The Monday Report

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

By Greg Peel

Scripted

I suggested on Friday morning the local market would likely open to the upside on overnight strength before fading in the afternoon as traders took profits following a week-long rally, unless Beijing had something to say about it. Well Beijing did have something to say about it, but the market still played to script.

China posted GDP growth of 6.7% in the June quarter, in line with the March quarter result and beating expectations of 6.6%. Industrial production grew 6.2% year on year in the month of June, up from 6.0% in May and beating expectations of 5.9%. Retail sales rose 10.6%, up from 10.0% and beating 9.9%. Fixed asset investment grew 9.0% year to date, down from the 9.6% pace in May and below 9.4% expectations.

On face value, these appear to be a pretty encouraging set of numbers with the exception of fixed asset investment. To the ASX200, they were worth 20 points at midday, taking the index from up 20 points, and ready to fade, to up 40 points. But then the sellers arrived on cue.

Economists do not, however, suggest these were numbers out of China that offer relief. Within the GDP result, growth in private investment, representing 60% of all investment, fell to a record low for the quarter. This leaves the government to carry the can. On that note, the 9.0% growth rate in fixed asset investment to June is the lowest since 2000, suggesting the government is easing off on the infrastructure stimulus.

The June retail sales number was indeed encouraging, but in a way China’s economy is a bit like Australia’s in that it is trying to transition away from a previous model. Can the growth of China’s consumer economy offset the slowdown in the export-driven sectors? Not if private investors are not on board. Beijing can beef up the stimulus again, as everyone expects it will, but just how many airports and railway lines can you build for the sake of it?

Local traders may have had a closer look at the Chinese data, after the computers had had first shot, and decided they were not so hot after all. The index faded all afternoon.

But importantly, the index has clearly breached the 5400 resistance level, meaning that will now become support. Wall Street took a breather on Friday night and the local futures finished down 11 points on Saturday morning, so 5400 will now be the pivot level for the decision as to whether we have reason to push higher.

That will likely come down to the US earnings season now underway and the local earnings season due to start next month.

Almost

Had the S&P500 closed even a tenth of a point higher on Friday night, it would have been the first Monday to Friday run of all-time highs for the index since 1998. But alas, the S&P closed down two points at 2161. The Dow closed up 10 points but that only marked four days of rally. The Nasdaq lost 0.1%.

The fact the 1998 record was not achieved underscores the reality that markets do not usually go up five days in a row. Wall Street was all set for a similar session of Friday profit-taking after a very strong week, but instead hung in there. It is a positive sign.

Traders have also pointed to other positive signs in the Russell small cap index catching up to its large cap counterparts post Brexit and indeed outperforming on the upside. This suggests the rally has breadth. And a further six basis point gain for the US ten-year bond yield to 1.59% equates to over 20bps from the Brexit low and an indication the safe haven money is coming back out again.

The ongoing element traders have been pointing to for several post-GFC years is the level of cash still on the sidelines. If investors decide they have no choice but to deploy that cash in a low interest rate world, stock market upside could be substantial.

The US CPI rose 0.2% in June, in line with expectation. The increase was largely due to the oil price which many believe should ease off after the summer driving season. Annual inflation is only 1.0%, reflecting the initial big drop in oil prices. Core inflation, without oil, is 2.3%. This should be enough to prompt the Fed into hiking but for three reasons.

Firstly, the Fed prefers the PCE measure of inflation, and that is still running under 2%. Secondly, the Fed did not hike in June because of Brexit risk, and despite the rebound in markets a rate hike is not expected at the July meeting either, on a “too soon” basis. Thirdly, wages fell 0.2% in June. Lack of wage growth suggests a subdued inflation outlook.

But US retail sales jumped 0.6% in June when 0.1% was expected. It’s the third consecutive solid gain.

The big earnings result on Friday night came from the banks. Citigroup posted a beat and Wells Fargo posted in line. The shares of both closed down on the day, but this was more a case of a Friday after a week-long rally and the fact JP Morgan’s solid result on Thursday night had traders amped up for strong beats on Friday night.

As of this week, the earnings reports will come thick and fast, with a lot of Dow names in the frame. If Wall Street is to hang on to or exceed new all-time highs, it will need the run of results to be as positive as the early numbers have suggested.

Commodities

Since we’re focusing on records today, we can also note the 0.6% jump in the US dollar index to 96.69 on Saturday morning ended the strongest week for the dollar against the yen since 1999. The yen has been plunging basically since “Helicopter” Ben Bernanke met with officials in Tokyo early in the week, sparking speculation the BoJ may be prepared to use “helicopter money” as a last ditch effort to soften the yen and boost the Japanese economy.

Helicopter money directly refers to hand-outs of printed money to the populace as a form of stimulus, analogously dropped from helicopters. In the GFC, the famed “Pennies from Kevin” is a local example. But it can also mean other drastic stimulus measures, such as the BoJ buying government bonds and then forgiving the debt. Whatever the case the policy is highly inflationary, but given a low inflation world and over two decades of deflation in Japan, hyperinflation is not considered a risk.

The jump in the greenback on Friday night helped aluminium, copper and nickel down around 0.5% on the LME and lead down 1.5%, with zinc rising 0.5%.

Iron ore fell US20c to US$57.80/t.

Oil traders cited the better than expected China GDP and US retail sales in sending West Texas crude up US73c to US$46.23/bbl, despite the US rig count marking its sixth week of gains in seven.

Gold held its ground against the strong greenback in rising US$2.50 to US$1337.10/oz.

The Aussie is down 0.7% on the strong greenback at US$0.7580.

The SPI Overnight closed down 11 points or 0.2% on Saturday morning.

The Week Ahead

All eyes will be on the ECB on Thursday night when it holds a scheduled policy meeting. But given the wold has quickly recovered from Brexit fears, and the Bank of England elected not to react, it is likely Draghi will keep his powder dry.

The US will see housing sentiment tonight, housing starts on Tuesday and existing home sales, the Chicago Fed national activity index, the Philadelphia Fed activity index, FHFA house prices and leading economic indicators on Thursday. Friday sees a flash estimate of July manufacturing PMI, and Japan and the eurozone will offer the same.

Japan is closed today.

The minutes of the July RBA meeting are due tomorrow and otherwise, NAB’s June quarter business confidence summary on Thursday provides the local data of note this week.

It will be a bit different on the local stock front however, as the quarterly reporting season ramps up.

Western Areas ((WSA)) will report quarterly production today, Rio Tinto ((RIO)) and Oil Search ((OSH)) tomorrow, BHP Billiton ((BHP)) and Woodside Petroleum ((WPL)) on Wednesday, South32 ((S32)) on Thursday and Santos ((STO)) and OZ Minerals ((OZL)) on Friday, among others during the week.

Rudi has returned from two weeks of touring Victoria and Queensland. He will appear on Sky Business via Skype-link on Tuesday, 11.15am, to discuss broker calls. On Thursday he'll return to the studio at Macquarie Park, 12.30-2.30pm and on Friday he'll do the Skype-link again around 11.05am.
 

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

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