The Monday Report

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This story features TELSTRA GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: TLS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Whiplash

Friday wrapped up a rather strange three days on the local bourse as investors try to find some direction in the vacuum left by the now complete results season.

On Thursday the market decided, in real time, that President Trump’s address to Congress contained nothing new, so we closed flat on the day. But Wall Street decided it was a fabulous speech, mostly on the basis it wasn’t an embarrassing speech, so the Dow went up 300 points and we played catch-up with a scrambling 70 point rally for the ASX200.

That rally was all about the resources sector, which jumped 3% on the day. All sectors finished in the green bar telcos, given it’s hard to find a reason to hang in to Telstra ((TLS)) once it’s gone ex.

On Thursday night, Wall Street broke its historic winning streak more emphatically as finally the Dow gave back a hundred points. Maybe Trump’s speech was just more hot air after all. Maybe a looming March rate hike had begun to cause concern. Whatever the case, the ASX200 fell 47 points in response as the materials sector plunged -2.1%.

So what, exactly, changed between Thursday and Friday? Not commodity prices. They moved, but not by enough to justify 3% up one day and -2% down the next.

If we net it all out, that 3% jump is the outlier. Resource stocks were bought up heavily into result season, and in many cases on the day of release on often surprisingly good numbers. But that was it. With commodity prices having largely stabilised and analysts struggling to see any more upside, that race has been run. Profits have been locked in since, thus that 3% blip was just that.

It is also interesting to note that amidst what was otherwise market-wide selling on Friday, the telcos were one of only two sectors to buck the trend.

It would appear the market is unsure, post result season, what to do next. If there is no further upside in resource stock valuations, and we have to wait another month before there’s new news to ponder, being quarterly production reports, then what will take the ASX200 to 6000, as the chartists are suggesting?

Maybe some sort of Trump policy confirmation. But that could still be a while off. In between we will have a Fed meeting and, it would appear now almost certainly, a rate rise. Attention now swings away from the resource sector and towards stocks that, one way or the other, are impacted by rising rates.

All But Confirmed

Having fallen a hundred points on Thursday, Friday saw the Dow open up 40 points, and immediately fall -90 points before spending the rest of the session grafting its way back. Again Wall Street is failing to bring about any meaningful consolidation of the Trump rally.

The focus was nevertheless not on Trump on Friday (we’ll find out tonight what Wall Street thinks about the Donald’s latest bizarre tweet allegation) but on Janet Yellen. She was speaking at a monetary policy conference.

At the end of her speech, commentators were gobsmacked. On the assumption that nothing untoward will appear in US data releases between now and March 15, the Fed will hike. The hike itself is not gobsmacking, it’s the fact that Yellen effectively confirmed it would happen. Where’s the usual Fed obfuscation? Where’s the having to read carefully between the lines, looking for the slightest shift in language? Where’s the constant debate in the market?

Yellen also suggested the pace of Fed rate rises in 2017 will be much faster than was the case in 2015 and 2016. Each of those years gave us one December hike. The Fed is intent on delivering three hikes this year. And yet, Wall Street shrugged.

If a March Fed rate hike is going to be the factor that finally sparks a pullback to more realistic valuations, well it seems to have failed the test. The Dow closed up 2 points on Friday night, the S&P rose one point to 2383 and the Nasdaq gained 0.2%.

The US ten-year yield was flat at 2.49% and the US dollar index actually fell -0.6% to 101.53, having shot up the day before.

The market is now pricing in an 85% chance of a March rate hike, up from 20% a week ago. The reason it’s not closer to 100% is no doubt because we have a jobs report in between, this Friday night, and if anything is going to change the Fed’s mind in the short term it could be a shocking result for non-farm payrolls.

Suddenly the US jobs report is back as being of extreme importance.

Commodities

The LME was closed by the time Janet Yellen was speaking so we’ll have to wait until tonight to see if there is any adverse reaction to the prospect of three US rate hikes this year. Meanwhile, Friday night saw all metals down less than a percent bar nickel, which rose 2%.

Iron ore fell -US10c to US$91.60/t.

Another year, another raid on a Libyan oil terminal by some armed faction or another. Haven fallen notably on Thursday night on record US crude inventories, Friday night saw West Texas crude rise US63c to US$53.26/bbl.

Despite the drop in the US dollar index, gold is steady at US$1233.60/oz. Three rate hikes must surely limit gold’s appeal, unless inflation starts to run away.

The Aussie was 0.3% higher on Saturday morning at US$0.7589.

The Week Ahead

The SPI Overnight closed up 21 points or 0.4% on Saturday morning. So which one was misguided, the 70 point rally on Thursday or the -50 point plunge on Friday?

US jobs numbers will dominate releases next week, although tonight in the US sees factory orders and Tuesday the trade balance. The ADP private sector jobs report is out on Wednesday and non-farm payrolls on Friday.

China will release February trade numbers on Wednesday and inflation on Thursday. Over the weekend the Chinese premier suggested a target of around 6.5% for the Chinese economy this year. It’s the lowest target ever set in recent times but also the most vague. Perhaps Beijing is waking up to the fact Chinese data releases are often a source of great amusement in the West.

The ECB will hold a policy meeting on Thursday.

The RBA will hold a policy meeting tomorrow and leave rates unchanged.

Today sees local numbers for retail sales and the ANZ job ads series. Tomorrow it’s the construction PMI and on Friday it’s housing finance.

Sonic Health Care ((SHL)) will host an investor day on Wednesday and Treasury Wine Estates ((TWE)) on Friday. On Thursday the ACCC is due to reveal its decision on the proposed Tatts ((TTS))/Tabcorp ((TAH)) merger.

Otherwise the week will be dominated by stocks going ex-dividend.

Rudi will appear on Sky Business on Tuesday morning, around 11.15am, to discuss broker calls over Skype. On Thursday he'll appear in the Macquarie Park studio from 12.30-2.30pm and again between 7-8pm for the Switzer Report. On Friday, he'll repeat the Skype-link at around 11.15am.
 

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