Daily Market Reports | Aug 31 2015
By Greg Peel
Just A Flesh Wound
Another positive session on Bridge Street on Friday ensured the index actually finished up for the week, as did the grey hair count. But Friday’s session was all about commodity prices, and subsequent 3.7% gains for both the materials and energy sectors. Take those sectors out, and it was otherwise a typically quiet Friday featuring smallish moves.
The August reporting season effectively came to a close on Friday, and now that the volatility of last week appears to have settled down, at least for now, market attention can be concentrated on the score cards and assessments that will follow.
As FNArena’s Result Season Monitor winds to a close, we can note the beat/miss ratio is around 1.6 and the broker ratings upgrades to downgrades is around 3 to 1. If it wasn’t for what’s been going on in the macro realm this month, we might call it a successful season. If we compare it to the last February reporting season, it saw a beat/miss ratio of 1.1 and downgrades outnumbering upgrades almost 2 to 1.
The problem is that February’s result season occurred in a rally, after which the ASX200 closed at 5600 on its way to 6000. At that point, many an analyst was calling stocks overvalued, particularly yield stocks, hence the big downgrade count. In stark contrast, the August season occurred in a correction which accelerated as the month wore on. The index closed on Friday at 5260 having seen 4930, and at the back end of the season, a lot of those upgrades reflected oversold calls as a result of the market sell-off as opposed to micro valuation calls based on earnings results.
The good news for the beaten down commodity names is that commodity prices rallied strongly again on Friday night. The rallies were driven by a combination of short-covering and buying on a belief in oversold levels. At some point commodity prices will settle down again and consolidate, likely at levels lower than a couple of months ago but not as low as the depths of last week.
Relief
Wall Street, too, settled down a bit on Friday night and in S&P500 terms, finished the week higher. The Dow fluctuated on Friday between a hundred points down and unchanged, but in terms of last week, this was a quiet session.
All talk on the Street now is of whether the snap-back rally signifies a bottom is in place, or whether it is just a typical precursor to another leg down. Many assume it will all come down to the September Fed meeting on the 17th.
But to that end, central bankers around the globe don’t seem too concerned about recent market volatility, and also believe the markets are overblowing China slowdown fears. That was the mood emanating for the Jackson Hole symposium on the weekend, which was attended, among others, by the vice chairman of the Fed, the vice president of the ECB and the governor of the Bank of England.
Fed vice chair Stanley Fischer suggested in an interview that nothing that occurred last week will stop the Fed raising at the September meeting. This did not mean the Fed had already reached that decision, he added (personally, I believe otherwise), and it will still come down to data releases over the next two weeks. This Friday night’s US jobs report will basically be the decider, he hinted.
He also gave the first indication of what the move might actually be, suggesting the existing zero to 25 basis point funds rate would be moved to 25-50 basis points. But the most interesting point to note is that despite yet another almost-confirmation from a Fed official, Wall Street didn’t blink. It closed flat. Just how worried is Wall Street about that rate rise? Not all, I suggest.
And as an added element, the BoE governor said he expected to raise UK rates fairly soon. The BoE went very close in the wake of the London Olympics, which provided a big boost to the UK economy, until it became clear it was just a bit of a honeymoon.
Commodities
West Texas crude jumped US$2.71 or 6.4% to US$45.33/bbl on Friday night, to mark a 20% rally from the intraday low of a week ago. Brent rose US$2.30 or 4.8% to US$49.90/bbl.
There is little doubt short-covering was heavily involved, and one outside trigger cited by traders was news Saudi Arabia had sent troops into northern Yemen. News of tropical storms hitting Cuba provided a reminder hurricane season has now begun. Traders also cite genuine buying from those believing last week saw oil trading at oversold levels.
Another seasonal issue for the US oil market is nevertheless the end of the summer driving season, now approaching, and the annual refinery maintenance season which typically follows. When refineries shut down, crude supply builds up in storage centres such as Cushing, forcing down prices until maintenance is complete.
So as with Wall Street in general, there is debate over whether oil has seen the bottom, or could yet plunge once more.
In mixed trade on the LME on Friday night, aluminium, lead and zinc surged 3% and tin 2%, while copper and nickel stayed put. Copper is the only base metal not to close higher for the week. Again, short-covering has been cited among metals, and also the fact it’s a long weekend in the UK and thus the LME is closed tonight.
Iron ore jumped US$2.20 or 4% to US$55.50/t.
With margin call selling now easing, gold found renewed support on Friday. It’s up US$8.90 at US$1133.70/oz.
Commodities rallied on Friday night despite another gain for the US dollar, which is up 0.3% to 96.11 on its index. The Aussie is steady at US$0.7165.
The Week Ahead
The SPI Overnight closed up 12 points on Saturday morning.
As noted, this Friday night sees the US non-farm payrolls report. If it’s positive, lock in a September rate rise.
Over the course of the week, the US will also see the Chicago PMI tonight, construction spending and vehicle sales on Tuesday, private sector jobs, factory orders and the Fed Beige Book on Wednesday, and the trade balance and chain store sales on Thursday.
This week also sees PMIs from across the globe, with manufacturing numbers mostly due on Tuesday and services on Thursday. There are a couple of public holidays about the place this week nonetheless so some dates vary. China is closed on Thursday and Friday.
After a big month of earnings releases, suddenly it’s a big week for Australian economic data.
We’ll see June quarter company profits and inventories today, and the current account including terms of trade tomorrow, ahead of the GDP result on Wednesday. Economists are forecasting 0.4% quarter on quarter growth and 2.2% year on year growth, down from 0.9% and 2.3% for the March quarter.
Monthly data this week include the TD Securities inflation gauge and new home sales today, building approvals, house prices and the manufacturing PMI tomorrow, and retail sales, the trade balance and the service sector PMI on Thursday.
The RBA will meet tomorrow and leave rates on hold, but commentary around China and market volatility will be interesting.
There are a handful of tardy results reports to trickle in this week, but more notably this week sees the ex-divs starting to build. We’ve already had some biggies during result season, but over the course of September a substantial number of stocks will go ex, keeping a lid on prices.
Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. Also, on Wednesday late (9pm) he will host Your Money, Your Call Equities.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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