The Monday Report

This story features BENDIGO & ADELAIDE BANK LIMITED. For more info SHARE ANALYSIS: BEN

By Greg Peel

Wall Street closed higher for the month of May for the first time since 2009. There was no “Sell in May”, but there was a very big “Sell on the last day of May” on Friday night. The Dow fell 208 points, or 1.4%, the S&P fell 1.4% to 1630 and the Nasdaq fell 1.0%.

At the closing bell on Friday there was a major rebalancing of the MSCI index of US stocks. Rebalances should imply zero-sum, in that every dollar sold should match a dollar bought, but that assumes fund managers sell and buy simultaneously. This did not appear to be the case and traders were ascribing 100 Dow points of value in the drop to this rebalance.

Which still leaves 100 points of raw selling, and this was largely attributed to the fact it was the last day of the trading month in the fifth consecutive month of net gains. Traders were happy to lock in profits, suggesting growing nervousness over further gains. The rally from last year has not seen one 5% pullback, and that is unusual. Everyone is still talking of the pullback that has to come.

While May proved to be yet another up-month, it was also a month that featured significant portfolio switching. On Friday night the US ten-year bond yield closed 4bps higher at 2.16%, having opened the month around 1.7%. It doesn’t seem like much, but that’s actually a 27% rise in yield. When bonds are being sold it usually implies stocks are being bought in a “risk on” switch, but the S&P 500 only rose 3% in May. Instead, what we saw was a switch out of yield sectors that become less attractive on the yield gap as Treasury yields rise, being utilities, telcos, healthcare and so forth, and a move into growth sectors such as financials, industrials and technology.

The movement in bonds and the switching in stocks all relate to heightened expectation the Fed will begin to taper its bond purchases soon. Some still believe it won’t happen until next year, while others see the first reductions as soon as September. Fed rhetoric suggests the timing will all be to do with improving economic data, rather than immediate inflation concerns. There is a growing level of confidence with regard to the US economy, so appropriate portfolio adjustments have begun.

Such adjustments have also meant the foreign selling of yield investments. In Australia, we have seen big moves down in the banks, telcos, mining services companies and other high dividend payers. Yet for Australia there has been little in the way of “switching”. Australia’s cyclical sectors are heavily weighted to resources and commodity prices have been weak on weaker Chinese data, and the mining boom is in the process of peaking (not so for energy yet). If you’re wondering why banks appear in the “defensive” side in Australia and the “cyclical” side in the US, it’s because US banks are yet to return to more normal payout ratios as they continue recover from the GFC.

Thus the Australian market has fallen 5% in May when Wall Street has risen 3%. Money moving out of Australian investments has helped the Aussie to pull back 7% in May, including a 1% drop over Friday to US$0.9572. The good news is that the lower Aussie is healthy for the overall Australian economy. Consolidation for the stock market is also healthy, as it clears out the perceived overvaluation of yield stocks.

On the subject of the US economy, Friday’s economic data releases showed a jump in the fortnightly Michigan Uni consumer sentiment gauge to 84.5 from 76.4 a month ago. This was the highest reading since 2007. The Chicago PMI posted an extraordinary turnaround from contraction into rapid acceleration, as evident from the move to 58.7 from 49.0 in April. On a slightly sour note, personal spending fell 0.2% in April and personal incomes were flat.

The US dollar index rose 0.3% to 83.27 on Friday, thus ending gold’s little foray back above the 1400 mark. Gold fell US$25.80 to US$1388.00/oz.

Base metals have recently become stuck in a bit of a push me-pull you, with moves in the US dollar counteracting economic data news. The metals were again mixed on smallish moves on Friday. It was not the same for the oils though, following OPEC’s decision not to reduce production quotas despite falling energy prices and increasing US unconventional energy production. Brent fell US$2.04 to US$100.15/bbl and West Texas fell US$2.02 to US$91.59/bbl.

Spot iron ore dropped another US$1.20 to US$110.40/t.

It will be interesting to see just how much of Wall Street’s fall on Friday can be attributed to the MSCI rebalance in isolation, given the SPI Overnight dropped 57 points, or 1.1%.

The sliding Chinese spot iron ore has again become a point of concern, but data released on Saturday should provide some easing of nerves. The official Chinese manufacturing PMI was expected by economists to fall to 50.0 in May from 50.6 in April, but instead it rose to 50.8. It’s not exactly thundering expansion, but given last week’s HSBC flash estimate showed 49.5, the official result is a pleasant surprise.

HSBC will report its final calculation today but in the meantime, a breakdown of Beijing’s number shows production bounced 0.7 to 53.3, new orders were up 0.1 and export orders were up 0.8. The results indicate the Chinese are beginning to restock. Beijing will report its May service sector PMI today.

Australia’s May manufacturing PMI is due today, services on Wednesday and construction on Friday. Today also sees retail sales, the RP Data-Rismark house price index, ANZ job ads and the TD Securities inflation gauge. March quarter results are due for company profits and inventories ahead of Wednesday’s GDP.

Tuesday sees the March quarter current account and net exports result, and the RBA will decide to leave its cash rate unchanged at 2.75% if market expectation is accurate. Wednesday it’s the March quarter GDP, with consensus suggesting 0.8% growth compared to December’s 0.6%, for an annual growth rate of 3.1% compared to 2.7% in December.

Thursday brings the April trade balance.

The eurozone, UK and US will report manufacturing PMIs today and services PMIs on Wednesday. The ECB and Bank of England will hold monetary policy meetings on Thursday.

On the weekend, China will report inflation, trade, industrial production, retail sales and fixed asset investment data.

It will be an interesting week in the US now that economic data releases will be specifically assessed in the context of whether the Fed might decide to start tapering sooner rather than later. The biggie is the jobs report on Friday, but ahead of that we will see the PMIs as well as construction spending tonight, the trade balance and vehicle sales on Tuesday, private sector jobs, factory orders and the Fed’s Beige Book on Wednesday, and chain store sales on Thursday.

New Zealand markets are closed today for the Queen’s birthday.

On the local stock front, investor days will be held this week by Bendigo & Adelaide Bank ((BEN)) on Tuesday and Fairfax Media ((FXJ)) on Thursday.

Rudi will appear on Sky Business today 11.15am, Wednesday at 5.30pm, Thursday at midday and again on Switzer TV 7-8pm.
 

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

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