The Monday Report

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

Oil Worries

It was the energy sector that took the big hit on the ASX on Friday, driven down by falling oil prices and the belief West Texas crude may be poised to fall into the thirties, thus revisiting GFC lows.

Energy fell 3.7%, and next worst performer on the day was materials with a 1% fall. The banks also fell 0.5% to round out a tough couple of weeks since the ANZ capital raising announcement. Commonwealth Bank ((CBA)) is also raising capital, and will come out of its trading halt this morning.

To add insult to the injury of bank sector woes, the Australian market in general copped an additional beating last week thanks to the sudden and poorly explained Chinese currency devaluation. Beijing has been at pains ever since to insist the devaluation is not about boosting China’s flagging export economy via currency wars but about moving the renminbi towards a marker-based pricing mechanism, as the IMF has entreated the Chinese to do so.

Fair enough, but the timing is certainly interesting. And while the last thing we need is for Beijing to begin disclosing possible policy moves a year ahead, a la the Fed, so we can all die of frustration debating the issue for the months and months preceding, it would be nice if Beijing at least made their explanations at the time of the event, rather than in a scramble a day or two later.

The local index attempted to stabilise after a torrid week on Friday morning, but was unable to hold out. When the ASX200 broke support at 5380, the technical sellers poured in in the afternoon.

As You Were

Australia has felt the pain but the US stock market did manage to recover ground last week after the initial renminbi volatility spike. Wall Street remains very much stuck in its 2015 range, and will no doubt remain stuck at least until the September Fed meeting.

On that note, Friday night featured a 0.6% rise in July US industrial production when 0.4% was forecast. The previous two months’ numbers were also revised upwards. The US producer price index rose a muted 0.2% in July after having risen 0.4% in June. The impact of lower oil prices is clearly evident in the annual headline PPI rate of minus 0.8% against the annual core rate, ex food & energy, of plus 0.9%.

Friday’s data sufficiently offset each other to provide no fodder for either side of the Fed timing debate, and no real impetus for Wall Street. It was only the news from Europe that provided a little boost as the week came to a close.

The Dow closed up 69 points or 0.4%, the S&P gained 0.4% to 2091 and the Nasdaq added 0.3%.

You might remember Greece? Well on Friday night the eurozone signed the deal that will see Greece receive E86bn over the next three years in bailout package number three. Packages number four, five, six and so on remain pending. As to whether this is enough to save Greece from economic disintegration in the meantime remains to be seen.

The deal’s approval was more of a rubber stamp than a source of great market relief but at least Greece might slip out of the news now for a while. The approval also managed to soften the blow from the eurozone’s June quarter GDP result, which showed an easing to 0.3% quarter on quarter growth following March’s 0.4%, for an annualised growth rate of 1.3%. Germany’s growth rate improved but not by as much as hoped, while France’s economy stagnated once more.

The best we can say of Mario Draghi’s QE package at this stage is that it has stopped the rot, and brought stability to the European economy if not raging growth. Of course, China’s currency devaluation is not going help an economy dependent on exports.

Commodities

It was a mixed bag on the LME on Friday night, with lead up around a percent, nickel a percent and a half and tin two and a half but aluminium, copper and zinc all fell asleep.

Iron ore remained unchanged at US$56.20/t.

The oils found some stability, having fallen 20% in a month and looking dangerous. West Texas was down slightly at US$42.13/bbl and Brent was down slightly at US$49.03/bbl.

Gold was steady at US$1113.70/oz as the US dollar index rose a tad to 96.52.

The Aussie is up 0.3% at US$0.7379.

The SPI Overnight closed up 9 points on Saturday morning.

The Week Ahead

US inflation – the weakness of which is the main reason supporting the “not in 2015” side of the Fed rate rise argument – will be in the frame again this week with the release of the US CPI on Wednesday.

The US will also see housing sentiment and the Empire State activity index tonight, housing starts on Tuesday, and existing home sales, leading economic indicators and the Philadelphia Fed activity index on Thursday. Wednesday also sees the release of the minutes of the last Fed meeting but any specific clues are unlikely.

The release of the minutes of the August RBA meeting is the only real economic highlight for Australia this week. Given the meeting pre-dated the Chinese currency revaluation, the minutes will not be of any great value.

Instead, the Australian market will be heavily focused on corporate earnings this week, as the gentle trickle of reports to date turns into a barrage.

Today’s highlights include Aurizon ((AZJ)), Charter Hall ((CHC)) and Newcrest Mining ((NCM)).

And a reminder that CBA recommences trading today following its announced 10% discounted rights issue.

Rudi will appear on Sky Business on Wednesday at 5.30pm.
 

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