The Monday Report

This story features INCITEC PIVOT LIMITED, and other companies. For more info SHARE ANALYSIS: IPL

By Greg Peel

Policy Confusion

A square-up rally on Wall Street on Thursday night seemed a good enough reason to bargain hunt from the open on the local market on Friday. There may have also been cause to question the week’s big sell-off given the detail of the RBA’s quarterly Statement on Monetary Policy.

The pullback was largely driven by Tuesday’s RBA policy statement for May, which delivered a rate cut but implied there would be no more to follow. Gone was the usual “we will continue to assess the outlook and adjust policy as needed” line. But hold the phone, that exact line makes an appearance in the quarterly. The central bank also revised down its GDP and inflation forecasts, and reiterated that it expects unemployment to peak at 6.5%. If no one had ever read the May statement, then there would be no change to the assumption another rate cut is still a possibility.

So as you were, let’s buy back those stocks. But around midday, conviction began to waver. China’s trade numbers for April came out and showed a 6.2% year on year fall in exports when a 0.9% gain was expected, and a 16.1% fall in imports when only an 8.4% fall was expected. This was not good news for the miners.

So by day’s end the market was down on the session having been up 44 points. It was a mixed bag, with an RBA-led 0.9% rebound in utilities, for example, matched by a 0.8% fall in materials. But there was one sector that never went up in the first place. On a growing belief oil prices may have now peaked following their stellar comeback, the energy sector was thumped 3%.

Yes, Prime Minister

And they came out of the sun screaming Tory, Tory, Tory, och ai. No one came even close to predicting the outcome of the UK election, which saw the Conservatives claim an outright majority and left Labour and the Lib-Dems in a smouldering heap. And having voted against independence only last September, the Scots decided to establish a nationalist bloc north of the border.

As to whether markets will be back fretting about possible Scottish secession once more was not important on Friday. The FTSE soared 2.3%. A Tory government may be more capitalist-friendly but the overriding issue was that fears of a hung parliament were swept away.

They liked it in Europe too, strangely, given the Tories are committed to holding a referendum on whether or not Britain should remain in the EU. The German market surged 2.7% and the French market 2.5%, despite data showing German industrial production growth slowed to 0.1% in March from 0.5% in February.

But it was not just about the election. It was also about US jobs.

Just Right

Ahead of Friday night’s US non-farm payrolls release, Wall Street had decided that if the April number is as bad as the March number was, then that’s bad. It would mean snow is not the reason the US economy appears to have stalled in the first quarter. But if snow was indeed the issue and April jobs rebounded spectacularly, say 300k+, then that, too, would be bad. It would imply a June Fed rate rise would be back on the cards.

So a result of 223,000 was just what the doctor ordered, after the March figure was revised down to a mere 85,000. It’s enough to suggest the US economy will recover in the June quarter from its winter malaise, but not enough to spur the Fed into action too soon. The UK election result was also well-received across the pond, and European strength flowed over into US markets as the Dow surged 267 points to be back over 18,000, the S&P chimed in with 1.4% to be back over 2100, and the Nasdaq scraped back over 5000 with a 1.2% gain.

So still the hamster is running round and around in its wheel but not going anywhere.

Funnily enough, while US stock markets saw a Goldilocks jobs result, the bond market decided it was a disappointment. The US ten-year yield fell 3 basis points to 2.15%.

Oil Relief

All things being equal, Wall Street would likely not have been surprised if the oil price tanked on Friday night, having apparently tipped over during the week. So there were sighs of relief when West Texas crude rose US50c to US$59.46/bbl, spurred on by the positive jobs number and another reported fall in the US rig count. Brent fell, on the other hand, but only by US25c to US$65.39/bbl.

The response on the LME was more mixed. A positive US jobs number was balanced out by a subsequent 0.3% rise in the US dollar index to 94.79 and by the weak Chinese trade data. Nickel rose 1% but lead fell 1%, while the other metals were up and down on small moves.

Iron ore rose by US50c on Friday to US$60.50 a tonne. Over the week iron ore lifted by US$4.30 a tonne or 7.7%.

Gold rose US$3.40 to US$1187.80/oz.

The Aussie dollar is a little higher at US$0.7933, despite the weak Chinese data and the stronger greenback.

Futures traders have no doubt a big rally on Wall Street is enough for the bargain hunters to give it another shot on Bridge Street today. The SPI Overnight closed up 43 points or 0.8% on Saturday morning.

Beijing Delivers

If futures traders risked being wrong on Saturday morning, by last night they would have been feeling a lot more confident.

On Saturday, Beijing released April inflation data which showed a slight tick-up in CPI to an annual 1.5% from 1.4% in March but economists had forecast 1.6%. Forecasters had also assumed some relief for factory prices but the PPI remained stubbornly at minus 4.6%, flat on March. There is certainly no impediment here to Beijing further upping the ante on its promised stimulus measures.

And right on cue, yesterday the PBoC announced another cut to interest rates – the third in six months. The benchmark one-year lending rate has been trimmed 25 basis points to 5.10% and the deposit rate falls by the same amount to 2.25%.

This will come as no surprise to markets given any weakness in Chinese data has led to further stimulus measures over 2015, and Friday’s trade data were another case in point. But confirmation is still a positive, so the local market should see a boost today.

The Week Ahead

Let’s hope it doesn’t all come crashing down on Wednesday, after Tuesday night’s supposedly dull and boring federal budget release. There have been plenty of leaks but that doesn’t mean some sectors on the ASX won’t be holding their breath, such as healthcare, child care and wealth management.

Before Joe gives it another shot we’ll see the NAB business confidence survey for April out today, and the ever popular housing finance numbers out tomorrow. On Wednesday we’ll see the March quarter wage price index.

China will be back in the frame on Wednesday, delivering April industrial production, retail sales and fixed asset investment numbers.

The eurozone will provide a first estimate of March GDP – the quarter that introduced QE – on Wednesday.

Wall Street will be watching retail sales and business inventories on Wednesday, the PPI on Thursday, and industrial production, fortnightly consumer sentiment and the Empire State activity index on Friday.

On the local stock front, Incitec Pivot ((IPL)) will deliver its half-year result today and Orica ((ORI)) tomorrow along with a full-year result from CSR ((CSR)) and an investor update from Qantas ((QAN)). AusNet ((AST)) releases its full year result on Thursday, Graincorp ((GNC)) its half-year and Paladin Energy ((PDN)) provides a quarterly update.

The week will also see a handful of AGMs being held, including those of Coca-Cola Amatil ((CCL)), Westfield Corp ((WFD)) and Oil Search ((OSH)).

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report. On Wednesday, between 8-9pm, he will host Your Money, Your Call Equities on Sky Business.
 

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