The Monday Report

This story features NINE ENTERTAINMENT CO. HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: NEC

By Greg Peel

Watch and Act

Last week began on the local market with a solid rally in the wake of the Chinese president’s speech, taking the ASX200 back up to the critical 5800 level. Thereafter the week saw a series of uncommitted ups and downs, each of around 13 index points, and Friday’s session was no exception.

Trade war potential remains an issue, although so does the potential for the US and China to settle their differences via negotiation. Trump’s reassessment of the TPP, however that may play out, also provides the slight chance of a positive for Australia.

The missiles flew in Syria, leading to elevated geopolitical risk fears, although the allies ensured the strikes were surgical and hit only their intended targets. Further sanctions have been placed on Russia and Russians, and now Russia is talking sanction retaliation. The aluminium price soared in the week.

Missiles also flew out of Yemen towards the Saudi Arabian capital and oil assets. The oil price is now at its highest level in three years.

The White House revolving door remains a potential source of further volatility, as do probes into Trump’s Russian connections and past dalliances.

As all of the above plays out, the Australian stock market has moved into a holding pattern. Friday night was to bring the first of the big US earnings reports for the season, and there is much anticipation that it will be a tax cut-driven cracker, not just in terms of earnings but in terms of possible accompanying share buyback/dividend increase announcements.

There is much for markets to absorb at present.

Domestically, the big news on Friday was that after forty years, Nine has lost the cricket to Seven, after Seven lost the tennis to Nine. Shares of Nine Entertainment ((NEC)) were little moved on Friday, but Seven West Media ((SWM)) enjoyed a 12.6% pop.

Fox Sports, which is now owned by Foxtel, which is partly owned by Telstra ((TLS)), has also picked up its share of cricket rights. Telstra shares rose 0.3%.

Speculation is mounting Wesfarmers ((WES)) may be set to launch a bid for troubled Kiwi Fletcher Building ((FBU)), given Wesfarmers has picked up a 4% stake. Fletcher shares rose 8.5%.

Ord Minnett upgraded Primary Health Care ((PRY)) to Accumulate on Friday and lifted its price target 23%. Primary shares rose 7.7%.

The consumer discretionary and healthcare sectors were strong on Friday, along with materials on further commodity prices rises. IT was the best performing sector given sector heavyweight Computershare ((CPU)) benefits from rising US rates.

On the other side of the ledger, consumer staples dragged and the banks were relatively flat.

Already Banked

All of JP Morgan (Dow), Citigroup and Wells Fargo reported earnings before the bell in New York on Friday and all three beat forecasts on both the top and bottom lines. The Dow shot up 160 points from the open.

And that’s where it ended. The profit-takers moved in on the banks, which all closed -2-3% lower on the session. Throw in all of the above with regard what global markets have to worry about at the moment, and the Dow was down -240 points late in the afternoon, before halving that loss in the last half hour.

The response to bank earnings beats took some by surprise, but as it was pointed out, it is not unusual for bank stocks to rally into earnings releases, surprise to the upside, and then drop on profit-taking. While it’s been an up and down 2018 for US banks to date, bank stocks did spend the week rallying in anticipation.

Aside from expectation of improved interest margins, given higher US rates, Wall Street’s focus was on bank trading profits in financial markets. 2017 saw the banks struggle to book any trading profits due to a complete lack of volatility. Volatility has returned with a vengeance in 2018 and hence Wall Street expected much better numbers on that front.

They were better, but not overwhelming. While volatility may provide the opportunity to profit from trading in equities, currencies, commodities and fixed interest, it is ingenuous to assume the banks will always be on the right side of every trade.

Nevertheless, Wall Street has come to rely on bank earnings results to provide a bellwether indication for the wider market, coming, as they do, early in the season. The response to the banks’ “beats” has caused pause for thought as to whether a “sell the fact” attitude will pervade over the next month, even if the S&P500 does report as much as 20% net earnings growth.

The jury is out. Bank of America, Morgan Stanley and Goldman Sachs (Dow) report early this week, along with a number of Dow stalwarts.

Commodities

Aluminium saw some Friday profit-taking following a very strong week, driven by sanctions imposed on Rusal, Russia’s major aluminium producer.

Gold saw a modest return to popularity on Syria concerns.

Geopolitics are also behind the week’s strong run for oil prices.

The Aussie remains steady around US$0.7660.

The SPI Overnight closed down -6 points on Saturday morning.

The Week Ahead

All eyes will be on US earnings reports this week, and for the following month.

China will also be in focus, as Beijing releases the March quarter GDP result. Forecasts are for 6.8% year on year growth, in line with the December quarter, and ahead of Beijing’s “around 6.5%” target.

Monthly Chinese industrial production, retail sales and fixed asset investment numbers will be released alongside the GDP on Tuesday.

US data releases this week include retail sales, housing sentiment and the Empire State activity index tonight and housing starts and industrial production tomorrow. The Fed Beige Book is due on Wednesday, and Thursday brings leading economic indicators and the Philadelphia Fed index.

The minutes of the April RBA meeting are due tomorrow and Australia’s March jobs numbers are out on Thursday.

On the local stock front, Bank of Queensland ((BOQ)) reports earnings tomorrow and Australian Pharmaceutical Industries ((API)) on Thursday.

For many companies in the market, we are now entering a season of quarterly reports and updates, mostly from the resources sectors but increasingly in recent years from the wider market in general.

OZ Minerals ((OZL)) and Whitehaven Coal ((WHC)) release production reports tomorrow and Rio Tinto ((RIO)) on Wednesday, along with a quarterly update from Aurizon Holdings ((AZJ)). Thursday sees production reports from all of BHP ((BHP)), Evolution Mining ((EVN)), Iluka Resources ((ILU)), St Barbara ((SBM)) and Santos ((STO)), along with an update from Challenger ((CGF)), and likewise Macquarie Atlas Roads ((MQA)), as it is called for the moment, on Friday.

We are also now moving into the AGM season for calendar year reporters. Woodside Petroleum ((WPL)) meets on Thursday and APN Outdoor ((APO)) and G8 Education ((GEM)) on Friday.

Perhaps April will see sufficient micro drivers to draw some attention away from the current macro maelstrom.

Rudi will appear on Sky Business on Monday at 7.30pm, on Tuesday at 11.15am, via Skype, and on Thursday between midday-2pm.

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