The Monday Report

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By Greg Peel

More selling on the local market on Friday suggests further exiting of Australia by foreign investors, given the big caps were all hit again. The materials sector has its own problems but the banks, the telco and big healthcare names were equally hit. The only sector closing in the green was utilities.

The question for the local market is one of just how hard will Australia’s popular yield stocks be hit if US rates start to rise? Were Wall Street not to react negatively to any hint of a move from the Fed, we might see a period of decoupling from Wall Street as yield differentials narrow.

To that end we note the US ten-year bond yield rose one basis point on Friday night to 2.46%. That might seem insignificant, but the US jobs number did elicit a lot of head scratching.

US August non-farm payrolls came in at 142,000, well short of 225,000 consensus. It is the first month in seven a plus 200k addition has not been made and the lowest increase this year. The prior July and June numbers were also revised down by a net 28,000. The unemployment rate fell to 6.1% from 6.2%, but the participation rate fell to 62.8% from 62.9%, representing a 32-year low.

Initially, the Dow fell 60 points on the news. But then the buyers arrived. There were two points to consider: (a) many economists dismissed the big jobs miss as being anomaly, pointing out that there were on-off events affecting retail and auto jobs in the month and also pointing out that these numbers are forever revised, and sometimes significantly; and (b) there is a lingering element of “bad news is good news” as the weak number implies the Fed is right in remaining more dovish than hawkish in its policy stance.

But that would also suggest bond yields should be lower. They were initially – the ten-year yield fell to 2.41% — but then the sellers arrived to achieve the 2.46% close. This would tend to suggest the bond market is also dismissing this one jobs number as a blip, and is setting itself ahead of the big sell-off that many think is now in the offing.

The turnaround in stocks had the Dow closing up 67 points or 0.4%, while the S&P rose 0.5% to another new high at 2007 and the Nasdaq added 0.6%.

On the geopolitical front, Western leaders met in Wales to organise a coalition of the willing to step-up the assault on ISIL, and to discuss what further sanctions would be applied to Russia were Putin to maintain his aggression. On Friday night however, Putin and Poroshenko agreed to a ceasefire.

The ceasefire could have been great news for a Monday morning, until news came through over the weekend of at least two more incidents of conflict in Ukraine. So as to what happens next is anyone’s guess. Meanwhile, UK prime minister David Cameron announced he would commit 3500 British troops to a NATO “spearhead” force, ready to be deployed in Ukraine if needed.

Those in the know suggest Putin’s prime motivation is to prevent the West arriving on his doorstep, which would be the case were Ukraine to join NATO, just as the US did not want Russian missiles in Cuba in 1962. A ceasefire may be one thing, but Putin is not going to concede.

The European stock markets were steadier on Friday night following Thursday night’s fresh policy stimulus from the ECB, and the US dollar index also steadied at 83.77. The same can’t be said for the Aussie, unfortunately.  If there is foreign money getting out of the stock market then that should be supported by downside pressure on the currency but given the interest rate differential between Europe and Australia is now even wider, the euro-Aussie carry trade is even more popular. The Aussie was up 0.4% to US$0.9378 on Friday.

Gold rose US$6.60 to US$1268.70/oz.

The prospect of a ceasefire in Ukraine was enough to send the oils lower, with Brent falling US99c to US$100.84/bbl and West Texas falling US$1.09 to US$93.42/bbl. One might also argue the weak US jobs number had an impact but over in London, metals traders followed Wall Street traders in shrugging off the non-farm payrolls. Metal prices consolidated, with small falls the norm expect for copper, which rose 0.5%, and nickel, which is on the move again now the Philippines looks like getting into the export ban act. It rose 1.2%.

Iron ore continued its slide, falling another US70c to US$83.60/t. Over the weekend, a second small Australian iron ore miner called in the administrators.

The SPI Overnight fell 2 points.

The US jobs number will be much discussed for a month until the next one, providing for more confusion on the US interest rate front. Meanwhile, the European economy hangs in the balance of whatever might transpire in Ukraine. And locally, it appears we’ve entered a post result season hangover period in which there’s little in the way of new corporate news to consider, thus time to reflect on stretched valuations. We may wallow ahead of AGM season next month.

Focus this week will be on Australia’s own jobs number “blip” of last month, which saw the unemployment rate unexpectedly jump to 6.4%. Economists are assuming the August result, due on Thursday, will provide a return to a more believable 6.3% or even 6.2%.

Before that we’ll see the ANZ jobs ads series today and NAB business confidence tomorrow, along with housing finance and investment lending data. Wednesday it’s the Westpac consumer confidence survey, with jobs wrapping up the week on Thursday.

China is on holiday today but Chinese data will flow towards the end of the week. Thursday sees inflation, and Friday sees industrial production, retail sales and fixed asset investment.

Japan will revise its disappointing June quarter GDP result today while the US is in for a quiet week data-wise, at least until Friday. Friday brings retail sales, inventories and consumer sentiment.

Just when you thought the results season was over in Australia it’s not, given we’ll be seeing the odd off-season result trickling through over the next couple of months. On Thursday it’s Myer ((MYR)) and Sigma Pharmaceutical ((SIP)).

The ex-divs continue to roll this week and thus will continue to put ceteris paribus downward pressure on the index.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon.
 

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