The Monday Report

This story features METCASH LIMITED, and other companies. For more info SHARE ANALYSIS: MTS

By Greg Peel

Uncertainty

The local market began strongly on Friday, spurred on by the sudden turnaround in offshore markets as a result of an apparent swing back to the “stay” vote in Britain. But the rally was short-lived, to the point the index was slapped back down almost to square again by midday.

While “stay” may have been looking more likely on Thursday night, the reality is one poll does not a conclusion make. There is talk that the suspension of campaigning until Monday in deference to murdered MP Jo Cox will most likely hurt the “go” camp, which had previously been gaining some momentum. There is also a suggestion the murder may swing voters towards “stay” given Cox was a “stay” campaigner.

The bottom line is it’s still too close for anyone to call. Unless the polls between now and Thursday all line up to predict a definitive result one way or the other, it is likely global markets will swing back and forth on every apparent shift. But if nothing is at all clear, it is most likely investors will remain on the sidelines, having set their hedges, counting down the hours.

It could be a long four days.

Sector moves were mixed on the local market on Friday. The sector most damaged to date by Brexit fears – the banks – managed a 0.7% rebound to mark the biggest sector move of the session. Otherwise it was small moves up or down, with a rare quiet day for the resource sectors.

Fed Shock

It was only a month ago the Fed was talking up its rate hike expectations, surprising Wall Street by hanging onto the concept of perhaps three hikes in the remainder of 2016. Then last week the mood changed, with only one rate now the apparent expectation. On Friday night, St Louis Fed president James Bullard went one surprising step further.

Yes, Bullard said, there will be one rate hike in 2016. But that will be it until 2018, he added.

Come again?

Once upon a time such a comment may have sent Wall Street reeling, in one direction or another – up if the response is “Thank God, the Fed will continue to support the market” or down if the mood is “Omigod, the US economy must be in worse shape than we thought”. But in actual fact, Bullard’s comments had very little impact whatsoever, for two reasons.

One is Brexit – that is dominating all thinking at present. The other is sheer exasperation. The Fed’s credibility has already been brought to question thanks to its apparent flip-flopping all through the year, and what makes Bullard’s comments even more outlandish is the fact he was previously among the most hawkish of FOMC members.

To that end, Bullard managed only to cause a lot of bemusement. And eye rolling.

Indeed, the US ten-year bond rate went up 5 basis points to 1.62% when one would have expected the opposite on such a dovish suggestion. The US dollar index did duly fall 0.5% to 94.15 but both moves are a reflection of faith growing in a “stay” vote in Britain and not anything that happened to come out of a Fedhead’s mouth.

The same was true with oil, which having fallen back from the 50 mark through the week due to rising “go” fears, rebounded 5% on Friday night.

Once upon a time a 5% jump in the oil price would have had US stock indices surging. Not anymore. A period of relative stability for the oil price has meant the close correlation that existed earlier in the year is no longer evident. And no one was going to go on a buying spree before next Thursday.

To that end, Wall Street was quiet on Friday. Closing volumes were enormous due to the quadruple witching expiry and quarterly stock index rebalancing but volatility was lacking. The Dow closed down 57 points or 0.3%, the S&P lost 0.3% to 2071 and the Nasdaq fell 0.9%.

Commodities

West Texas crude rose US$2.21 to US$48.26/bbl.

The weaker greenback may have helped a little but that was not at all apparent on the LME. Nickel decided to have a 2% jump but the other base metals closed mixed on insubstantial moves.

Iron ore rose US50c to US$50.70/t.

Gold dropped back on Thursday night when a UK poll showed a swing towards “stay” but on Friday night the lack of any predictable result was evident in gold rallying back US$20.10 to US$1298.0/oz.

The fall in the greenback means the Aussie was 0.4% higher on Saturday morning at US$0.7394.

The SPI Overnight closed flat.

The Week Ahead

While there’s a lot more going on than just the Brexit vote next week, unfortunately nothing else will matter until Friday morning when, presumably, we’ll know the result.

Please God let it not be so close as to take days to confirm.

Three polls over the weekend all suggest “stay”, but still as a close call.

Janet Yellen will provide a scheduled testimony to the US Senate Banking Committee on Tuesday night. The world will be very interested in what she has to say, particularly following Bullard’s comments on Friday night.

With regard data, the US will see existing home sales and house prices on Wednesday, new home sales, the Chicago Fed national activity index and a flash estimate of the June manufacturing PMI on Thursday, and durable goods and fortnightly consumer sentiment on Friday.

Japan and the eurozone will also flash PMI estimates on Thursday.

Normally the eurozone’s ZEW investor sentiment survey, due Tuesday, and Germany’s IFO business sentiment survey, due Friday, would be closely watched, but given the world might change on Thursday the results are irrelevant.

In Australia, March quarter house prices are due tomorrow along with the minutes of this month’s RBA meeting. Is the RBA really “on hold” or could we yet see further rate cuts? Maybe the minutes might hold some clues.

On the local stock front, Metcash ((MTS)) will release its earnings result today, BHP Billiton ((BHP)) will host an investor day in London tomorrow night and Wesfarmers will hold a strategy day on Wednesday.

Rudi will appear on Sky Business on Tuesday, via Skype-link, to discuss broker calls around 11.15am. On Thursday he'll appear for his weekly slot between 12.30-2.30pm and on Friday he'll repeat the Skype-linkup at around 11.05am.
 

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

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