The Monday Report

This story features BENDIGO & ADELAIDE BANK LIMITED, and other companies. For more info SHARE ANALYSIS: BEN

By Greg Peel

Rotation

5500 has become the new barrier for the ASX200 as the local market continues to show signs of wanting to push higher. On Friday, a steady morning rally took the index up 37 points to 5512 but a drift-back in the afternoon meant a close of only up 21, at 5497.

There was, of course, Friday night’s US jobs report to consider and it was a Friday, so no doubt there was some typical squaring up ahead of the weekend.

Looking at the sector moves however, Friday’s action screamed rotation. The best performing sectors were energy, up 1.1% on a small move up in the oil price, Materials, up 1.7% despite lower metals prices, and consumer discretionary, up 0.7% having been sold down over the week.

The only sectors to post losses were utilities, telcos and consumer staples, while all other sectors posted small gains. This sector spread screams rotation, from defensives to cyclicals. This is not the first time we’ve seen such action in the local market lately and often the defensives come roaring back, but at elevated levels, we may be reaching the point where reliable yield is just too expensive.

If cyclicals are now going to take the baton, they’ll still need some incentive to do so. Results season will provide some individual direction.

Good is Good

The US added 255,000 jobs in July, seasonally adjusted, smashing expectations of 180,000. The unemployment rate was unchanged at 4.9% despite an increase in the participation rate, suggesting those coming back to look for work found it. Wages increased by a healthy 0.3%.

It was the jobs report of an economy in good shape. But in the upside-down world in which we currently reside, tipping what Wall Street’s response to the report might be is not straightforward. Stocks could have risen on the good news is good news assumption or fallen on the good news is bad news assumption of a Fed rate rise being back on the cards. Either response was going to be explainable.

As it was, Wall Street liked it. The Dow closed up 191 points or 0.1%, the S&P rose 0.9% to a new all-time high 2182 and the Nasdaq also reached a new all-time high in gaining 1.1%.

Perhaps the reason why Wall Street chose “good news is good news” over “good news is bad news” is evident in the move in the Fed funds futures, which is cited as representing the chance of a Fed rate rise. The chance of a September hike moved up to a mere 18% from 9%, while December rose to 46% from 32%.

Great jobs report or not, virtually no one is expecting a September rate rise. And even December is yet to reach a 50/50 bet. Aside from all other data, there will be another jobs report before the September meeting. The general belief is that the US economy is beginning to look healthier – certainly healthy enough to justify a rate rise – but that the Fed will simply remain too timid to do so.

There is also the matter of what other central banks are up to. The BoE just delivered a substantial easing. The BoJ disappointed but eased further nevertheless. The RBA cut its rate. China is pursuing various measures. Around the globe, major economies are in easing mode. That, by default, is as good as a Fed rate rise.

And there’s the matter of the US dollar. It jumped 0.5% on Friday night to take its index to 96.24. A rising dollar will dampen the still “modest” US recovery. The Fed should not, by rights, pay attention to exchange rates but in the increasingly “globalised” world, of course it does.

The chance of a September rate rise may still be low but other markets were making adjustments on Friday night. Aside from the stronger greenback, the US ten-year bond yield rose 8 basis points to 1.58% and gold fell US$25.00 to US$1335.40/oz.

With the US results season now in its tail end, and everyone happy that was another not-as-bad-as-feared quarter, attention will now once again shift to central banks and economic data.

Commodities

A strong US jobs number also creates a push-pull for commodity prices. Gold aside, given its not a commodity per se, a healthy US economy is good for commodities but the stronger greenback offsets.

On Friday night we saw West Texas crude up US16c to US$41.97/bbl.

Nickel and zinc rose 0.5% and aluminium 1.5% while copper fell 1% and lead 0.5%.

Iron ore jumped US$2.00 to US$60.70/t.

Alas, despite the stronger greenback, the Aussie is only 0.1% weaker at US$0.7618.

The Week Ahead

The SPI Overnight closed up 31 points or 0.6%.

China will be back in the frame this week. Today sees July trade numbers, Tuesday inflation and Friday the monthly dump of industrial production, retail sales and fixed asset investment data.

On the central bank rounds, it’s over to the RBNZ to cut its rate on Thursday, as is expected.

It’s a quiet week for data in the US until week’s end. Tuesday sees June quarter productivity ahead of Friday’s retail sales, inventories, PPI and consumer sentiment.

In Australia we’ll see ANZ job ads today, NAB business confidence on Tuesday and Westpac consumer confidence on Wednesday. Wednesday also brings the critical monthly housing finance numbers.

The local results season steps up a gear this week.

Highlights will come from among the banks, with Bendigo & Adelaide ((BEN)) reporting today and Commonwealth Bank ((CBA)) on Wednesday, with ANZ Bank ((ANZ) offering a quarterly update tomorrow.

Classifieds will also feature, thanks to reports from Carsales.com ((CAR)) and REA Group ((REA)) tomorrow and Fairfax Media ((FXJ)) on Wednesday.

Other results of interest among the many this week include Transurban ((TCL)) and Cochlear ((COH)) tomorrow, OZ Minerals ((OZL)) and AGL Energy ((AGL)) on Wednesday and Goodman Group ((GMG)) and Telstra ((TLS)) on Thursday.

Rudi is attending and presenting at the AIA National Conference this week and will appear on Sky Business on Thursday between 7-8pm for the Switzer Report and again on Friday, through Skype-link, at around 11.05am to discuss broker calls.
 

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

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