The Monday Report

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By Greg Peel

Banking on Trump

It was a choppy session on the local market on Friday, featuring three clear attempts to post a decent rally – from the open, at midday, and on the death – and two dips back towards square in between. By the end of the session, a theme was clear.

The sell-off in yield stocks which began pre-Trump on the growing expectation of a Fed rate hike, and to fund a switch into resource stocks as commodity prices surprisingly surged, is continuing post-Trump. US interest rates have shot up on inflation expectations, Fed or no Fed. Friday saw utilities down 3.0% and telcos down 2.5%.

While ongoing strength in commodity prices continued to support resources, sending materials up 0.5% and energy up 0.7%, the big winners on Friday were the banks. Taking the lead from Wall Street, where the expectation of looser regulations has ensured US banks have been leaders in the post-Trump rally, the Australian financials sector put on another 2.9% to provide the bulk of the index gain.

Funny that when the appetite for yield began to turn a couple of months ago, the banks were being sold down with the bond proxy stocks. Banks are after all amongst the most attractive yield plays. Now that US interest rates have leapt up without waiting for the Fed, the banks are soaring.

Presumably the market is assuming what is good for the US banks, in the form of looser regulation, is good for all banks. And higher interest rates are typically positive for bank margins, it’s just that in Australia we fear rising bad debts as a result, and a weakening in what is already subdued loan demand.

The world continues to adjust to Trump, even though there is little certainty on that front. What happens after the oaf takes the oath? A fundamental reason cited for the post-Trump market turnaround was the President Elect’s victory speech, in which he sounded a lot less like the volatile tyrant and a lot more like an actual president. Already talk is of the infamous wall being more of a fence. Where does this leave his promise to slap a 45% tariff on Chinese imports, for example, and to cut the corporate tax rate from 35% to 15%?

After a turbulent week, the dust will now begin to settle. Trump does not take over the reins until January. Aside from being keen to see who he chooses for key roles in his cabinet, Wall Street will now look to the OPEC meeting at the end of the month and the Fed meeting mid-December.

And what does Santa feel about all this? After the biggest weekly rally in five years, the Dow is at a new all-time high. We may have been expecting a post-Fed rate hike Santa rally from December on the usual buy-the-fact trade, but we’re already there. Whereto from here is not so clear. Wall Street stalled on Friday night and the SPI Overnight closed down 13 points on Saturday morning.

And China has thrown rather a wet blanket over commodity prices.

Topping Out?

It was a light volume session on Wall Street on Friday night given Veterans Day had banks and the bond market closed, and likely encouraged many to take a long weekend. We thus have to take Friday night’s action with a bit of a grain of salt.

The big news on the day was a surprise September quarter doubling of profits for chip-maker Nvidia, sending that stock up a whopping 30%. This reignited the Nasdaq, which had suffered post-Trump, while the other indices surged, due to weakness in the Big Tech names and FANG stocks in particular. These stocks saw some bargain hunting on Friday and the Nasdaq rose 0.5%.

The biggest Trump winners are resident in the Dow, and the same themes we saw post-election continued through Friday. The banks again led the charge. That sector has rallied no less than 10% since Wednesday.

The Dow closed up 39 points or 0.2% at a new all-time high, marking its strongest week since December 2011. In the broader market the exuberance eased off, nevertheless. The S&P closed down 0.1% at 2164.

It is also notable the Russell small cap index has rallied 10% since Wednesday, as smaller companies look towards a lower tax rate, less regulation and an unwinding of the Obamacare burden.

So the question being asked on Friday night was how far can this go? Probably not much further for now. What Wall Street can hope for at this very early stage of the Trump Era has priced in and needs to be confirmed, which in reality will be at least a year-long process.

Interestingly, Michigan Uni’s fortnightly consumer confidence measure published on Friday showed a surge to 91.6 from 87.2. Confidence had been on the wane in previous surveys which was beginning to worry Wall Street ahead of Christmas, but now it looks like all is well. Except that the survey was conducted pre-election.

Commodities

Last week Chinese futures exchanges increased margin requirements on coal, iron ore and steel product contracts in order to stem the tide of runaway speculation that has exacerbated the recent surge in prices. On Friday the Chinese regulators went after the copper market, enforcing new limits on positions.

Copper had already begun to rally pre-Trump but the post-Trump surge has sent the benchmark metal rapidly to its highest level in 17 months. All base metals have run up on the expectation of increased US infrastructure spending, despite the drag of a stronger US dollar, which was up another 0.3% on its index on Friday night to 99.06.

The news out of China clearly spooked the LME. Copper was only down 0.5%, but aluminium and lead fell 1.5%, zinc 2.5% and nickel 3.5%.

While the thermal coal price fell 5% on Friday, iron ore continued to surge the other way, up US$5.50 at US$79.70/t. A few months ago metals analysts would have suggested iron ore is no chance of getting back to 70, and in a blink it’s almost at 80.

It was not such a good session for gold, which having surged initially on Trump’s victory had come straight back down again, and now it has capitulated. Gold is down US$34.40 at US$1223.80/oz. Silver fared worse, falling 7%.

OPEC members may be talking the talk of production cuts but in the meantime they’re walking the walk of surging oil production. Production shot up in October, with Nigeria, Libya and Iraq leading the charge.

Could it be that OPEC members are simply trying to pump whatever they can ahead of a production freeze, or should we just accept that talk of a production freeze will only ever be that – talk? West Texas crude fell US$1.38 or 3% on Friday to US$43.18/bbl.

The slide in the Aussie has continued, down another 0.9% at US$0.7546.

As noted, the SPI Overnight closed down 13 points or 0.2% on Saturday morning.

The Week Ahead

If we’ve seen as much of a Trump adjustment as we’re going to get for now, attention can turn to how the rest of the world might be faring.

Japan releases its September quarter GDP result today and the eurozone follows suit on Tuesday. China releases October industrial production, retail sales and fixed asset investment data today and property prices on Friday.

What do we assume now about US data releases vis a vis the Fed? There are still plenty to come before the December meeting.

Tomorrow night sees retail sales, business inventories and the Empire State activity index. Wednesday it’s industrial production, housing sentiment and the PPI. Thursday brings the CPI, housing starts and the Philadelphia Fed activity index.

The minutes of the November RBA meeting are due tomorrow but being pre-Trump, they’re a little antiquated. More important to the central bank will be the September quarter wage price index due on Wednesday, which is the first of the quarterly releases ahead of the GDP result in a couple of weeks. On Thursday it’s the local jobs numbers that no one pays much attention to anymore.

On the local stock front, both ANZ Bank ((ANZ)) and Westpac ((WBC)) go ex-dividend today, which will distort the sector move on the day.

Earnings results are due from Elders ((ELD)) today, Ozforex ((OFX)) tomorrow, Graincorp ((GNC)) on Wednesday, James Hardie ((JHX)) on Thursday and AusNet ((AST)) on Friday.

This week will be one of the busiest on the AGM calendar.

Rudi will appear on Sky Business on Tuesday, via Skype-link, at around 11.15am. He'll host Your Money, Your Call Equities late on Wednesday, 8-9.30pm. On Thursday he'll appear twice. First from 12.20-2.30pm and again between 7-8pm for the Switzer Report. On Friday, he'll repeat the Skype-link at around 11.05am.
 

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