The Monday Report

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

By Greg Peel

Struggling for support

Last week on Bridge Street was a week in which the ASX200 opened to the downside, before bouncing off 5150 and rallying strongly to 5300. That wasn’t to last, and down we came again, culminating on Friday in an early fall back to 5150.

Energy led the selling on the day, closing down 1.2%, while materials and the telco closed slightly weaker. But a recovery rally from mid-morning saw all other sectors finish in the green. Last week the index found support at the previous breakout level of 5200 but now it appears the number is 5150.

Friday was also a day of squaring up positions ahead of the weekend release of the US jobs report and Chinese trade data.

Job Shock

August was a shock, September was an even bigger shock, but nothing had prepared Wall Street for the shock to come in the October non-farm payrolls result. The difference was it was a shock to the upside. The US added 271,000 jobs in the month, some 100,000 more than consensus forecasts.

That’s the biggest increase in 2015 to date. The US unemployment rate fell to 5.0% from 5.1% in September, its lowest level since April 2008. But the big news was a sudden jump in wage growth to an annual rate of 2.5%. That’s the fastest pace since July 2009.

It is that number which now has Wall Street locking in a December rate hike from the Fed. The Fed appears to be itching for an excuse, and would have been rocked by the criticism it received for not raising in September. There is still the November jobs report to come, and October’s number may yet to subject to revision, but the futures market now has a December hike at a 70% chance.

The US dollar index jumped 1.3% to 99.17 on Friday night, so forex markets are pricing in a rate hike. Ditto the US bond market, where the ten-year yield rose 9 basis points to 2.33%.

As for the US stock market, well, confusion still reigns apparently. Not about whether or not the Fed will raise but about whether that’s a good or bad thing. The Dow closed up 46 points or 0.3% on Friday night and the Nasdaq was up 0.4%, but the broad market S&P was flat at 2099.

We recall that when the Fed did not raise in September, Wall Street fell sharply. Not because the market necessarily wanted to see a rate hike but because it simply wanted to end the uncertainty. Then when we saw two consecutive jobs reports that were shockingly bad, Wall Street decided it was now certain the Fed would not raise, and thus started buying on the basis of ongoing easy policy.

By rights thus, Friday’s jobs number should have had Wall Street selling again. But it didn’t. Why not? Probably because Wall Street would still just like to see this damned rate rise debate over and done with so we can move on. And at the end of the day, a good jobs report is economically positive. Thus there was a level of trade-off, and the best the S&P500 could do was nothing.

China Woes

There’s still not a lot of economic positivity coming out of China.

Yesterday’s October trade data from Beijing showed a 6.9% year on year decline in exports, down from -3.7% in September, and an 18.8% fall in imports – better than September’s -20.4% but still pretty bad. Within Beijing’s initial 7% GDP growth forecast for 2015 was a growth forecast for trade of 6%. Year to date trade is down 8%.

That’s in dollar terms, it must be noted, and so also reflects the big falls in commodity prices. Indeed by volume, imports fell only 2.6% in October. However raw materials were the hardest hit segment within that number, such that by volume, iron ore imports fell 12.3% and coal 21.4%.

The good news, if we can call it that, is that commodity prices really tanked towards the end of 2014. Thus the year on year numbers China will cycle from now should not look quite so bad.

Commodities

The Chinese trade release was yet to come when commodity markets closed for the week on Friday night, so it was all about US jobs and the big jump in the US dollar. In the end, nevertheless, falls were not that dramatic.

Base metal prices have been weak for some time on a slower Chinese economy and the prospect of a Fed rate rise, so the market has been well shorted. Copper fell 0.6% on the LME on Friday and nickel 1%, but the other metals were flat to higher and beaten-down aluminium posted a 1.3% gain.

The story is not dissimilar for the oils, although an US80c fall for West Texas to US$44.43/bbl again puts the benchmark below the long-running 45-50 range. Brent fell US37c to US$47.60/bbl. There was other news to consider for the oil markets nonetheless.

President Obama announced on Friday night the proposed Keystone pipeline from Canada all the way to US refineries on the Gulf would not be built due to environmental concerns. It is a blow to Big Oil’s hopes of creating a major US oil exporting industry. Aside from environmental issues, the question of America’s energy security is a consideration, as is the desire to keep domestic energy prices contained.

Coming back to the US dollar impact on commodity prices on Friday, the big loser was gold. It fell US$17.40 to US$1087.40/oz.

The Aussie dollar was the other big “loser”, falling 1.3% to US$0.7047.

And the iron ore price is down yet again, by US30c to US$47.40/t.

The SPI Overnight closed down 25 points or 0.5% on Saturday morning, ahead of yesterday’s Chinese data release. If the Fed is indeed going to start raising US rates, Australia’s yield plays start to become less attractive to US investors, and the RBA is under less pressure to cut its own rate.

The Week Ahead

China’s October data will continue to roll in this week. Tomorrow sees inflation data and Wednesday sees industrial production, retail sales and fixed asset investment.

It’s a quiet week for US data until Friday, and on Wednesday the Veterans Day holiday sees US banks and the bond market closed while stock and commodity markets remain open, albeit with lower volumes. Friday sees the PPI, retail sales, inventories and fortnightly consumer sentiment.

The eurozone will provide its first estimate of September quarter GDP on Friday.

In Australia, today brings the ANZ job ads series and tomorrow NAB’s business confidence survey along with housing finance data. Wednesday it's Westpac’s consumer confidence survey and on Thursday our own October jobs numbers.

After a brief dip in activity, the local AGM season starts to hot up again this week ahead of a rush towards the end of November.

On top of the AGMs, Incitec Pivot ((IPL)) will release full-year earnings tomorrow followed by DuluxGroup ((DLX)) on Wednesday and Graincorp ((GNC)) on Thursday.

Rudi will appear on Sky Business on Thursday at noon.
 

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms