The Monday Report

This story features ELDERS LIMITED, and other companies. For more info SHARE ANALYSIS: ELD

By Greg Peel

Friday

I mentioned on Friday morning, with regard Thursday’s trade on the local market, that telcos had traded up 0.8% and utilities down 1.7%, with no real rhyme or reason. Well on Friday, telcos were down 1.2% and utilities up 1.0%, so go figure that one.

Beyond that, there was an air of “Friday” about Friday’s trade. We had the run-up into the technical target range of 5300-5400 and having done so, ran out of any reason to push higher. Materials fell 1.2% with a bit of help from weak metal prices but energy was down 0.5% despite a stronger oil price.

Consumer staples led the market down 1.5% as traders took profits after having successfully ridden the rally back in the supermarkets from oversold conditions, to the point further catalysts are not apparent. Discretionary (+0.8%) is getting more attention now thanks to the RBA’s urgent change in policy.

With Wall Street down on Friday night, the SPI down 15 points and the weekend’s Chinese data releases disappointing, it looks like we’ll be in for some further consolidation as the new week begins.

It’s Structural

All last week on Wall Street we saw large US chain stores lining up to report earnings misses and suffer share price drops as a result. On Friday it was JC Penney’s turn to join the queue, falling 3%. By Friday night an ETF made up of all these big brick & mortar retail names was down 15% for the week alone, prompting concerns for the US economy.

The consumer represents two thirds of US GDP. If Americans are not spending, then the US economy is in trouble. On Friday night the April retail sales numbers were released, which were hoped would throw some light on the issue.

Vale bricks & mortar. April sales rose 1.3%, exceeding forecasts of 1.0% and marking the biggest monthly gain in a year. While autos represent a chunky component, sales ex-auto were still up a solid 0.8%. Outside of autos, one of the best performing segments was “non-store sales”. In other words, online.

Good news – the US economy is not in trouble. Bad news – such a stellar result will not have been missed by the Fed. Could June once again be back in play?

On the sales result, the US dollar index rose another 0.5% to 94.38. The greenback continues to rebound from what were previously encouraging lows, thus weighing on shares of multinationals. The US two-year yield spiked up on a return of the June possibility, before settling back to be down one basis point. But the ten-year yield closed down 5 basis points to 1.71%.

This “flattening of the yield curve” suggests that while the Fed may hike again in the short term, in the longer term the bond market does not anticipate strong US growth. Flat yield curves do not offer banks much opportunity to profit, thus the financials were sold down on Wall Street on Friday night. Slow economic growth does not bode well for consumer staples, so Wal-Mart led the Dow down.

The Dow closed down 185 points or 1.1% while the S&P fell 0.9% to 2046 and the Nasdaq lost 0.4%. The S&P breached its 50-day moving average at 2054 and thereafter the selling accelerated. Typical “risk-off” ahead of a weekend was exacerbated by a monthly options expiry.

Commodities

The sell-off on Wall Street had nothing to do with oil prices, which for once were very flat on Friday night. West Texas was barely changed at US$46.38/bbl and Brent was down a tad at US$47.80/bbl.

Thursday night’s selling on the LME gave way to retrospection on the strong US sales result, but also squaring ahead of the weekend’s data out of China. Only a 1% rally in zinc is worth noting.

Iron ore fell US90c to US$53.50/t.

Despite the stronger greenback, gold managed to rally US$9.60 to US$1272.80/oz. Because of the stronger greenback, and a change in trend since the RBA rate cut, the Aussie fell 0.7% to US$0.7268.

The SPI Overnight closed down 15 points or 0.3% on Saturday morning.

China

On Saturday Beijing released monthly Chinese data for April.

Industrial production rose 6.0% year on year, down from 6.8% in March and missing forecasts of 6.5%. Retail sales rose 10.1%, down from 10.5% and missing 10.5% forecasts. Fixed asset investment rose 10.5% in the four months to April, down from 10.7% for the three months to March, and missing 10.9% forecasts.

So all were disappointing. But then, the March numbers had been stronger than expected so once again, we must factor in the Lunar New Year distortion. Beyond that, just how worried should the world be about an economy growing output at a 6% annual rate, retail sales at 10% and construction spending at 10%?

The Week Ahead

The minutes of the April Fed meeting will be released on Wednesday night. As usual, the market will be looking for any clues as to what the Fed might do next.

US data this week include housing sentiment and the Empire State index tonight, housing starts, industrial production and the CPI tomorrow, the Chicago national and Philly Fed indices on Thursday, and existing home sales on Friday. More grist for the Fed mill.

Japan will report March quarter GDP on Wednesday.

The minutes of the RBA’s May meeting are due tomorrow and these, too, will be closely scrutinised.

On Wednesday Australia’s March quarter wage price index result will be released – the first of the quarterly releases ahead of our own GDP result in a couple of weeks. The April jobs numbers will be released on Thursday to a country in election mode.

God help us.

On the local stock front, Elders ((ELD)) will report earnings today, while DuluxGroup ((DLX)), James Hardie ((JHX)) and Ozforex ((OFX)) will report tomorrow. There is another handful of AGMs to be held this week and Woodside Petroleum ((WPL)) will hold an investor day on Friday.

National Bank ((NAB)) goes ex tomorrow.

Rudi has a busy TV appearances schedule ahead of him this week. On Tuesday he'll Skype-link with Sky Business around 11.15am to discuss broker calls. Later that day, he'll host a webinar for clients of VFSGroup. On Wednesday he'll host Your Money, Your Call Equities (8-9.30pm). On Thursday, he'll appear twice; first as guest on Sky Business (12.30-2.30pm) then later as guest on Switzer TV, between 7-8pm. On Friday, he'll linkup again through Skype, probably around 11.05am, to discuss time broker calls one more.

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