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The Monday Report (On Tuesday) – 08-10-2019

Daily Market Reports | Oct 08 2019

World Overnight
SPI Overnight (Dec) 6564.00 + 24.00 0.37%
S&P ASX 200 6563.60 + 46.50 0.71%
S&P500 2938.79 – 13.22 – 0.45%
Nasdaq Comp 7956.29 – 26.18 – 0.33%
DJIA 26478.02 – 95.70 – 0.36%
S&P500 VIX 17.86 + 0.82 4.81%
US 10-year yield 1.55 + 0.04 2.51%
USD Index 98.64 – 0.17 – 0.17%
FTSE100 7197.88 + 42.50 0.59%
DAX30 12097.43 + 84.62 0.70%

By Greg Peel

Friday

The SPI futures were suggesting up 35 points for the ASX200 on Friday following a significant turnaround on Wall Street on Thursday night from what was perceived as an oversold position. But from the opening bell, it looked like everyone had already left for the long weekend.

The index did virtually nothing all the way to lunchtime. I don’t know what they put in the shiraz, but suddenly the buyers emerged in the afternoon to provide for a close of up 24.

All sectors produced relatively consistent, modest gains, with a couple of exceptions. IT rose 1.1% but that’s still a modest gain for the most volatile of sectors.

Healthcare stood out with a 2.3% gain, all down to a 3.2% jump for CSL ((CSL)). Morgan Stanley upgraded the stock to Overweight, citing tight immunoglobulin market conditions that have absorbed the company's accelerating supply, leaving upside risk to FY20 guidance.

The banks (-0.1%) were the only losing sector on the day. Commonwealth Bank ((CBA)) will face criminal charges of illegal “cold calling” by its Comminsure insurance business which the bank has since sold. But this wasn’t the problem. CBA shares actually rose 0.3%.

The other three all saw losses after the ACCC said it is pressing ahead with plans for an inquiry into “barriers to entry” created by the Big Four in retail banking. But there are a couple of problems. The Treasurer is not yet on board, creating internal hesitation at the regulator, and after a Royal Commission, which followed several more specific inquires, is it really worth flogging a dead horse?

In economic news, retail sales grew by 0.4% in August, below 0.5% expectations. While this was an improvement on 0.0% in July, economists had assumed tax cuts and rate cuts would have consumers out waving their wallets around with glee.

But this would be to ignore why the RBA is cutting to ever lower record lows. Australians are constantly being reminded they have the highest level of household debt in the developed world and see rate cuts as a desperate attempt by the central bank to prevent the country falling into recession. One can hardly blame consumers for choosing debt reduction over discretionary spending.

The number did not deter consumer sectors, which both closed modestly in the green on Friday, but that was part of market-wide buying rather than sector specifics.

There was nothing of note among individual stocks on the day.

Friday Night

The Dow closed up 372 points or 1.4% while the S&P rose 1.4% to 2952 and the Nasdaq rose 1.4%.

The US added 136,000 jobs in September, short of 150,000 expectation and representing the slowest pace of growth in four months. Annual wage growth fell to 2.9% from 3.2% in August.

The result capped off a week which saw misses on both manufacturing and services PMIs and private sector jobs growth. The manufacturing PMI sent Wall Street into a tailspin on Monday night, the private sector jobs report only served to exacerbate, and when the weak services PMI came in, the Dow was down -1200 points for the week. The R-word was writ large.

But then Wall Street turned, and turned hard, and on the non-farm payrolls report kicked on further, adding up to a 900 point Dow rebound from the Thursday night low.

It would be easy to explain the turn as an assumption the Fed would simply have to cut at the end of the month, and thus bad news is good news. The “weak” jobs report further strengthened that assumption. But if bad news is good news, why the -1200 point drop in the first place? And was all of the news all that bad?

The services PMI did dip more than expected, but remains in expansion territory. As for jobs, the US unemployment rate fell to a 50-year low 3.5% in September, down from 3.7% in August.

Notwithstanding revisions to the prior two months added back another 40,000 jobs, it is not alarming to see the pace of jobs growth slowing at an unemployment rate of 3.5%. Is it slowing because companies aren’t hiring? Or is it slowing because companies can’t fill vacancies given virtually everyone already has a job?

As for wages growth, the fall to 2.9% from 3.2% is disappointing, but with inflation at 1.8% (PCE), it’s still a solid number.

So take your pick. Wall Street rallied on Friday night because the jobs number was “weak” and that suggests the Fed must cut on October 30. Or, it rallied because the jobs number was healthy and that suggests the US may not go into recession after all.

I’d say the week’s action suggested bad news is bad news, and good news good. Wall Street fears a recession that the Fed simply can’t prevent.

Commodity price movements on Friday night were minimal at best other than for the oils, which rebounded 1% simply because they had fallen -5% in the week to that point.

Currency movements were also negligible.

The SPI Overnight closed up 55 points or 0.9% on Saturday morning.

Monday

Not far off – the index closed up 46 points yesterday. After a strong open there was a bit of a morning fade, reflecting the fact there was little to no volume with NSW on holiday, but an afternoon rally restored order.

All sectors closed in the green, with healthcare (+1.3%), telcos (+1.2%) and consumer staples (+1.1%) leading the charge. IT (+1.4%) played its usual game.

The banks (+0.4%) were the underperformer on the day, with US bond yields a tad lower on Friday night and more regulatory scrutiny being threatened.

Nothing of particular stood out among individual stocks, other than a 7.3% rally for WH Soul Pattinson ((SOL)) on a broker upgrade (Shaw and Partners initiated coverage).

What is more important is what happens in the rest of this week, as US-China trade talks resume. China is also back on board today after its week-long break.

Friday Night

After a week dominated by US economic data, and a sharp turnaround in equity market fortunes, attention turned firmly back to trade last night ahead of senior level talks beginning on Thursday.

It was an uncertain start for Wall Street following a report on Sunday suggesting China was not looking to negotiate a broad deal at this point but would discuss terms that did not include commitments on reforming Chinese industrial policy or government subsidies.

The White house tried to put a positive spin on the week ahead but it wasn’t until lunchtime when senior economic advisor Larry Kudlow told reporters that the US could be open to a short term deal, as long as there was a plan to deal with such structural issues at some point, that the major indices rose into the green for the day.

This proved fleeting, when the Chinese Ministry of Commerce confirmed a willingness to strike a deal on those areas in which the US and China agree, but not on intellectual property laws.

Intellectual property theft has always been the predominant issue from Washington’s standpoint, with sundry matters such as buying more agri-products more of a sideshow. So one assumes this week’ talks are dead in the water already. But no one on Wall Street expected THE deal to be signed this week, so any progress can only be encouraging.

We can only wait. A bit of risk was taken off the table as selling accelerated to the close.

That acceleration may reflect Trump’s announcement of the withdrawal of US troops from Syria as Turkey prepares to invade – a decision strongly derided by both parties.

President Obama made the understandable but ultimately unfortunate decision to follow the will of the people and cease the needless death of young Americans in an endless war by withdrawing the troops, only to fuel the rise of ISIS. Trump is now making the same move, which results in the abandonment of the Kurdish allies the US has funded in the battle against Assad and his backers – Iran and Russia. There is grave fear for the Kurds, and fears of the resurgence of ISIS and/or other terrorist groups.

Trump has threatened to “obliterate” the Turkish economy if it goes “off limits”.

Strangely, this news did not rate a headline on US financial media as Wall Street came to a close. Focus was on Trump signing a trade agreement with Japan, which underscores just how focused investors are on trade, and not what has little direct effect on the stock market.

Moreover, our own futures closed up 24 points or 0.4% this morning despite the S&P losing -0.5%, suggesting yesterday’s trade left a bit out on the field.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1492.10 – 11.90 – 0.79%
Silver (oz) 17.39 – 0.12 – 0.69%
Copper (lb) 2.56 + 0.03 0.99%
Aluminium (lb) 0.78 + 0.01 1.33%
Lead (lb) 0.98 + 0.01 1.12%
Nickel (lb) 8.11 – 0.02 – 0.24%
Zinc (lb) 1.05 – 0.01 – 0.53%
West Texas Crude 52.91 + 0.10 0.19%
Brent Crude 58.45 + 0.08 0.14%
Iron Ore (t) futures 93.90 0.00 0.00%

Gold also fell -US$12/oz, despite geopolitical implications.

Base metals were again mixed and we will have to wait to today to see what the Chinese want to do with the iron ore price.

Oil prices stood still for once, while the Aussie is off -0.4% at US$0.6730 with the greenback down -0.2%.

The Week Ahead

Trade talks are all that matters, but the US will also see the PPI tonight and CPI on Thursday, with consumer sentiment on Friday. Fed chair Jerome Powell speaks tonight and tomorrow night and the minutes of the September Fed meeting are released tomorrow night.

Locally we’ll see ANZ job ads and the NAB business confidence survey today, the Westpac consumer confidence survey tomorrow and housing finance numbers on Thursday.

On the local market, the ex-divs are now quietly fading, albeit Harvey Norman ((HVN)) goes ex on Thursday.

Baby Bunting ((BBN)) holds its AGM today followed by Brambles ((BXB)) and Transurban ((TCL)) on Thursday. Domino’s Pizza host an investor day on Thursday.

A reminder that with daylight savings kicking in on the weekend, the NYSE is now closing at 7am Sydney time.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ANZ ANZ BANKING GROUP Upgrade to Equal-weight from Underweight Morgan Stanley
CSL CSL Upgrade to Overweight from Equal-weight Morgan Stanley
FAR FAR LTD Downgrade to Equal-weight from Overweight Morgan Stanley
LLC LENDLEASE Downgrade to Neutral from Buy UBS
MYX MAYNE PHARMA GROUP Upgrade to Neutral from Underperform Macquarie
NAB NATIONAL AUSTRALIA BANK Downgrade to Underweight from Equal-weight Morgan Stanley
PPH PUSHPAY HOLDINGS 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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