The Monday Report

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

By Greg Peel

Bottom?

It was just over a week ago that the ASX200 closed at a new low for the correction from 6000, at 4918. The close “took out” the previous intraday low of 4928 after having breached what had been solid support at 5000. Technically, were the index to bounce from that level we could start to believe perhaps the bottom had been seen.

And it did, back over 5000. It briefly consolidated and then commenced a five-day rally. On Thursday the ASX200 closed above solid resistance at the top of the recent range at 5200. Technically this was another green light. On Friday we rallied again, to close above 5300.

All very positive, but of course nothing is certain in financial markets. Looking at Friday’s sector moves it is nevertheless clear the rally from the bottom is being driven by commodities.

When rumours emerged last week that heavily indebted global resource giant Glencore was potentially about to go under, Lehman-style, we saw capitulation selling in local mining names that took the likes of BHP down to prices long forgotten. Glencore dismissed the suggestion, and sparked a rebound in resource sector stocks. At the same time, commodity analysts have for a while now been suggesting that prices may have fallen about as low as they can go in this cycle. Already there have been big moves afoot to cut production and trim back mining and drilling activity.

In other words, China may yet disappoint further and the prices of some commodities may yet slip lower but in reality, there is unlikely to be a lot of downside left if mining companies continue to pursue a supply-side response. If there are to be casualties yet to come, they will be at the smaller end of the spectrum, and may well be consolidated through M&A rather than left to perish. Bigger companies in tenable financial positions should survive without issue, to eventually benefit from such curtailment and consolidation activity.

On Friday the local materials and energy sectors led the 1.3% index rally with 2.3% gains each. It was a long way back to banks and consumer staples with 1.2%. The big resource sector names have now rebounded very substantially from their Glencore-related bottoms. And on Friday night Glencore set metals markets on fire.

Commodities

Last night metal producers and traders converged on London for LME Week, hosted annually by the London Metals Exchange. In what has been considered a shrewd move ahead of the gathering, Glencore announced on Friday night it is responding to weak conditions to cut 100,000tpa of lead production and 500,000tpa of zinc production. The announcement is expected to promote further talk of supply curtailment over cocktails in London, and generally revive some enthusiasm in the industry.

In response, lead jumped 6.3% on the LME on Friday night. Zinc jumped over 10%, its biggest session move in decades. Meanwhile, as expectations of a Fed rate hike in 2015 continue to fade, the US dollar index dropped 0.5% to 94.87, further supporting commodity prices.

On anticipation Glencore’s announcement will not be the last we’ll hear across the metals spectrum, aluminium and copper jumped 3% on Friday night and nickel 4%. Tin, up 1%, proved the laggard, but tin had already rallied strongly last week on news of an Indonesian ban on tin exports.

The news came as markets absorbed what had been a disappointing earnings result from Alcoa, announced after-market on Thursday night, but Alcoa is also planning to break up its business and sell-off a chunk, which is all part of the consolidation process going on in the sector. While Alcoa is considered first cab off the rank for each US quarterly earnings season, it is no longer looked to as a bellwether for the season.

The weaker greenback again encouraged West Texas crude to trade over the US$50 mark on Friday night, but again it fell back by the end of the day, to close up US13c at US$49.50/bbl. At present, talk of oil having seen the bottom is also bubbling, and the greenback is supportive, but geopolitical considerations are also playing a part as tensions heighten over Syria.

There seems to be some work yet to do to break through US$50. Brent rose US80c to US$52.44/bbl.

Iron ore rose US70c to US$55.50/t.

Gold used to be the safe haven to run to whenever geopolitical tensions emerged, but not so much these past few years. A weaker US dollar is nevertheless supportive, hence gold jumped US$17.80 on Friday night to US$1157.70/oz.

Is the Aussie a commodity currency? On Saturday morning the Aussie was up a cent at US$0.7327 and is hanging in there so far this morning.

Wall Street

Unsurprisingly, the US materials sector led Wall Street higher on Friday night, with energy in tow. In the wider market it was a more sluggish session nonetheless, suggesting that while the rally marked its sixth day, things were beginning to look a little tired. The Dow closed up 33 points or 0.2% and the S&P managed just under a 0.1% gain to 2014 to notch up its best weekly performance of 2015. The Nasdaq rose 0.4%.

Atlanta Fed president Dennis Lockhart was still beating the 2015 rate rise drum on Friday night, insisting that December was still a possibility and October could not be ruled out either. But it’s starting to look like the Fed is simply trying to keep up appearances. No one believes an October rate rise is going to happen. The market is now favouring March over December.

Thus it is unlikely Lockhart’s hawkish spin had much of an impact on trading on Friday. With earnings season beginning in earnest this week, traders squared up after a week of solid gains. With Fed speculation now shifting to the background for the time being, the next month in the US will be all about earnings.

The Week Ahead

Of particular interest will be reports from the big US banks, which hit the wires this week, along with a raft of other Dow names.

Meanwhile, the SPI Overnight was down 18 points or 0.4% on Saturday morning, which seems out of line with the big rally in metals. Perhaps traders have decided the big rally in metals simply provides confirmation of the rallies on resource stocks all week long.

The mood might change, nevertheless, when the market realises that China was only on a one-week break and is now back to scare everyone to death. China releases trade data tomorrow and inflation data on Wednesday.

Tonight is Columbus Day in the US, which is a convoluted holiday that sees US banks and the bond market closed but commodity and stock markets open, but likely thin in volume.

Wall Street may have shifted its focus away from an immediate Fed rate hike but the data upon which the central bank is dependent continues to roll in. Wednesday sees retail sales, inventories, the PPI and the Fed Beige Book. Thursday it’s the CPI and both the Empire State and Philly Fed activity indices. Friday it’s industrial production and fortnightly consumer sentiment.

The eurozone will see the influential ZEW investor sentiment index out tomorrow night – the first since the VW scandal. Friday night sees eurozone trade and inflation data which will be closely watched as expectations of a second wave of ECB QE gather steam.

Japan is closed today.

In Australia, tomorrow brings the monthly NAB business confidence survey and Wednesday the Westpac consumer equivalent. The September jobs numbers are belatedly due on Thursday. The RBA’s deputy governor will speak tomorrow and on Friday the RBA will publish a Financial Stability Review.

On the local stock front, this week sees a step-up in the number of AGM’s and resource sector quarterly production reports. In the former camp, Telstra ((TLS)) tomorrow and CSL ((CSL)) on Wednesday offer highlights. In the latter camp, Fortescue Metals ((FMG)) and Woodside Petroleum ((WPL)) on Thursday and Rio Tinto ((RIO)) on Friday are the big names.

Rudi will appear on Sky Business on Thursday at noon.
 

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