The Monday Report (on Tuesday)

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By Greg Peel

Friday

Friday’s local session was a game played in two halves. Taking a lead from Wall Street, which having rallied up to psychological levels on its major indices decided it was time to take some profits, the ASX200 fell sharply from the open.

It nevertheless appeared to be more of a case of buyers standing aside rather than sellers piling in, thus when the morning’s opening rotation was complete and close to 50 points were lost, the buyers were ready to get in at better levels. If we truly are in rally mode right now, such dips offer welcome opportunities for previous slow movers.

So by lunch time the index was back to square. But then someone pointed out that it was a long weekend, and thus Friday afternoon was all about drifting off again as traders locked in what should have been some solid short term profits and got out of the city as soon as possible.

We can always take such Fridays with a grain of salt. The profit-taking tale is most obvious if we look at the biggest sector fall on the day, that of materials, which dropped 2.4% on a day iron ore had rallied 7%. You don’t see that too often. But given the likes of BHP and co had run up some 30% from their lows as the iron ore price pushed sharply higher, it seemed like a great opportunity to lock that in. Particularly if that 7% jump seemed like a possible blow-off top.

The fall in energy was less dramatic at 1.1%, but oil prices were actually down a tad. Elsewhere, the two standout sectors in what was otherwise a fairly general pullback were the banks, which didn’t move, and utilities, which were hit 1.7%.

Interesting that the banks, which have also seen a run good run this month, should not see any notable profit-taking a day after a major broker issued a warning that the two smaller members of the Big Four could well cut their dividends next month.

As for utilities, well I noted in Friday morning’s Overnight Report that selling on Wall Street was driven mostly by yield sectors, including utilities, following a week of gains for the US ten-year bond yield. It looks like the local market saw this as a lead.

Friday Night

The Dow closed up 21 points or 0.1% to scrape back over 18,000. The S&P was flat at 2091 as the Nasdaq tumbled 0.8%.

If Bridge Street’s session was a game played in two halves, Wall Street’s session on Friday night was a game played across two halves of the market.

We tend to call stock such as Microsoft and Google “old tech” because they’re last century’s stars while the likes of a Facebook or a Netflix represent the “new tech” of the new millennium. But if we put those two together and call them “new(ish) tech” we can compare them to what we might call “very old tech”, such as railroads.

After the bell on Thursday night, earnings misses were posted by Microsoft and Google. This clearly put the frighteners through the market on Friday night, such that all tech names were unloaded in a hurry, new or old. That’s why the Nasdaq was down 0.8%.

But two major railroads posted solid results and went for a run, sending the Dow Transports (separate to the Dow Industrials) surging. Within the Dow Industrials, General Electric – the only remaining company to have been included in the first ever Dow Jones Average – posted an earnings beat while Caterpillar, which has seen the going very tough as commodity prices collapsed, suggested the bottom is nigh.

Honeywell, another old world stock (even aerospace is an old industry), also posted an earnings beat. Having run up strongly ahead of their releases, all three of these industrials saw slight dips on the day, but the distinction is clear. McDonalds is another Dow stock that is pretty old world these days, and it posted its best quarter in a very long time.

Hence the divergence on the day between the Dow and the Nasdaq, with the broad market S&P holding fast in the middle.

The US oil rig count fell by another 8 rigs last week to 343, according to Baker Hughes’ regular Friday report, marking a fifth straight weekly decline. West Texas crude rose US27c to US$43.70/bbl on Friday night and Brent rose US39c to US$45.12/bbl.

Zinc and nickel missed out on an otherwise strong session on the LME, which saw aluminium, lead and tin all up 1% and copper just a little shy.

Sentiment has clearly swung to the positive in commodities markets (and not just in rocks, but in agriculturals as well it should be noted). Recent strength has come despite the US dollar index having rebounded rather sharply over the week. It was up another half a percent on Friday night at 95.12.

This was good for the Aussie, which was able to come down 0.4% to US$0.7710 despite the big jump in the iron ore price, but not good for gold, which fell US$15.80 to US$1232.20/oz.

On Saturday morning the SPI Overnight closed up 26 points or 0.5%.

Monday Night

The US dollar index fell back again last night, by 0.4% to 94.79. The Aussie, however, is little changed from Saturday morning at US$0.7714.

And having been a feature of Friday night’s trade, the Dow Transports also fell back again last night.

Tech names continued to remain under pressure nonetheless, with all eyes on Apple’s earnings report tonight. But across Wall Street in general last night was a case of entering a new week which is not only loaded with earnings results and heavy on economic data releases, but which also sees two significant central bank policy meetings – those of the Fed and the Bank of Japan.

No one expects anything much different from the Fed on Wednesday night but the market will still look for any clues as to whether June might still be considered a rate hike possibility. The Bank of Japan has markets somewhat concerned nevertheless, as no one’s at all sure what might transpire. At its last meeting the BoJ lowered its cash rate into the negative, yet the yen has done nothing but rise ever since.

Could the BoJ go even further into the negative? While central bank stimulus around the globe is usually welcomed by stock markets, Japan’s negative rates represent an experiment that many worry could have unintended consequences.

Speaking of unintended consequences, Beijing is currently caught between a rock and a hard place as it tries to provide ample liquidity to the Chinese economy to prevent a sharp decline in growth while at the same time trying to keep a lid on debt, and potential asset price bubbles.

Over the weekend the PBoC requested that China’s major banks pare back their lending targets to 70% of what they were at the beginning of the month.

Oil prices fell from the open last night and helped the Dow down to almost a 150 point drop, but as oil eased back and other influences took over, Wall Street recovered. The Dow closed down 26 points or 0.2% while the S&P lost 0.2% to 2087 and the Nasdaq fell 0.2%. The uniformity of the index fall, traders suggests, signals positioning ahead of the central bank meetings rather than micro forces.

So since the ASX closed for business on Friday, the Dow was up 21 and then down 26. Just to drive home the fact little has changed on a net basis since Friday, the SPI Overnight closed up 26 points on Saturday morning and down 25 points this morning for a net one point gain.

Oil prices fell last night because Kuwait production is back in full swing following the three-day strike, and the country intends to increase its production levels. Iraq is close to reaching a production record, Iran continues to ramp up, and Saudi Arabia is close to completing a major oil field expansion.

If you can’t freeze it, pump it as fast as you can. It is probably surprising that this morning, West Texas crude is down only US71c at US$42.99/bbl and Brent is down US34c at US$44.78/bbl.

Volumes on the LME were to the low side last night as metal traders, too, await this week’s central bank meetings. In thin trading, copper lost what it gained on Friday night, zinc fell 2% and lead fell 3%.

A spot iron ore price is proving difficult to get hold of this morning, probably because of the long weekend, but I can report a price being quoted this morning after two sessions of US$66.07/t, down from US$68.70 on Thursday night.

Gold is up US$5.70 at US$1237.90/oz.

The Week Ahead

As noted, the Fed will release its April policy statement on Wednesday night and the Bank of Japan will meet on Thursday, as will the Reserve Bank of New Zealand.

A busy week for US data releases, coinciding with the busiest week for US earnings results, sees durable goods orders, Conference Board monthly consumer confidence, Case-Shiller house prices and the Richmond Fed index tonight, pending home sales on Wednesday and the first estimate of March quarter GDP on Thursday. The market is forecasting a mere 0.7% annual growth rate.

Friday sees personal income & spending, the Chicago PMI and Michigan Uni fortnightly consumer sentiment.

The UK will publish its first estimate of March quarter GDP on Wednesday and the eurozone will follow suit on Friday.

While attention will be focused on the BoJ on Thursday, Japan will also see monthly releases for inflation, unemployment, retail sales and industrial production ahead of a public holiday on Friday.

Monetary policy debate downunder will focus this week on Wednesday’s release of the March quarter CPI numbers, followed on Friday by the PPI.

On the local stock front, this week brings another mix of resource sector quarterly production reports, quarterly updates from other sectors, investor days and AGMs.

Production report highlights this week include those from Independence Group ((IGO)) on Thursday and Origin Energy ((ORG)) on Friday. ResMed ((RMD)) will release quarterly earnings on Wednesday, Mirvac Group ((MGR)) will issue a quarterly report on Thursday, and Thursday also brings investor days from Cochlear ((COH)) and Computershare ((CPU)).

Rudi is on leave this week.
 

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