The Monday Report

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By Greg Peel

Indecision

Friday proved to be a volatile day on Bridge Street, albeit in a tighter range than we’ve suffered recently. The ups and downs were almost a microcosm of the week itself. Early buy orders sent the index tumbling into an upward hole before the sellers quickly moved in to slap the market back into shape.

Thus the ASX200 was up 45 points from the open and down 35 at lunchtime, before rallying back into the green at 3pm and finishing with a thud on late selling, down 29 points at the close.

Not that any of it means that much at this point. Sector moves were inconsistent, with the consumer sectors and materials positing the only rallies while energy and the banks ensured a negative index close. The important point from a technical perspective is that at 5042, we still closed above 5000.

Swoosh

The strong opening on Bridge Street was attributed to supposedly positive commentary just before kick-off from Janet Yellen. A weak finish suggested perhaps Janet Yellen really didn’t say anything new.

Which she didn’t, as far as I’m concerned. The Fed still favours a rate rise before year-end and that’s what Fedheads have been consistently saying now for months. The only point of argument is that in reaffirming this stance, Yellen went some way to easing the global growth fears that heightened when the Fed did not chose to raise at the September meeting.

At least, that’s the way they took it in the northern hemisphere. London jumped 2.5%, Germany 2.8% and France 3.1%. Wall Street, which had closed on Thursday evening before Yellen spoke, jumped from the open and was up 260 Dow points at lunchtime.

Aiding the mood was an earnings report from Dow component Nike, which trashed expectations. The “beat” came down to an unexpected 30% increase in sales to…guess where — China. Thus within the space of two sessions we had one US multinational – Caterpillar – issuing a profit warning due to the impact of weaker Chinese demand and another going the other way on increased Chinese demand.

Are rumours of China’s death premature? The difference is that Caterpillar indirectly feeds China’s export economy – Tonka trucks for mining the raw materials imported by China’s manufacturing sector for example – while Nike feeds a Chinese domestic consumer economy obsessed with all things Western, such as overpriced sandshoes. On the basis of these two US corporate results, one might be prepared to believe Beijing’s economic policies are working.

Wall Street would also have been heartened on Friday night by another revision to the June quarter GDP result, which saw the number lifted to 3.9% from a previous 3.7%. Surely this puts more pressure on the Fed to move, and as we know, Wall Street is now pro-rate rise rather than anti, as it was for most of 2015 to date.

Friday’s rally didn’t last through the afternoon, as a rate rise is still not good news for the volatile US biotech sector. This sector remains the best performing over twelve months but is sensitive to interest rates, given valuations are based on long dated earnings potential and every little tick up in the short end rate is amplified through discounted cash flow valuation from the long end.

It’s also a momentum traders’ sector, thus once it begins to move in either direction it usually gathers pace. Thus when biotechs started to drop on Friday, the selling accelerated through the afternoon. Hence we saw the Nasdaq close down 0.9% even as the Dow closed up 0.7% or 113 points, 68 of which represent a 9% jump for Nike, and the S&P split the difference closing flat at 1931.

The US ten-year bond rate rose 5 basis points to 2.17%.

Commodities

The oils also had another up-day, which is typically positive for Wall Street, but only to the tune of US27c for each of WTI and Brent. West Texas is at US$45.43/bbl and Brent at US$48.60/bbl.

While the US dollar index only rose 0.2% to 96.26, LME traders saw a stronger for longer dollar on Fed tightening and sold all base metals bar nickel, albeit modestly. Zinc copped the worst of it with a 2.7% fall.

Iron ore fell US60c to US$58.20/t.

Gold jumped up on Yellen’s supposed dovishness at her post-meeting press conference last week, and has slipped back again since Thursday night’s lift in hawkishness. It’s down US$7.80 at US$1146.30/oz.

The Aussie is up 0.3% at US$0.7024.

Given the local futures market takes the S&P500 as the Wall Street lead and not the Dow, the SPI Overnight closed down 4 points on Saturday morning.

The Week Ahead

We’re in for a busy week ahead, as locally we head towards a long weekend and the start of summer time. And of course the big match on the weekend – Australia v. England. Apparently some other trivial domestic tournaments will be held as well.

The two big events of next week are the US non-farm payrolls report for September due on Friday, in reference to all of the above, and the beginning of Golden Week in China, which sees the country close down from Thursday through to Wednesday.

While Golden Week is not quite as disruptive as the week-long Chinese New Year holiday, it can still play havoc with China’s non-seasonally adjusted data.

Thursday is the first of the month and that means manufacturing PMI day across the globe, including the numbers from Beijing and Caixin. Both parties now post both their manufacturing and services PMIs together, whereas everyone else spreads them out.

In the lead-in to the jobs report the US will see pending home sales and personal income & spending tonight, which includes an August reading for the Fed’s preferred PCE inflation measure, and Case-Shiller house prices and the Conference Board consumer confidence index on Tuesday.

Wednesday it’s the ADP private sector jobs report and the Chicago PMI, Thursday construction spending, vehicle sales and the manufacturing PMI, and Friday factory orders and jobs.

Japan will report industrial production, retail sales and jobs data across the week, as well as the quarterly Tankan Survey.

In Australia we’ll see building approvals on Wednesday and the manufacturing PMI on Thursday, followed by retail sales on Friday.

On the local stock front we’re still working through a handful of ex-divs, while Kathmandu ((KMD)) will post its FY15 result tomorrow. AGL Energy ((AGL)) and ASX ((ASX)) will both hold AGMs tomorrow, ahead of what becomes a flood of AGMs through October.

Rudi will only appear on Sky Business once this week and it'll be on Thursday at noon.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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