The Monday Report

This story features BHP GROUP LIMITED. For more info SHARE ANALYSIS: BHP

By Greg Peel

Friday

After another volatile week which saw the ASX200 rebound back towards to 5000 mark, Friday’s trade had a very “Friday” feel about it. We opened lower on a weaker Wall Street and oil prices, stalled over lunch, and then fell away further in the afternoon.

The sectors that led the late fall were those which had posted strong gains during the week – energy, materials, financials and consumer discretionary. In other words, it looked a lot like traders squaring up ahead of the weekend. Telstra continued to fall in the wake of a somewhat disappointing earnings report, while other sector moves were mixed up and down.

The Australian market has been largely following the global trend over the month to date but there have been some significant individual stock moves within that trend as well thanks to result season. We are now entering the final week of the month-long season but around half of the major stocks on the market choose the last week to report, so there is plenty of scope for some more alpha fun and games this week.

We will also see the first of the December quarter data releases this week that build us up to the GDP result next week.

Poised

Friday’s trade in New York was interesting in that the oil price fell 3% but the S&P500 closed flat, and ditto the January CPI showed its biggest jump since 2011 but the S&P500 closed flat.

It would appear the US markets are now coming to terms with the fact the oil price is weak and will remain so for the foreseeable future, and that any talk emanating from OPEC with regard production curtailments is just that – talk, being used as a tool to force a bounce back in oil prices just as they appear destined to drop to new lows.

Perhaps fearing their strategy will ultimately reach a “cry wolf” point of ineffectiveness, last week did see an actual figure being out on curtailments, but “only if everyone else does the same” and “we understand that Iran needs to catch up”, which basically means no curtailments.

Wall Street is braced for lower for longer oil prices and braced for the financial fallout that will follow as marginal US producers hit the wall. The big US banks are carrying minimal exposure to energy sector loans so there is no great panic on that front.

The US headline CPI for January came in at 0.0%, it was revealed on Friday night, when economists had expected a 0.1% decline. Low fuel prices and a bout of food deflation are keeping headline inflation in check. But the core (ex food & energy) CPI showed a 0.3% gain – the biggest move since August 2011. Headline CPI is up only 1.4% on an annual basis but core CPI is up 2.2%, which exceeds the Fed’s target rate.

So we’re back to talking March again for the next Fed rate hike. Or are we? Were that the case, we would have expected to see Wall Street sold off heavily on Friday night. But we didn’t. The Dow closed down 21 points or 0.1%, the S&P closed unmoved on 1917 and the Nasdaq rose 0.4%.

The bottom line is the Fed does not pay a lot of attention to inflation as measured by the consumer price index. The FOMC’s preferred measure of inflation is the personal consumption & expenditure (PCE) measure, the January result of which is due this Friday. The PCE has been running behind the CPI and has yet to return to the Fed’s target of 2%.

Meanwhile, the Nasdaq also went some way to balancing out the equation on Wall Street on Friday. The new world tech names and biotech names that clutter up the Nasdaq are the “momentum” stocks of the market, often trading on astronomical PEs or no PE given no E. They are bought up in a scramble when the mood is positive and then amongst the first to be jettisoned when the mood turns sour. As we were crashing earlier in the month, the Nasdaq was “outperforming” to the downside and on the rebound, has been outperforming to the upside.

Having crashed to oversold levels earlier in the month and now posted a rebound representing the fastest move up in years, Wall Street is poised, both technically and fundamentally. What will happen next? Well, there are a lot of US data releases this week and right through next week, when the February jobs number is due.

Commodities

West Texas crude fell US89c to US$29.84/bbl on Friday night and Brent fell US89c to US$33.26/bbl.

It was a positive night on the LME but traders are not reading too much into it, noting volumes remain low. Many Chinese participants create a two week annual holiday around the week-long New Year shutdown so this week is expected to see a return to more normal activity. Aluminium, nickel and zinc all rose 2% on Friday.

Iron ore rose another US50c on Friday to US$47.00/t. Through all the turmoil experienced in the local materials sector recently, an 8% rebound in iron ore has almost gone unnoticed. Probably because no one can quite figure out why.

Gold is very much in the headlines of the popular press at the moment, so be warned. If your cab driver tells you he’s just bought a gold bar, sell! Gold fell US$8.80 on Friday night to US$1236.20/oz.

The fall came despite weakness in the US dollar index, down 0.3% at 96.66.

We have subsequently seen significant weakness in the pound this morning following the weekend’s announcement the British will go to the polls in June to provide an opinion on whether the UK should exit the EU. An exit is not favoured in financial and commercial circles given the myriad trading agreements and relationships that have been established over the past 40 years.

The Aussie continues to consolidate and is sitting at US$0.7147 this morning, while being a percent up against the GBP.

The SPI Overnight closed down one point on Saturday morning.

The Week Ahead

The highlights of this week’s local data will be December quarter readings on wage prices and construction work on Wednesday and private sector capital expenditure on Thursday, ahead of Wednesday week’s GDP result.

The US will see the Chicago Fed national activity index tonight, the Richmond Fed index, the Conference Board’s monthly consumer confidence measure, existing home sales and Case-Shiller house prices tomorrow, and new home sales on Wednesday. Thursday it’s durable goods and FHFA house prices, and Friday brings personal income & spending (including the aforementioned PCE), Michigan Uni fortnightly consumer sentiment, trade numbers, and a second revision of December quarter GDP.

On the latter front, the market is expecting a revision down to 0.5% growth from the previous 0.7% estimate.

The US will also see flash estimates of February manufacturing and services PMIs tonight and Wednesday, and Japan and the eurozone will also provide flash estimates of manufacturing PMIs today.

As noted, the final and most crowded week of the local results season is upon us. Special mention can be made of the much anticipated BHP Billiton ((BHP)) result due tomorrow, but thereafter please refer to the FNArena calendar for listings.

No one will be paying much attention to BHP’s profit result, just its dividend policy.

Rudi will appear on Sky Business on Wednesday between 8-9.30pm to host Your Money, Your Call Equities and on Thursday between 7-8pm for the Switzer Report.
 

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

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