The Monday Report

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

By Greg Peel

No Deal in Doha

Shock horror. The meeting of OPEC and non-OPEC oil producers in Doha last night has failed to reach any agreement on a coordinated production freeze. The first market to respond this morning to the stunning news is the Aussie dollar, which fell from around US77.2c to under US76c in a heartbeat.

But in almost as short a space of time, the Aussie is currently back at US76.6c.

As to why the meeting in Doha even went ahead is a mystery. All year Saudi Arabia has said it will only freeze production if all relevant oil-producing nations, including Iran, freeze production, and all year Iran has said no. Heading into the meeting, Saudi Arabia maintained its position. As it turned out, Iran didn’t even bother to attend.

The question now is as to whether, heading into the meeting, oil and other markets had accepted the fact the whole thing was going to be a farce or whether today will bring substantial moves in response, in particular a plummeting oil price. Perhaps the Aussie has provided a clue. Were the initial response in oil prices to be a plunge, the buyers may well be ready to jump on the opportunity and damage will be limited.

There can hardly be any excuse for being surprised.

And then there’s China

Notably, the only sector not to finish in the green on the local market in Friday’s trade was energy. A slight dip suggested squaring up for Doha.

The banks and the materials sectors both had quieter sessions after their solid runs last week, up 0.5% each. This left the rest of the market, which had mostly taken a back seat last week, to pick up the ball and have a run. The consumer sectors, healthcare, telcos and utilities all posted gains of around 1% or more, with industrials just off the pace. It was a choppy session, but in the end the 0.8% gain for the ASX200 was mostly a market-wide effort.

The highlight of the day was the release, mid-session, of Chinese economic data.

China’s GDP grew by 6.7% in the March quarter, smack on expectation. That’s down from 6.8% in December, and, as the headlines in the populist press will be quick to point out, the slowest pace of growth since 2009. It may be a fact but it’s also an ignorant comparison. China’s economy has grown substantially since 2009, such that to achieve the dollar value of additional GDP represented by 6.7% growth today would have required a growth rate in 2009 well into double digits.

In the month of March, Chinese industrial production grew by 6.8% year on year, up from 5.4% in February and ahead of 5.9% forecasts. Retail sales grew by 10.5%, up from 10.2% and ahead of 10.4% forecasts. Year to date fixed asset investment grew by 10.7% over the same period last year, beating expectations of 10.3%.

While drawing upon the usual grain of salt, we may conclude from the data that the stimulus measures undertaken by Beijing last year and into this year are finally starting to see some results. But once again the caveat is the impact of volatility around the Lunar New Year break.

The Chinese numbers helped lift a wobbly ASX200 to a stronger close on Friday but it was not the sort of performance one might have expected in times past when China reported Street-beating numbers. The local resource sectors had a muted session.

Wall Street

Wall Street’s session on Friday was mostly about waiting for Doha. The WTI price fell a dollar to sit poised near the US$40 mark in anticipation. US oils stocks similarly saw a square-up.

Citigroup was the last of the major US commercial banks to report on earnings on Friday and just as had been the case for its counterparts throughout the week, Citi reported a result that was weak but not as weak as forecast. All up Wall Street finished slightly lower on Friday night but higher for the week, led by the rebound in bank stocks.

On Friday night the Dow closed down 28 points or 0.2% while the S&P fell 0.1% to 2080 and the Nasdaq lost 0.2%.

US data releases for the session were weak. Industrial production fell a greater than expected 0.3% in March to mark the sixth monthly decline in seven. The Michigan Uni fortnightly measure of consumer sentiment showed a fall to 89.7 from 91.0 at end-March, suggesting a fourth consecutive month of decline.

Bucking the trend, The Empire State activity index rose to 9.6 from 0.6 last month, to post its strongest reading since January 2015. But this series has become increasingly volatile, and could just as easily be negative next month.

Either way, Wall Street is currently supported by the Yellen Put. Weak data only serve to push out the expected timing of the next Fed rate hike.

Commodities

On Saturday morning, West Texas crude was sitting at US$40.42/bbl, down US$1.03 from Thursday night, and Brent was down US81c at US$43.07. We await tonight’s reaction to Doha.

We can say the same for base metal prices, given the direction of oil has this year been a significant factor in sentiment on the LME. Moves were mixed on Friday night, with zinc’s 1% gain the standout as copper fell 0.7%.

Iron ore fell US$1.10 to US$57.50/t.

The US dollar index had slipped 0.2% by Saturday morning to 94.70, which helped the Aussie up 0.4% to its pre-Doha level of US$0.7726. Gold rose US$6.50 to US$1234.10/oz.

The SPI Overnight closed down 4 points on Saturday morning, but that’s no longer relevant.

The Week Ahead

The US earnings season steps up a gear this week, as a range of Dow components across all sectors take centre stage. Morgan Stanley and Goldman Sachs will round out the investment banking performance, while everything from Johnson & Johnson to Google, Caterpillar and General Electric will offer a more widespread indication of the state of the US economy.

Economic data releases will come thick and fast as well, but as suggested, they lack any real clout above the Fed’s safety net.

Tonight sees housing sentiment, tomorrow housing starts and Wednesday existing home sales, while Thursday brings house prices, leading economic indicators, the Philadelphia Fed activity index and the Chicago Fed national activity index. Friday will see a flash estimate of April’s manufacturing PMI.

Japan and the eurozone will also flash on Friday. The ECB will hold a policy meeting on Thursday but no one is expecting anything new.

It’s a quiet week for Australian data, but the RBA will be in the frame nonetheless. The central bank’s Financial Stability report, released on Friday, suggests concerns over Australia’s apartment construction bubble. Glenn Stevens will speak on Tuesday, and the minutes of the April RBA meeting will be released.

There’s plenty of action on the local stock front this week. The resource sector quarterly production report season ramps up in earnest, with highlights this week featuring Oil Search ((OSH)) and Rio Tinto ((RIO)) tomorrow, BHP Billiton ((BHP)) and Newcrest Mining ((NCM)) on Wednesday, OZ Minerals ((OZL)) and South32 ((S32)) on Thursday and Santos ((STO)) on Friday.

Outside of resources, quarterly reports will be forthcoming from Transurban ((TCL)) today and Brambles ((BXB)) and Challenger ((CGF)) on Thursday. Wesfarmers ((WES)) will report quarterly retail sales on Thursday.

Cimic ((CIM)) and Woodside Petroleum ((WPL)) will hold AGMs on Thursday.

Watch the price of Woodside this morning.

Rudi will appear on Sky Business on Tuesday around 11.15am, via Skype-link, then again on Wednesday, to host YMYC 8-9.30pm, then twice on Thursday (12.20-2.30pm and Switzer TV between 7-8pm), and then again via Skype-link on Friday, usually around 11.05am.
 

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

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