The Monday Report

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By Greg Peel

Tariff Trouble

Friday’s was a choppy session on the ASX, culminating in a -20 point fall after being down -40 points earlier in the day. Sector moves proved a mixed bag, with the downside influence clearly a response to Trump’s threatened tariffs.

The standout worst performer was energy, down -2.5% after oil prices plunged -7% on Thursday night.

Materials (-1.3%) fell on a lower iron ore price, with Fortescue Metals ((FMG)) the worst performing stock in the ASX200 on the day in falling -6.1%. It would have been much worse for the sector if not for the big surge in the gold price. The top four index winners on the day were all gold miners, led by Saracen Minerals ((SAR)) up 10.9%.

Number five on the winners list was Lynas Corp ((LYC)) with 6.3%. Back in May when Trump announced the increase on existing tariffs, Lynas caught a bid on anticipation one way China might retaliate is to curb exports of rare earth minerals, of which China has plenty and the US has very little. It did not transpire, but China is running out of retaliation options.

Consumer discretionary (-1.2%) was among the worst performers, likely reflecting the fact Trump’s new tariffs will particularly hit consumer goods.

On the flipside, healthcare was the go-to sector, led by the usual suspect, rising 1.0%. The Aussie’s drop to under 68 would have helped.

Otherwise, yield plays in industrials, telcos and utilities found support, albeit the banks fell -0.4%.

While Wall Street closed well off its lows on Friday night, the S&P still fell -0.7%. Oil bounced back a bit but iron ore fell another -5% and base metals all fell sharply on their first chance to respond to the tariff news. Gold fell back five dollars. Yet our futures closed unchanged.

Either that is not an accurate indicator of today’s trade, or perhaps it’s a reflection of…

TINA

The latest tariff threat had the Dow down over -330 points from the open on Friday night. But buying in the last hour brought the average back to be down only -98. The S&P, wherein lie lots of big retailers which will be hit by the new tariffs, nevertheless still booked a -0.7% fall and the Nasdaq, wherein lie many a China-exposed tech company, fell -1.3%.

Wall Street booked its worst week in 2019, down just over -3%. But it could have been a lot worse if not for TINA.

The US ten-year bond yield had its biggest weekly fall since 2012, most of that on Thursday night but fell another -4 basis points to 1.86% on Friday night. Any hope the Fed may have had of steepening the yield curve with its -25 point cut have been dashed. The curve is back to flat.

Recession? US bond yields have merely fallen in lock-step with global bond yields, Australia’s included. German yields are now negative right across the curve. On Friday night Trump announced the EU will buy more US beef, but reiterated that tariffs on European autos remain a possibility.

Jerome Powell had singled out “trade uncertainty” as one of the main reasons for last week’s rate cut, and within in a day things became more uncertain. Those hoping for a follow-up cut in September would have been disappointed by Friday night’s jobs report, which at 164,000 came in right on expectation.

Neither good nor bad news.

But falling bond yields – not to mention near-zero rates on bank deposits – only serve to underscore the TINA trade. To find any sort of yield, the only alternative is the stock market, whatever the risk. Friday’s comeback on Wall Street suggests a buy-the-dip mentality prevails, with TINA the underlining influence.

And let us not forget the US earnings season rolls on. With 77% of the S&P500 having reported, net earnings are projected to have fallen -1.0% in the quarter.

Commodities

LME traders did not have the chance to respond to the tariff news on Thursday night, so Friday saw the fallout, with copper down -3%.

Oil prices bounced back a bit after the Thursday night’s plunge while gold fell back a bit after Thursday night’s rally. Iron ore, however, went on with it.

The US dollar fell back -0.2% but the Aussie is relatively steady at US$0.6792.

The SPI Overnight closed unchanged on Saturday morning, which seems a bit ambitious.

The Week Ahead

Today is a bank holiday in NSW which will crimp trading activity and research flow.

It’s services PMI day across the globe today.

A quiet week economically in the US has Friday’s PPI release as the only other highlight.

China will report trade numbers on Thursday and inflation on Friday.

The RBNZ meets on Wednesday.

The RBA meets tomorrow. What are the odds?

We’ll also see job ads and trade numbers tomorrow and housing finance on Wednesday.

The local earnings season starts to ramp up this week and we’re now at the stage there are too many to list. Please refer to the FNArena Calendar (see below).

Highlights this week include reports from Commonwealth Bank ((CBA)), Suncorp ((SUN)), Transurban ((TCL)), AGL Energy ((AGL)), AMP ((AMP)), Insurance Australia Group ((IAG)) and REA Group ((REA)).

The Australian share market over the past thirty days…

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

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