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The Monday Report – 11 November 2019

Daily Market Reports | Nov 11 2019

World Overnight
SPI Overnight (Dec) 6726.00 + 27.00 0.40%
S&P ASX 200 6724.10 – 2.50 – 0.04%
S&P500 3093.08 + 7.90 0.26%
Nasdaq Comp 8475.31 + 40.80 0.48%
DJIA 27681.24 + 6.44 0.02%
S&P500 VIX 12.07 – 0.66 – 5.18%
US 10-year yield 1.93 + 0.01 0.36%
USD Index 98.35 + 0.22 0.22%
FTSE100 7359.38 – 47.03 – 0.63%
DAX30 13228.56 – 60.90 – 0.46%

By Greg Peel

In the Grip of Yield

The scorecard for the ASX200 over the last three sessions of last week reads down -37 points on Wednesday, up 66 on Thursday and down -2 on Friday. The scorecard for the US ten-year bond yield in the nights preceding reads up 9 basis points, down -5 and up 11.

The index fell on Wednesday mostly due to a sell-off of bond-proxy stocks and other high-yield payers. The rally on Thursday largely reflected some better than expected earnings results, and National Bank ((NAB)) not raising new capital, as well as all those sold-down bond proxies being bought back again.

On Friday the index gained 16 points to late morning on Wall Street strength but fell back over the rest of the session to close flat. If it were not for a 1.8% gain in the energy sector on higher oil prices, and more bargain-hunting in the already knocked-down banks (+0.3%), the fall would have been a lot steeper. Once again it was all about selling yield-payers.

Utilities fell -1.7%, telcos -0.4%, industrials -0.4% and staples -0.8%.

It was also about selling gold miners. Gold does not pay a yield, therefore in a world of negative interest rates, 0% is attractive. As US bond yields rallied across last week, the US dollar gold price was a clear victim.

On Friday, all of the top five ASX200 losers were gold miners, sending materials down -0.3%. An offset was provided by lithium miners as protesters continue to block access to mines in Chile. Galaxy Resources ((GXY)) topped the winners’ board with an 8.4% gain, while Orocobre ((ORE)) chimed in with 6.1%. These are two of the most shorted stocks on the market.

Of course, behind the moves in US bond yields was progress on US-China trade negotiations.

The week had its ups and downs – as reflected in the ups and downs of the US ten-year yield – but by Thursday night it appeared possible that both sides were prepared to begin withdrawing tariffs as part of the phase one deal.

President Trump said on Friday night he was yet to support such a measure, but Wall Street rallied again anyway. This time the ten-year bond yield was little moved.

Our futures closed up 27 points on Saturday morning, again seemingly ambitious against Wall Street and the yield sell-off Australia is now experiencing, being a go-to destination for yield in a no-yield world. In the US, anything over 2% is met with excitement.

But we have also had news over the weekend Iran has discovered a major new oil field, which would increase the country’s proven reserves by a third. US sanctions against Iran presently curtail oil exports, but oil prices are unlikely to react positively to the news, nor energy sector share prices.

Fingers Crossed

On Thursday night Wall Street initially surged on news both sides of the trade negotiations were prepared to begin a tariff roll-back as part of phase one, provided the right concessions were made. Later in the session some doubt set in on news there was “fierce opposition” within the White House.

The finger was pointed at senior trade advisor Peter Navarro, who has been the hard nut all along. On Friday night Navarro pointed out that there was as yet no formal agreement in place, but that the final decision lies with the president.

Trump told reporters on Friday night he hasn’t yet agreed to a tariff roll-back, but that China would like him to agree. He also said he plans to sign any deal agreed upon in the US. This is a turnaround from earlier in the week when he suggested Switzerland was a suitable location.

The result was Wall Street was lower for most of Friday night’s session, with the Dow down close to a hundred points late morning. But optimism built throughout the afternoon to send the S&P500 up 0.3% to another new high.

Perhaps buoying confidence was the fact US bonds yields did not this time fall back again on possibly negative news. The ten-year ticked up a point to 1.93%.

The University of Michigan’s fortnightly consumer sentiment index showed a rise to 95.7 from a prior 95.5 when 95.0 was forecast. Despite the impact of the trade war to date, the US consumer – the driver of the US economy — has remained upbeat. With record low unemployment and another rate cut from the Fed, why not?

The relative strength of the US economy is underpinning Wall Street confidence as the trade negotiations appear to be headed towards possible resolution.

Of course, it would all come a cropper if suddenly the deal was off, and the obvious question, with Wall Street again hitting new highs, is what is the upside if a deal is on?


Spot Metals,Minerals & Energy Futures
Gold (oz) 1458.80 – 10.10 – 0.69%
Silver (oz) 16.77 – 0.32 – 1.87%
Copper (lb) 2.68 – 0.00 – 0.03%
Aluminium (lb) 0.83 + 0.00 0.07%
Lead (lb) 0.96 + 0.00 0.03%
Nickel (lb) 7.24 – 0.13 – 1.81%
Zinc (lb) 1.14 – 0.01 – 1.09%
West Texas Crude 57.24 + 0.34 0.60%
Brent Crude 62.51 + 0.46 0.74%
Iron Ore (t) futures 82.50 0.00 0.00%

Oil markets were also buoyed last week by potentially positive developments in trade, amidst the usual US crude inventory fluctuations. On Friday night prices rose further on another drop in the weekly US rig count—down -7 rigs to 684 to mark a third week of declines, and down -202 year on year.

But oil markets closed before the news from Iran over the weekend.

US yields took a breather on Friday night but selling momentum continued for gold.

Iron ore has now slipped into the seventies and momentum here also appears to be to the downside.

Nickel continues to be volatile, but most recently is only jogging on the spot.

The Aussie is up slightly this morning at US$0.6879.

The SPI Overnight closed up 27 points on Saturday morning which even in isolation looks ambitious, ahead of the Iran news.

The Week Ahead

There is little doubt this week will be all about trade, again. No point in trying to predict anything.

The US reports September quarter GDP tonight and Japan on Thursday.

China provides monthly data for industrial production, retail sales and fixed asset investment on Thursday.

The US will see CPI data on Wednesday and PPI on Thursday although these are less important now with the Fed on hold. More important will be Friday’s retail sales numbers, along with industrial production.

Locally we’ll see the NAB business confidence survey tomorrow and Westpac consumer confidence survey on Wednesday. On Thursday it’s the RBA’s favourite data set – jobs numbers.

The local stock market calendar is very full this week, mostly dominated by AGMs but also more profit results and quarterly updates.

Commonwealth Bank ((CBA)) will round off the bank reporting season tomorrow with its quarterly numbers. Beyond that, I will update on a day to day basis.

Elders ((ELD)) reports earnings today, BHP Group ((BHP)) holds a strategy day and Domain Group ((DHG)) and Hub24 ((HUB)) hold AGMs.

ANZ Bank ((ANZ)) and Macquarie Group ((MQG)) both go ex-dividend today, so don’t be frightened when the financial sector takes a dive this morning. You’ll get 70% franking on the former and 40% on the latter, by the way.

The Australian share market over the past thirty days…

BLD BORAL Downgrade to Neutral from Buy Citi
Downgrade to Neutral from Buy UBS
CCL COCA-COLA AMATIL Upgrade to Accumulate from Hold Ord Minnett
DOW DOWNER EDI Downgrade to Neutral from Buy UBS
FLT FLIGHT CENTRE Downgrade to Neutral from Buy Citi
PDL PENDAL GROUP Upgrade to Add from Hold Morgans
Downgrade to Neutral from Outperform Macquarie
Downgrade to Sell from Neutral UBS
REA REA GROUP Downgrade to Neutral from Outperform Macquarie
Z1P ZIP CO Upgrade to Buy from Sell UBS

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

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