The Monday Report

This story features MACQUARIE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MQG

By Greg Peel

Trade Surplus

It was a strong session on the ASX on Friday to end the week, leading to a reconquering of the 5700 level for the ASX200. Again the banks and big miners helped the index higher, but for once there was some broader support.

A 1.3% gain for financials was aided by strength in the likes of Macquarie Group ((MQG)) and QBE Insurance ((QBE)), both of which benefit from rising US interest rates. Rising rates are not, however, beneficial for Australian yield payers, yet utilities (+1.1%) and telcos (+0.7%) both had a good session and consumer staples (+1.6%) was the winner on the day.

The only losing sector was materials (-0.6%), despite further gains for the big diversified miners, as gold stocks came under pressure and Alumina Ltd ((AWC)) shares pulled back after Thursday’s surge.

Otherwise, all other sectors finished in the green to a varied extent, suggesting a bit more breadth as we look towards possibly reclaiming the previous high at 5800.

The economic news of the day centred around the December quarter export/import price index. When Australia posted a soggy September quarter GDP result, it was suggested at the time this would only be a blip ahead of stronger commodity prices flowing through to the numbers. Sure enough, Friday’s data suggest a much improved terms of trade.

Export prices surged 12.4% in the December quarter, thanks mostly to iron ore and coal and to put that quarter into perspective, rose 12.4% year on year. Import prices rose by only 0.2% to be down -4.6% year on year. The economists at CBA suggest the terms of trade could rise by 12.5% in the quarter to be 18% higher for the year, boosting GDP, tax revenues and, in CBA’s belief, wage growth.

Not necessarily interest rates, however, which are still anticipated by many an economist to see at least one more cut. While the December quarter was a stand-out for commodity prices, CBA notes, 2017 is not likely to see a repeat.

Consolidation

The Dow closed down -7 points while the S&P lost -0.1% to 2294 and the Nasdaq gained 0.1%.

The US GDP grew by 1.9% in the December quarter, missing the most recent forecast of 2.2%. It’s a big drop back from the September quarter’s 3.5%, but then that was a big jump up from two anaemic quarters prior.

Economists consider 2% growth the be “the new normal” for the US. The difference will be Donald Trump and his stimulus policies, but while Trump wants to see 4%, it’s not going to happen overnight, and is also a big call when structurally weak productivity growth remains an issue. Economists are expecting 2% or slightly better growth in 2017.

December durable goods orders also came in weaker than expected on Friday night, but there was little in the way of negative response. These numbers are considered Obama-era. Wall Street has hit new highs in anticipation of what the Trump era will bring.

On that note, the indices stalled on Friday night after a solid week, and there is talk of a mild correction being needed to consolidate the gains before another leg-up can begin. Of concern to many is the VIX volatility index on the S&P500. Recent history suggests every time the VIX fall to 11 or below, a correction is on the cards. The implication is the market has become too complacent.

The VIX closed on Friday night at 10.5. It is not unheard of for the VIX to fall into single figures for a period, but this has not occurred since the GFC.

While the trend in December quarter earnings remains positive, Friday night was a bit of a losers’ night. Starbucks, Chevron (Dow), Alphabet (Google), Colgate-Palmolive (Dow) and American Airlines all saw their share prices lose ground following results releases, while Microsoft (Dow) went the other way.

Energy stocks in general were under pressure on Friday night as oil prices fell over -1%. The balance, at present, is between the extent to which OPEC, Russia & Co can reduce production against the extent to which idled US production comes back on line. Friday night saw another jump in the US rig count, and so oil was sold.

Realistically the WTI price has been to-ing and fro-ing in the low 50s for the past month without any substantial trend.

Commodities

West Texas crude fell -US67c to US$53.12/bbl.

Copper and nickel both gained over 1% on the LME as the other base metals took a breather.

Iron ore was unchanged at US$82.40/t.

The US dollar index rose 0.2% to 100.57 but gold is relatively steady at US$1190.70/oz.

The Aussie is steady at US$0.7548.

The SPI Overnight closed down -11 points or -0.2% on Saturday morning.

The Week Ahead

The Fed holds a policy meeting this week. Funny how Trump has managed to suck all the oxygen out of last year’s primary focus of attention. Nobody seems to care that much about the Fed on Wall Street at present, and nor is Friday night’s jobs number considered an event. It’s the first meeting of the year, and the first of the Trump era. No doubt the Fed will draw more attention as the year progresses.

It’s otherwise a busy week for US data.

Tonight sees personal income & spending and pending home sales and tomorrow brings Case-Shiller house prices, the Chicago PMI and Conference Board consumer confidence. Wednesday it’s the manufacturing PMI, construction spending, vehicle sales, private sector jobs and the Fed meeting, and Thursday it’s chain store sales and productivity.

Friday sees the service sector PMI, factory orders and non-farm payrolls.

Manufacturing PMIs will be published across the globe on Wednesday and service sector PMIs on Friday. Beijing will publish both on Wednesday despite the week-long Lunar New Year holiday being in full swing. Chinese markets are closed until Friday.

The Bank of Japan holds a policy meeting tomorrow and the Bank of England on Thursday.

In Australia the focus will be on the housing sector, with numbers due for housing affordability and private sector credit tomorrow, house prices on Wednesday and building approvals on Friday. Thursday should bring a welcome trade balance number, while the PMIs are out on Wednesday and Friday.

On the local stock front, there are a few more quarterly production reports to get through this week, including Fortescue Metals ((FMG)) tomorrow. But this week is also the first genuine week of the February reporting season, featuring a handful of company results.

It is thus a good opportunity to direct readers to the FNArena Calendar (link below). Please note that as is the case every six months, the calendar is compiled on a best endeavours basis. Companies are not by law obliged to disclose a result release date, nor stick to one they’ve suggested. This leads to the same company reporting on three different days, according to the different brokers.

Which of course they don’t, but be warned, often the FNArena Calendar can be caught out.

If everything goes to plan, Rudi will host Your Money, Your Call on Wednesday, 8-9.30pm, and thus make his first appearance for 2017 on Sky Business. He should re-appear on Thursday, 12.30-2pm and Skype-link on Friday, at around 11.05am, to discuss broker calls.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

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

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