Daily Market Reports | Sep 01 2014
By Greg Peel
It was a flatline Friday on Bridge Street to end the week, and end the official earnings result season. With the US set for a long weekend and the situation escalating in Ukraine, it was not a time to take risk positions, more a time to have a rest.
As at Thursday’s results, just over 250 major companies had reported and on FNArena’s more comprehensive measure, 77 had beaten expectations and 65 had missed, for a relatively even result. The ASX200 didn’t go anywhere much last week, which, macro influences aside, reflects what might be described as an “okay” season that mostly justified current PEs but provided no great incentive to see them expanded.
This assessment is supported by broker reactions to those results. The simple average of consensus target prices those stocks reporting has risen 2.15%, but FNArena database brokers have applied a total of 86 ratings downgrades to 47 upgrades. The bulk of these recommendation changes have been related to valuation. Common justification includes “good result but price a bit stretched” for downgrades and “weak result but perhaps the worst is over” for upgrades.
Japan provided a round of July data on Friday and offered no cause for excitement. The government has been hoping for a rebound out of the sales tax increase blues of the June quarter, but as yet the signs are not encouraging. Industrial production rose 0.2% in July having fallen 3.4% in June, missing forecasts of a 1.2% rebound. Retail sales did manage to post their first rise since the tax was imposed in April, but at 0.5% it was nothing to write home about.
In Europe, the eurozone flash estimate of August CPI came in at 0.3% growth, down from 0.4% in June and in line with the gradual downward trend. Mario Draghi has reiterated his QE-if-needed call, but markets do not expect any policy changes this week when the ECB meets, given Draghi has also maintained that the impact of his negative deposit rate policy is yet to flow through to the data.
It was a predictably quiet session on Wall Street on Friday night ahead of the Labor Day long weekend, albeit a positive one. The Dow rose 18 points or 0.1% while the S&P gained 0.3% to another new high at 2003, and the Nasdaq added 0.4%.
It was an unusual Friday session in recent context, given the apparent escalation in tensions between Russia and Ukraine. A month or so ago Wall Street typically sold off on a Friday if geopolitical tension was heightened, as traders did not want to risk being stuck for two days if the situation worsened. It doesn’t get much worse than possible war, yet Wall Street is increasingly comfortable to ignore such influences. There is a concern, nevertheless, that when the rest of the market starts returning from the beach this week, new highs and increased risk may be sufficient triggers for profit-taking.
Then we could start arguing about corrections again. In the meantime, Russia, the Ukraine and EU are meeting again tonight to supposedly discuss a ceasefire. Putin is telling the West he supports peace, and it’s all the Ukrainians fault, while at the same time reminding his own countrymen and women that if anyone wants to mess with Russia, Russia got nukes.
It’s one reason markets appear to have become somewhat inured. One minute it gets very scary and the next minute nothing happens.
The positive session on Friday can be mostly attributed to US data releases. Fortnightly consumer sentiment came in at 82.5, up from 81.8 at the end of July and beating estimates of 80.0. The Chicago Business Barometer, or Chicago PMI, soared to 64.3 from 52.6 in July, smashing expectations of 57.0. But given the fall to 52.6 in July was the biggest since October 2008, one might consider this datum to be a rather volatile indicator.
The not so good news was that consumer spending fell 0.1% in July, the first fall since January, and incomes rose only 0.2%, the lowest monthly gain for the year. Incomes have risen 4.3% year on year, well below the 35 year average of 6%. Savings increased in July to balance out spending, suggesting Americans remain once bitten twice shy, six year down the track.
The combination of US data, weak Japanese numbers and the weak eurozone inflation estimate fuelled further gains for the US dollar on Friday night. The dollar index rose 0.3% to 82.73. The good news is the Aussie fell 0.2% to US$0.9338, but the bad news is that yen and euro weakness will dampen any impact on the Aussie of a stronger greenback. We need the greenback to be strong by itself.
If there was any notable response to escalating tensions on Friday it was in the oil markets. The EU has told Putin he has a week to withdraw his troops or further sanctions will be applied. Energy markets are the most vulnerable to sanctions, so on Friday Brent rose US67c to US$103.19/bbl and West Texas rose US$1.25 to US$95.83/bbl.
Base metals are more susceptible to weaker European economic growth implied by sanctions than sanctions themselves, but there is a level of balance. Hence metal prices were again little moved on Friday night. Activity should begin to increase from now, nevertheless, as the northern summer comes to an end.
There may be some respite for the local iron ore sector today. Iron ore actually rose for once, up 60c to US$87.90/t.
Gold was steady at US$1287.00/oz.
The SPI Overnight fell 2 points.
The local results season may now be over but this week sees an avalanche of economic data in its place.
We see the manufacturing, services and construction PMIs on Monday, Wednesday and Friday respectively. Today also sees the monthly RP Data/Rismark house price index and TD Securities inflation gauge, and June quarter company profits and inventories.
Tomorrow it’s monthly building approvals and the June quarter current account, and the RBA will meet and change nothing. Wednesday it’s the June quarter GDP. Consensus is for a pullback to 0.4% quarterly growth after March’s 1.1%, bringing annualised growth down to 3.0% from 3.5%, mostly thanks to the budget, one presumes. RBA governor Glenn Stevens will deliver a speech on Wednesday.
Thursday it’s the monthly trade balance and retains sales.
The US is closed tonight so its PMI data will flow a day later. Tuesday also sees construction spending while Wednesday brings factory orders, vehicle sales and the Fed Beige Book. The ADP private sector jobs number shifts to Thursday, along with chain store sales and the trade balance, while Friday brings non-farm payrolls.
Japan, China, the eurozone and UK will also provide PMI numbers this week, beginning today, while the ECB and Bank of England will both hold policy meetings on Thursday.
On the local stock front, results now give way to a rash of ex-divs. Stocks going ex will mathematically prove a drag on the index, although ex dates are fairly evenly spread across September.
On Friday the pending quarterly promotion and relegation will be announced for the S&P/ASX indices.
Rudi will appear on Sky Business today at 11.15am and then no more until next Monday as he will be traveling to Brisbane to share his thoughts post reporting season with local investors (see Weekly Insights email for more details).
For further global economic release dates and local company events please refer to the FNArena Calendar.
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