The Monday Report

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By Greg Peel

Jitters

Few pundits were predicting a one percent plunge for the local market on Friday but the mood can be best summed up by two sector moves. The oil price was up 4% overnight and energy closed down 1.2%. The iron ore price was up 8% and materials also closed down 1.2%.

The banks had been bought up during the week and they closed down 0.9%. Indeed, all sectors were down, be they cyclical or defensive, growth or yield. It was a market-wide sell-off that fed upon itself as the day progressed.

Not helping the mood was Bellamy’s Australia ((BAL)), which crashed 43% due to a “temporary volume dislocation in China”. Come again? Oh, less milk was sold than expected, thanks to Chinese regulation complications.

Another one bites the dust. Bellamy’s has become the latest among the non-traditional, high-multiple growth stocks on the Australian market to issue disappointing guidance and watch investors run screaming for the exits. The stock was last week the third most shorted on the ASX, at almost 13%, but obviously the shorters were in no rush to cover on Day One of what may yet be an ongoing de-rating.

A2 Bruté? Bellamy’s dragged down other stocks in the sector in sympathy, including A2 Milk ((A2M)), down 10%, and Bega Cheese ((BGA)), down 6%.

But one stock does not a market-wide sell-off make. Often the local market will square up ahead of a US non-farm payrolls report but considering a Fed rate rise is already well and truly priced in, it can’t have been that.

More likely it was a combination of the ASX200 having moved too close to the “sun” of 5500 on the Thursday, only to suddenly worry that the polls were suggesting the Italian referendum might come in with a “no”, the Italian president would resign and call an election, and Italexit, or “Italeave” as it’s being more popularly referred to, would be the next step in the fall of the EU.

On that note, we see Austrians did not vote in the Far Right candidate for president over the weekend, indeed quite the opposite. Although the role is merely a ceremonial one, commentators are suggesting the Brexit-Trump freight train has been halted, for now.

The polls close in Italy at 9am this morning, Sydney time. Indications of the result are expected from around midday.

Meandering

The aforementioned US jobs number for November came in at 178,000, below expectations of 200,000. Wages growth came in at negative 0.1% following October’s 0.4% spike, to be up 2.5% year on year. The unemployment rate fell to 4.6% — a low last seen in 2007 – when a steady 4.9% was expected. But this was due to a drop in participation.

Six months ago, this result would have had Wall Street claiming “no Fed rate hike” and possibly buying up stocks as a result. A rate hike is however baked in, so no response on that front. Economically the number was a disappointment, but not majorly, and indeed it is on-trend with results in 2016.

Thus the jobs report had little effect on Wall Street’s direction on Friday night. The oil price traded a little higher again, metals prices were mixed, but there was nothing there to provide obvious direction.

Rather, Wall Street meandered its way through the session slightly positive and slightly negative at times. Sector moves indicated Friday was a good day to square up on the week’s trades, with high-flying banks and other cyclicals sold and beaten-down utilities and REITs bought.

While Wall Street, too, heard nervous discussions about what might transpire in Italy, no one appeared to be in panic mode.

The Dow closed down 21 points or 0.1% while the S&P was flat at 2191 and the Nasdaq gained 0.1%.

Commodities

West Texas crude rose US83c on Friday night to US$51.67/bbl.

Base metals were again volatile in London. After big jumps up during the week, lead and zinc both copped profit-taking to the tune of 3% while nickel rose 2% and copper and aluminium both lost 0.5%.

After a ridiculously volatile week in Singapore, iron ore fell US10c to US$78.00/t.

The US dollar index was 0.3% lower on the jobs report at 100.72 but gold was up only slightly at US$1173.60/oz.

The Aussie was 0.5% stronger at US$0.7446.

Futures traders appear to have decided Friday’s trade on the local market was overdone. With Wall Street flat and the Italians yet to go to the polls, the SPI Overnight closed up 21 points or 0.4% on Saturday morning.

The Week Ahead

It’s a big week economically in Australia this week.

The RBA meets tomorrow but no policy change is expected. It should be noted, nonetheless, that the economists and other market commentators are becoming increasingly polarised over whether the next rate move will be up or down.

The biggie is the September quarter GDP result on Wednesday. After weak lead-in numbers for construction and capex, economists are forecasting 0.2% quarterly growth for 2.5% annual growth, well down from 3.3% in the June quarter. We still have some more lead-in numbers to consider this week, being company profits and inventories today and the current account tomorrow, which encompasses what should be a much improved terms of trade.

Monthly data across the week include the services PMI today and construction PMI on Wednesday, ANZ job ads today, the October trade balance on Thursday and housing finance on Friday.

China will release its November trade balance on Thursday and inflation numbers on Friday.

A quieter economic week for the US sees the services PMI tonight, factory orders and trade on Tuesday, and fortnightly consumer sentiment on Friday.

The ECB holds a policy meeting on Thursday, by which point we’ll know what’s happened in Italy.

On the local stock front, corporate newsflow slows right down this month compared to the frenzy of the November AGM season, albeit there are still a few late-cycle AGMs to get through. Most notable is that of Westpac ((WBC)) on Friday.

Insurance Australia Group ((IAG)) and Santos ((STO)) will each hold investor days on Thursday.

Rudi will appear on Sky Business on Tuesday, via Skype, to discuss broker calls at around 11.15am. On Thursday he'll appear between 12.30-2.30pm and again between 7-8pm for the Switzer Report. On Friday he'll repeat the Skype-link, probably at around 11.05am.

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