The Monday Report

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By Greg Peel

Risk On

As expected, it was a relatively quiet day on the local bourse on Friday ahead of the US jobs report and following a strong recovery week. However sector moves were not all that quiet.

The banks only posted a 0.2% gain following a very strong run over the week, but apparent recovery in oil and iron ore prices, along with strength in base metals prices, saw the energy sector up another 0.4% and materials 1.4%. Investors appear to be undertaking a “risk-on” sector switch, drawing on the defensive sectors of healthcare (-1.2%) and utilities (-1.2%) for funds.

Normally telcos would be included in that group but Telstra has been trading more like a cyclical of late. Having taken quite a hit recently, the telcos were up 1.1% on Friday and similarly consumer staples posted a 0.7% gain. The downer was consumer discretionary, which lost 1.0% due to a disappointing January retail sales result.

Retail sales grew 0.3% in January, short of 0.4% expectation. This follows the strong December quarter GDP result for the consumer spending component, and at 4.0% annual growth, spending looks reasonable compared to last year’s 3.5% and the decade average 4.5%. Bear in mind that 4.5% includes a couple of pre-GFC years of growth around the 6% mark.

Still, the market didn’t like Friday’s result. Aside from an unsurprising trend of the non-mining states spending more than the mining states, the other takeaway of note is that we are spending a lot more on services than we are on goods.

Something for Everyone

The US added 240,000 jobs in February, beating 190,000 expectations and continuing a trend of surprising strength in the US labour market. This might be a concern for those fearing the Fed may yet look to hike again in March, but there is always more to a US jobs report than just the headline number.

The unemployment rate remained steady at 4.9%, implying the participation rate fell. But most importantly, after a very strong burst of wages growth in January which heightened Fed rate rise fears at the time, wages fell back 0.1%. Annualised wage growth is running at a below-trend 2.2% — healthy enough considering lingering recession fears, but not enough to force the Fed into action next week.

June remains the current target date for the next Fed move.

Wall Street initially dipped on the jobs report release on Friday night but quickly resumed its rally once more. Simultaneously, the Dow crossed over the 17,000 mark and the S&P500 crossed over the 2000 mark. These numbers offer resistance merely on a “round number” psychological basis, and as such the sellers moved in. But a late rally at the death ensured another assault.

The Dow closed up 62 points or 0.4% at 17,006, the S&P gained 0.3% to close on 2000, and the Nasdaq rose 0.2%.

Proving further support, and risk-on confidence for Wall Street, was yet another rise in oil prices. A 4% gain for WTI meant the second consecutive weekly 6% gain for the global benchmark. Friday’s strength was driven by another drop in the weekly US rig count, suggesting next week’s weekly crude data may show a third week of falling production.

Commodities

West Texas crude rose US$1.37 to US$35.99/bbl and Brent rose US$1.62 to US$38.72/bbl.

Australia’s May budget is beginning to look a lot healthier. It will be interesting to see whether Scott Morrison does the right thing, and warns that a smaller deficit must be treated with caution given forecasters are not convinced the recent rally in the iron ore price will last, or plays the idiot politician, and gloats.

Iron ore was up another US70c to US$52.40/t on Friday.

The “risk-on” trade is now well and truly on show in base metal markets. When prices were heading towards their lows, commodity funds were bailing out rapidly. Now that the supply-demand balance across many a commodity is looking a little healthier – including global production cuts for base metals, particularly in China – the commodity funds are piling back in again, lest they be left behind.

Copper, nickel and tin all rose 3% on Friday night. Aluminium managed 0.7% and zinc was a wood duck.

Gold was relatively steady at US$1262.30/oz with the US dollar index down 0.2% at 97.36.

There’s no stopping the Aussie at present, which may be reaching a short-covering crescendo. It was up 1% on Saturday morning at US$0.7427.

The SPI Overnight closed up 36 points or 0.7% on Saturday morning.

The Week Ahead

The US goes into a bit of a data vacuum this week so the focus this week will be on the ECB, which holds a policy meeting on Thursday night. December’s extension to ECB QE has made little impression on the eurozone economy, which has also had to fight a pullback in the US dollar (ie stronger euro) as Fed rate rise expectations have been tempered.

The market is expecting something from Mario Draghi this week, but it’s not quite sure what.

China will be in the frame this week. Economists were disappointed with the Chinese government’s performance at the weekend’s national conference, at which it appeared Beijing’s focus is now back on reviving growth rather than addressing debt and further reforms. That should mean further stimulus from the PBoC, but Beijing has lowered its 2016 GDP growth target to 6.5-7.0% from 2015’s 7.0%.

The 2015 result was 6.9%. Perhaps by switching to a range rather than a single figure, Beijing is making it easier for its number crunchers to orchestrate an expected result.

This week China will release trade numbers tomorrow, inflation numbers on Thursday, and results for retail sales, industrial production and fixed asset investment on Saturday.

Australia will see ANZ job ads today, NAB business confidence tomorrow and Westpac consumer confidence on Wednesday. We’ll also see the construction PMI today and housing finance numbers on Wednesday.

As the ASX200 appears set to push further away from the gravitational pull of 5000 as the week begins, from tomorrow it will be fighting a large number of ex-divs throughout the week. These include BHP Billiton’s ((BHP)) dividend on Thursday, what there is of it.

Rudi will appear on Sky Business via Skype-link on Tuesday, 11.15am, to discuss broker calls. Next he'll appear twice on Thursday, from 12.20-2..30pm and between 7-8pm for the Switzer Report. On Friday he'll repeat the Skype-link performance at 11.15am.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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