The Monday Report

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By Greg Peel

The story in US stock markets on the weekend was not just one of jobs but also of the spectacular death of the momentum trade. Share prices in companies for which PE is meaningless but future possibilities drive value have lost all popularity these past couple of weeks and Friday night the flood turned into a torrent. Biotech stocks and internet stocks, which had run hard over 2013 on fairy dust, crashed. The Nasdaq fell 2.6%.

Big names in the internet space such as Facebook and Netflix are now down 20% from their 2014 peaks. Apple fell 1.3% on Friday, which not only has a big impact on the Nasdaq 100 but is felt in the S&P 500. The S&P ultimately fell 1.3% to 1865 while the Dow fell 159 points or 1.0%.

It was not the reaction one might have expected to the jobs number, but then it wasn’t just an employment-focused reaction. The US added 192,000 jobs in March, shy of the 200,000 consensus estimate. The result goes some way to confirming that the stumble in earlier months was all about the weather and that the US recovery is still on track. There was a rolling build-up of hope leading into the release, such that the so-called “whisper number” grew to heights above the 200k prediction, but realistically a 150 fall in the Dow is not reflective of this minor “miss”.

Indeed, the initial response on Wall Street was positive, at least for the first hour. Then the rot set in and the indices cascaded downwards. Tonight Alcoa will report its March quarter earnings result and thus unofficially kick off the quarterly earnings season. Part of the sell-off on Friday, which pulled both the S&P and Dow away from their earlier all-time highs, was about squaring up ahead of the reporting season. Otherwise it was about switching out of high-flying, wing-and-a-prayer stories and back into more solid, PE-calculable stocks and also back into one particularly beaten-down global sector – emerging markets.

Emerging market investments were left behind in the domestic multiple expansion phase of 2013 and have had a tough time of it in 2014 to date. China led the way with slowdown fears, a once surging Brazil fell back to the pack and imperial posturing had its impact on Russia. The Russian dust has settled for now, Beijing has begun its incremental stimulus program and on Friday night, the LatAm ETF in New York was one of few instruments that finished in the green.

Yet the reaction in other markets provided evidence that there was indeed overall disappointment in the jobs result. This is despite the February number being revised up to 197,000 from the previous 175,000 estimate, with January at 144,000 and December at 84,000. Perhaps the fact March’s 192,000 failed to show rolling progress was enough to imply the Fed may not be as hasty as it has recently implied in its tapering program and interest rate rise timetable. The unemployment rate was steady at 6.7% but this was because the participation rate rose to 63.2% from 62.0% in February and is now at its highest level since September.

The clue in the market’s perception of the Fed’s potential response was in the US bond and gold markets. The benchmark ten-year yield, which had been ticking up solidly all last week, dropped 7 basis points to 2.63%. Gold, which had been drifting off all last week, jumped US$17.50 to US$1304.70/oz. The implication here, and to some extent in the stock market, is that US investors had set themselves up for a cracker of a jobs report and didn’t get one.

The US dollar index remained steady at 80.44, but unfortunately when one talks of “emerging markets” one also turns to a traditional proxy – the Aussie dollar. The Aussie is up 0.7% to US$0.9290.

The reaction in commodity markets was nevertheless muted. Base metals put in another mixed session while iron ore rose US20c to US$115.70/t. The oils rather liked the jobs number, with West Texas rising US77c to US$101.14/bbl and Brent, which is currently supported by lingering uncertainty over Libyan supply, rising US33c to US$106.55/bbl.

The ASX 200 had its big stumble on Monday last week but spent the rest of the week grafting its way back in an attempt to force its way out of the gravitational pull of the 5400 level. Alas, it could be just another manic Monday today, with the SPI Overnight down 41 points or 0.8%.

Once upon a time the adage was one of where goes the Alcoa result, so goes the rest of the US result season. It’s a different world for aluminium these days and hence the adage no longer applies, although there is a lingering psychological effect from the first Dow cab off the rank. The real stuff nevertheless starts later in the week when the first bank results roll out from JP Morgan and Wells Fargo.

The suggestion is earnings forecasts have been downgraded due to the weather impact and overly so, thus there is more potential for upside surprise than downside. The jobs results of the past couple of months might support that argument. But that is to some extent why the US indices pushed into new high territory last week, only to see it all fall in a heap on Friday. So now we can only wait as the season plays out to assess the proof of the pudding.

It’s otherwise a quiet week economically in the US with wholesale trade on Wednesday, chain store sales on Thursday and consumer sentiment and the PPI on Friday being the highlights.

The Bank of Japan will hold a policy meeting tomorrow in the afterglow of much FTA schmoozing from Tony Abbott, James Packer and his large-cap CEO pals. The Japanese economy is now coming to terms with the fiscal thorn on the rose of monetary stimulus, being the sales tax increase which took effect this month.

China is also in the frame again this week. It’s a holiday in China today for tomb sweeping, as you do, then on Thursday the March trade balance is due. February’s balance showed a shock plunge in exports and a jump in imports but the numbers were typically distorted by the lunar new year break. Hence Thursday’s result will be keenly watched for signs of reversal. Chinese inflation data is due on Friday.

It’s a busy economic week in Australia beginning today with the ANZ job ads series and the construction PMI. Tomorrow it’s NAB business confidence and on Wednesday Westpac consumer confidence along with housing finance and investment lending. On Thursday, our own jobs numbers are due. Last month’s big jump in jobs seemed to all and sundry to be patently ridiculous so it will be interesting to see if we correct in March.

On the local, stock front we’ll see off-cycle interim results from Ten Network ((TEN)) on Thursday and Bank of Queensland ((BOQ)) on Friday while the March quarter resource sector production report season will kick off this week with ERA’s ((ERA)) report tomorrow.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon.
 

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