The Monday Report

This story features OZ MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: OZL

By Greg Peel

After its brief flirtation with 5500 on Thursday, the Australian market predictably fell heavily on Friday after the Nasdaq-led rout on Thursday night. Australia’s information technology sector was a stand-out loser with a 2.5% fall as local tech stocks, which arguably bear little relation to their US counterparts, were sold in sympathy. Among the most heavily sold were the previously high-flying internet classifieds stocks which now must be looking a lot more attractive.

The rout continued in the US on Friday night as the Nasdaq fell another 1.3% to take it to 3999 – a dangerous close under the 4000 technical level. The Dow fell 143 points or 0.9% while the S&P split the difference with a 1.0% fall to 1815.

The lingering mood from Thursday was not improved before the bell on Friday when the first Dow component off the earnings season rank, JP Morgan Chase, posted earnings per share of US$1.28, down from US$1.59 a year earlier and missing forecasts of US$1.39. JPM acknowledged a bit of a shocker of a quarter but management was upbeat in its outlook on the apparent strength of the US economic recovery. JPM shares fell 3.7% while banking peer and leading US mortgage bank, Wells Fargo, posted a solid result and a 0.8% gain.

The US producer price index showed a headline jump of 0.5% in March against expectations of 0.1%. The core PPI (ex food & energy) rose 0.6%, having fallen 0.2% in February, and is up 1.4% over twelve months.

The jump in wholesale inflation is not good news for those on Wall Street hoping the Fed will ultimately raise interest rates later rather than sooner. Aside from the Fed’s focus on unemployment, inflation is another critical element. As long as inflation remains low the central bank has scope to ease off on its tapering schedule if a slow economic recovery warrants. If inflation begins to rise then things become more urgent. The CPI is out on Tuesday night.

Which brings into focus consumer sentiment. Michigan Uni’s fortnightly measure of sentiment showed a rise to 82.6, the highest level since last July. Economists had expected 80.8. With spring having sprung and the snow having melted, no doubt US consumers are feeling a little better about things. If they get really excited, consumer inflation will rise. It’s a trade off.

The inflation data had little impact on the US dollar index, which was steady at 79.49. Gold was also steady at US$1318.70/oz while the US ten-year yield slipped only one more basis point to 2.62%. The Aussie slipped 0.1% to be back under 94 at US$0.9396.

The great nickel surge continued with the metal up another 2% on Friday night while all other metals were relatively steady. Iron ore nevertheless fell US$2.20 to US$116.90/t which won’t help local market sentiment today.

The oils were little moved on Friday despite the escalation of pro-Russian protest in eastern Ukraine. Brent fell US19c to US$107.27/bbl and West Texas fell US7c to US$103.74/bbl. A lot of the action hit the TV screens over the weekend so things might be different tonight. Ukraine is accusing Russia of sponsoring further calls for regional referenda, which Russia denies, but Russia has doubled Ukraine’s natural gas bill and is demanding payment. The critical element remains one of sanctions, which to date have been trivial. If the West steps up its sanctions against Russia, the potential response is one of Russia cutting off its gas exports to Europe, which represent a third of European consumption.

The SPI Overnight fell 14 points or 0.3%.

If accurate, the ASX 200 will be back close to 5400 once more today and at a level which launched last week’s two day rally on Bridge Street – a rally that was as brief as it was sharp. Local participants argue the Nasdaq-led sell-off on Wall Street has little correlation with the make-up of the Australian stock market so Bridge Street should find itself being able to stabilise, one might assume. Despite the severity of the Wall Street sell-off, commentators there are not panicking either given the selling is not wholesale but rather represents a switch back to value (yield) from growth. Growth was more popular than yield when it was assumed US bond rates must rise on Fed tapering, but this is yet to happen in earnest.

The local market will now begin to suffer from thin volumes as we enter the school holiday/public holiday period. It’s a short week for all Western markets this week given the Good Friday holiday. The US only has Good Friday off while the Australian markets are closed on the following Monday and Anzac Day Friday.

It’s an important week locally nevertheless, as the resource sector quarterly production reports roll out in earnest. The big names reporting this week include OZ Minerals ((OZL)) and Rio Tinto ((RIO)) tomorrow, BHP Billiton ((BHP)), Fortescue Metals ((FMG)) and Iluka Resources ((ILU)) on Wednesday, and Santos ((STO)) and Woodside Petroleum ((WPL)) on Thursday.

Economically it will be a quiet week in Australia this week, with the highlights being the release of the RBA minutes tomorrow, which no doubt will hold no surprises, and NAB’s March quarter business confidence summary on Thursday, along with monthly vehicle sales.

The focus for Australia will nevertheless be squarely on China. Thursday brings China’s monthly data dump of industrial production, retail sales and fixed asset investment numbers but also China’s March quarter GDP result. Economists are forecasting 7.3% growth, down from 7.7% in December.

For the US it will be all about the Nasdaq and the switch but earnings will take centre stage when plenty of the big Dow names report, particularly banks and computer hardware. Citigroup is in focus tonight.

There will also be a rush of US economic data ahead of the long weekend. Tonight sees retail sales and business inventories, tomorrow the CPI, housing market sentiment and the Empire State manufacturing index, Wednesday industrial production, housing starts and the Fed Beige Book, and Thursday the Philadelphia Fed manufacturing index.

With all talk in Europe as to whether the ECB might actually introduce QE or whether it’s all just a lot of tactical verballing from Mario Draghi, this week’s industrial production, trade balance, CPI and ZEW investor sentiment survey releases might provide some fodder.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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