The Monday Report

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By Greg Peel

Ground Zero

It was a stuttering session on Bridge Street on Friday as the local market struggled to establish any direction on the last trading day of what had been a disappointing month. One sector at least knew which way it was headed, with a 5% gain in energy off the back of the oil price rebound being the stand-out on the day.

There was some counterbalance from selling in the big hospital names, leading healthcare down 1.8%, but otherwise it looked like a weak monthly close at midday when the ASX200 was down 30 points. Then along came the Bank of Japan.

Having only a week ago assured markets there would be no dramatic move in monetary policy, the Bank of Japan shocked markets on Friday afternoon by dropping its cash rate to minus 0.1% from plus 0.1%. As Japanese banks will now have to pay 0.1% to park their money with the central bank, the move has been implemented to encourage lending into the economy instead. As to whether this is the magic bullet needed to get Abenomics back on the rails, well there’s not a lot of optimism across the globe.

But the move was certainly well received by stock markets. The Japanese Nikkei index jumped 2.8% to its close but beforehand the Australian market found the kicker it needed to carry the ASX200 back over the 5000 mark to close the month, as I had suggested on Friday morning would be the goal of fund managers in the session. The 5000 level is certainly ground zero for the local market – a centre of gravity so powerful we have ultimately returned to it every time there is any move above or below over the past 12 months.

All the Way with the BoJ

The BoJ rate cut also gave UK and European markets a shot in the arm, and that mood lost nothing as it crossed the pond to Wall Street. Underpinned by the week’s rebound in oil prices, the US markets took the Japanese rate cut as a major positive at a time the December Fed rate hike has been causing much consternation.

The Dow closed up 396 points or 2.5%, the S&P gained 2.5% to 1940 and the Nasdaq rose 2.4%.

Talk persists of Russia and Saudi Arabia agreeing to 5% oil production cuts. There are various reasons why the world is sceptical of this possibility, not least of which being a long history of failed co-operation between the two producing nations. But most importantly, it is the US which is creating global oil oversupply. With oil at US$30 a barrel, non-US oil producers have the best chance of affecting global supply reduction if, having come this far, they can just sit it out a bit longer and wait for a slew of underwater US producers to go to the wall.

If production cuts are implemented outside the US, pushing oil back to 40 or maybe even 50, then marginal US producers will hang in there and the problem will not have been solved. Oil would likely then go back down towards 20 again.

Oil prices stabilised on Friday night but there is no doubting the week’s rebound, to end a still woeful month, has given Wall Street some renewed hope amongst Fed rate rise fear and what is proving yet another disappointing US corporate earnings season. Energy sector losses have made net earnings look woeful but that aside, once again revenue growth across the US economy is sadly absent.

On the subject of Fed policy, Friday night’s first estimate of US December quarter GDP came in right on expectation at 0.7% growth. That’s down from 2.0% in the September quarter and 3.9% in June. The result might have met expectation, but on the basis of this trend, how could one see a central bank continuing on a steady tightening path? And for the third year running, snow is threatening to be a factor in the March quarter.

The GDP result was thus another outside factor in Wall Street’s rally on Friday night. It is hard to see the Fed raising in March. The BoJ has gone the other way, and oil has stopped falling. For now.

Commodities

West Texas crude was almost unchanged over 24 hours on Saturday morning at US$33.56/bbl. Brent was up US71c at US$34.74/bbl.

The BoJ’s move unsurprisingly sparked a big plunge in the yen and subsequently the US dollar index jumped 1% on Friday night to 99.58. This should have been bad news for commodity prices, but over in London, base metal traders were more heartened during the weak by the oil price rebound.

We are also now only a week away from that annual event that always has the capacity to throw commodity markets into a bit of a turmoil. Chinese New Year comes very early in 2016, beginning next week. There is always a scramble ahead of the break, which pushes prices up, deathly quiet during the week, and sell-off afterwards as life slowly returns to normal. The holiday also distorts Chinese data over the period which often causes distress.

You’d think we’d be used to it by now.

Copper rose 0.6% on Friday night but short-coverers sent zinc up 2.5%, lead up 3% and tin up 4.5%.

Iron ore was unchanged at US$41.50/t.

Gold was also little changed despite the big dollar jump, at US$1116.90/oz.

And the big rise in the greenback did not impact on the Aussie, which is steady at US$0.7080, given the counterbalance of a lower yen through the cross-rates.

The SPI Overnight closed up 37 points or 0.8% on Saturday morning.

The Week Ahead

Today is the first of February and that means two things: the first of the month brings the global round of manufacturing PMI releases; and we have now entered the local corporate earnings result season.

In China’s case, Beijing will release both the official manufacturing and services PMIs today. As we know from last month, these releases have the capacity to send the Chinese stock market into apoplexy.

For the US, it’s jobs week. I would suggest we’re probably now back into a “good news is bad news” setting on Wall Street, such that a better than expected non-farm payrolls result this coming Friday night will send US stocks south on Fed rate rise fears.

Before we get to that result, the US will see personal income & spending tonight, vehicle sales on Tuesday, private sector jobs on Wednesday, and factory orders, productivity and chain store sales on Thursday.

The Bank of England will hold a policy meeting on Thursday. What surprises might it come up with?

The RBA will meet tomorrow. No surprises are expected downunder. The RBA will also release a quarterly Statement on Monetary Policy on Friday.

Australia’ manufacturing PMI is out today, along with monthly house prices and the TD Securities inflation gauge. The services PMI is due on Wednesday and construction on Friday. We’ll also see building approvals and the trade balance on Wednesday and retail sales on Friday.

The first week of the results season proper will start slowly as always. Navitas ((NVT)) will report tomorrow, a small group will report on Thursday including News Corp ((NWS)) and Tabcorp ((TAH)), and Friday sees REA Group ((REA)) along with a couple of others.

Macquarie Group ((MQG)) will provide a trading update on Thursday.

Rudi will make his first appearance in 2016 on Sky Business as host on Wednesday, YMYC, 8.00-9.30pm and re-appear as guest on Thursday at noon.
 

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

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