The Monday Report

This story features NEXTDC LIMITED, and other companies. For more info SHARE ANALYSIS: NXT

By Greg Peel

Sell-Off

The sell-off in the local market on Friday began early in the session as resource sector stocks were dumped again and this time, unlike Thursday’s session, no buyers emerged. The selling then spread to other sectors to provide the first session for at least a week in which earnings result season was not the dominant factor.

Throughout the last couple of weeks, as the bulk of earnings reports were published, sector moves were typically in opposite directions dependent on which larger cap stock or stocks on the day moved substantially following their earnings releases. There are still a few reports to get through in the next couple of days but realistically Friday marked the end of the avalanche. Over the week the ASX200 failed to meaningfully breach 5800. On Friday it gave up.

The resource sector was due a sell-off, as it had run so far, so fast on commodity price rebounds that for the most part have now stalled. The big names in mining and in energy reported strong, and in some cases better than expected, results, and rallied further. But what now?

Now we have little in the way of upside lead from Wall Street, where the Trump rally is struggling to retain momentum as critical policy details continue to be missing in action. Not that one would expect such important policy decisions so early in an administration, it’s just that Trump keeps talking them up. The president will address both houses of Congress on Tuesday night, as does each new president, and the world is beginning to fear he’ll have nothing to say.

And let’s face it – it doesn’t really help that yet another Australian government appears to be imploding by its own hand. Investors looked at each other on Friday and asked what is going to take this market higher? The result was a general sell-off. Take those profits while you can.

It was still another hefty day in the earnings season nonetheless, and again there were notable winners and losers amongst individual reporters. NextDC ((NXT)) starred with a 12% rally, Asaleo Care ((AHY)) ran 10%, Super Retail ((SUL)) managed 5% and Charter Hall ((CHC)) 4%.

On the other side of the ledger, Automotive Holdings ((AHG)) and Retail Food Group ((RFG)) both lost -4% while the biggest loser on the day was MYOB ((MYO)), which lost -7% having reported the day before.

Despite the ups and downs, every sector finished in the red on Friday. Materials was the standout loser on -2.1%.

Clouds in Europe

It’s that time of year again when Greece is back in the spotlight. The Mediterranean basket case is up for another EU bailout. But while several years ago the eurozone economy was in turmoil and there was much fear a Grexit would mean disaster, now that the economy is looking a lot more stable there is talk of just letting Greece go. Hey, if we can get through Brexit (albeit that’s yet to actually happen) then we can sail through Grexit. The only difference is Greece is in the euro. But letting Greece go would likely prove a popular move within the electorates of the bigger EU economies such as Germany and France, who pay for the bailouts.

And those French elections are fast approaching. Grexit would likely go unnoticed. Frexit would signal the beginning of the end of the eurozone experiment. Investors in Europe are now moving into safe havens in number. European bond yields have been on the slide once more, and slid further on Friday night, in many cases into or further into the negative. Having hit 2.5% recently, the US ten-year yield fell -7 basis points to 2.32%.

US yields are moving south again on the European differential, but also on the same concern that all-talk Trump may yet prove to be no-action Trump. There is a lot of concern on Wall Street about the VIX volatility index, which continues to sit at historical lows. This suggests no one is buying protection, because everyone assumes it’s all onward-ever-upward from here as soon as Trump rolls out those policies. Complacency always precedes a fall

It looked like the Dow might finally break its winning streak on Friday night with a mild pullback. With half an hour to the closing bell the average was hanging around the down -60 point mark. But a late rush of buying saw the Dow pop over the line at the death, to mark eleven consecutive up-days. We are reminded that historically, we’re still in 1987.

The Dow closed up 11 points. The S&P gained 0.2% to 2367 and the Nasdaq rose 0.2%.

A lot now hinges on Trump’s address to a joint sitting of Congress on Tuesday night US time – Wednesday morning Sydney time. It is effectively a State of the Union address, although new presidents don’t like to call it that until they’ve been in office for a year and can claim credit for the state the union is in. A wishy-washy address of typical Trump carry-on and little substance will not sit well with Wall Street, or the world.

Concern is building, in Europe and in the US. Despite a small rise in the US dollar index on Friday night, gold jumped US$7.90 to US$1257.40/oz.

Commodities

After a weak session on Thursday night for base metals, Friday night saw short-covering ahead of the weekend. All prices rose around 1% except for that of nickel, which rose 2.5%.

Iron ore fell -US20c to US$90.20/t.

West Texas crude fell -US36c to US$54.05/bbl.

The US dollar index rose 0.1% to 101.13 but weakness has crept into the Aussie ahead of this week’s GDP release. It fell -0.5% to US$0.7677.

The SPI Overnight closed down -16 points or -0.3% on Saturday morning.

The Week Ahead

Today and tomorrow represent the tail-end of the local results season, with only a handful of more reports to be released. Today’s reporters include Lend Lease ((LLC)) and QBE Insurance ((QBE)).

This week and all of March will bring a flood of ex-dividends that will act as a drag on the index value.

Today we’ll see December quarter numbers for company profits and inventories, tomorrow net exports, and on Wednesday the GDP result. The market is expecting 0.7% growth for 1.9% year on year.

Monthly data releases this week include private sector credit tomorrow and building approvals and the trade balance on Thursday. Wednesday is the first of the month, meaning manufacturing PMIs from Australia and across the globe, and ditto service sector PMIs on Friday.

China will nevertheless release both its manufacturing and services PMIs on Wednesday.

The US will see pending home sales and durable goods tonight, and trade, consumer confidence, house prices, the Richmond Fed index and the Chicago PMI on Tuesday, along with a revision of December quarter GDP. Wednesday it’s the manufacturing PMI, personal income & spending, construction spending and the Fed Beige Book, and Friday it’s the service sector PMI.

The big event will nevertheless be Trump’s address.

Rudi will appear on Sky Business on Tuesday morning, via Skype. On Wednesday he'll host Your Money, Your Call from 8pm till 9pm. On Thursday he'll be on from 12.30pm till 2.30pm and on Friday morning, if everything goes as planned, he'll repeat the Skype experience at around 11.15am.
 

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