saw a reaction.

The Australian ten-year bond yield has been tracking to historical lows in line with the RBA cash rate, but on Friday the ten-year yield bounced 11 basis points to 1.44%. If the stock market needed any trigger to lock in profits ahead of a weekend after a solid run, this was it.

All sectors bar two sold off. One were the banks (+0.1%), which benefit from higher rates.

The other was energy, on the back of what was on Friday a hurricane shutting production in the Gulf, later downgraded to a tropical storm as it crossed coast. And there were also rumours circulating that Santos ((STO)) was looking to bid for Oil Search ((OSH)), its larger JV partner in PNG LNG. Energy also rose 0.1%.

Otherwise it was a general Friday sell-off, although not without slow-moving buyers looking to jump in after an early plunge down -30 points. By lunchtime the ASX200 was almost back to square before the Friday afternoon blues set in.

There were also Chinese trade data to consider.

Chinese exports swung to a -1.3% year on year drop in June after rising 1.1% in May, although the fall was not as steep as -2.0% expectations. Imports fell -7.3% after falling -8.5% in May. Economists had forecast -3.8%. The Chinese trade surplus widened beyond expectation, including the specific surplus with the US.

Weak Chinese trade numbers are not a positive harbinger for Australia, although they do suggest Beijing will look to further boost stimulus. This is more likely than Beijing looking to wave a white flag on trade. On that note, China is threatening sanctions on US firms selling arms to Taiwan, after a deal was signed on Friday night.

Among individual stocks, Oil Search's 3.5% gain on the Santos rumours was enough to top the ASX200 on an otherwise weak day.

On the flipside, Nearmap ((NEA)) pre-released some earnings report details, suggesting record portfolio growth will be booked, contract value will be up 36% year on year, and cash flow breakeven will be achieved.

Nearmap shares fell -9.5%.

I suggested last week that strength in the local market is likely being supported by offshore investors looking at strong yields from Australian dividends available at a low exchange rate. Powell's hints at a rate cut go some way to undermining the yield gap, and also suggest more cuts might be ahead.

Wall Street kicked on further to new all-time highs on Friday night. Our futures fell -30 points.

Fed-Phoria

US wholesale inflation rose 0.1% at the headline in June, and 1.7% year on year, down from 1.8% in May and representing the slowest growth since January 2017. The core PPI slipped to 2.1% annual growth from 2.3%.

Hooray!

The earlier CPI numbers had looked a little stronger, suggesting reason to be concerned about the Fed not cutting in July. But Powell's testimony put an end to such nonsense. And the PPI is music to Wall Street's ears, even if the Fed is no longer data-dependent given "global uncertainties".

So all three major indices jumped to new all-time highs, again, with the S&P closing over 3000 for the first time.

While the Chinese trade numbers suggest Trump's tariffs are having an impact (as they are in the US, but Trump won't see that), over in Europe industrial production made a sharp turnaround in May, rising a shock 0.9%.

There was a similar result back in January, which proved to be a false dawn, and year on year production is down -0.5%. But there are hopes this result may signal the eurozone slowdown is beginning to ease.

Trump will decide Europe's tariff fate in October.

Wall Street had already baked in a rate cut ahead of this week, and US stocks continue ever higher despite no sign of a trade deal anytime soon. Clearly more than one rate cut is now being priced in, and TINA is highly active.

On Friday night the first of the big US banks will report earnings. Wall Street is expecting negative earnings growth for the S&P500 in the June quarter but in recent times has tended to be too pessimistic. Soon all will be revealed.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1415.60	+ 12.40	0.88%
Silver (oz)	15.20	+ 0.11	0.73%
Copper (lb)	2.68	+ 0.00	0.05%
Aluminium (lb)	0.81	– 0.01	– 0.99%
Lead (lb)	0.90	+ 0.00	0.47%
Nickel (lb)	5.94	+ 0.03	0.50%
Zinc (lb)	1.11	+ 0.02	1.95%
West Texas Crude	60.21	– 0.22	– 0.36%
Brent Crude	66.72	– 0.04	– 0.06%
Iron Ore (t) futures	118.55	– 0.70	– 0.59%

Hurricane Barry did not prove to be overly damaging to Gulf oil production, hence oil prices stabilised on Friday night.

Base metals were helped by another -0.3% dip in the greenback.

Gold seems to be doing a lot of to-ing and fro-ing off the 1400 mark.

And once again the Aussie is living in the seventies, up 0.6% at US$0.7014.

The SPI Overnight closed down -30 points or -0.5% on Saturday morning.

The Week Ahead

China reports June quarter GDP today. Forecasts suggest 6.2% annual growth, down from 6.4% in March. Monthly industrial production, retail sales and fixed asset investment numbers are also due.

Japan is closed today.

The US will see housing sentiment, industrial production and retail sales data tomorrow, presumably none of which matters. Wednesday brings the Fed Beige Book along with housing starts, and Friday sees fortnightly consumer sentiment.

The minutes of the July RBA meeting are out today for some fun reading. The June jobs numbers are out on Thursday.

This week sees the resource sector quarterly production reporting season ramp up, led out by Copper Energy ((COE)) today.

Over the week we'll see reports from Oil Search, Rio Tinto ((RIO)), BHP Group ((BHP)), South32 ((S32)), Santos and Woodside Petroleum ((WPL)), among others.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
A2M	A2 MILK	Upgrade to Buy from Neutral	UBS
AWC	ALUMINA	Downgrade to Underperform from Neutral	Macquarie
DCN	DACIAN GOLD	Downgrade to Neutral from Outperform	Macquarie
EBO	EBOS GROUP	Upgrade to Add from Hold	Morgans
EVN	EVOLUTION MINING	Downgrade to Underperform from Neutral	Macquarie
		Downgrade to Hold from Add	Morgans
FLT	FLIGHT CENTRE	Upgrade to Buy from Neutral	Citi
GOR	GOLD ROAD RESOURCES	Upgrade to Outperform from Neutral	Macquarie
GXY	GALAXY RESOURCES	Downgrade to Neutral from Outperform	Macquarie
HVN	HARVEY NORMAN HOLDINGS	Upgrade to Neutral from Sell	Citi
JBH	JB HI-FI	Upgrade to Neutral from Sell	Citi
MPL	MEDIBANK PRIVATE	Downgrade to Underperform from Neutral	Macquarie
NST	NORTHERN STAR	Downgrade to Neutral from Outperform	Macquarie
PMV	PREMIER INVESTMENTS	Upgrade to Neutral from Sell	Citi
RRL	REGIS RESOURCES	Downgrade to Neutral from Outperform	Macquarie
S32	SOUTH32	Downgrade to Underperform from Neutral	Macquarie
SAR	SARACEN MINERAL	Downgrade to Neutral from Outperform	Macquarie
SBM	ST BARBARA	Upgrade to Neutral from Underperform	Macquarie
SFR	SANDFIRE	Downgrade to Neutral from Outperform	Macquarie
SGM	SIMS METAL MANAGEMENT	Downgrade to Hold from Buy	Ord Minnett
WPL	WOODSIDE PETROLEUM	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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