The Monday Report

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

By Greg Peel

Miner Problem

The Australian stock market is very fickle at present, occasionally selling out of the blue before exhibiting fresh bouts of enthusiasm. The problem is one of the vacuum left by results season providing little in the way of new news, coupled with Wall Street on hold awaiting new policy announcements and seemingly steady as she goes growth out of China and Europe.

Friday saw such a bout of enthusiasm, which is unusual ahead of a US jobs report. Clearly the local market took on board the fact a Fed rate rise this week is already a given and anticipated a positive response from Wall Street. Or perhaps it’s simply a matter of all those profits being taken in the resource sector being redeployed into other areas of the market.

The only sector to fall on Friday was materials, again, by -0.5%. Every other sector finished in the green including energy, which appears to be defying growing downside risk in the oil price. Among the bigger moves to the upside were consumer staples (+1.8%), healthcare (+1.7%) and utilities (+1.3%) which looks like a switch into defensives, except that the banks (+1.0%) provided the bulk of the ASX200 points, consumer discretionary (+1.2%) had a good session and telcos were flat. So no real theme there.

How far can the miners keep falling? If we assume most of the profits have now been taken after a week of selling, it will all come down to commodity prices. Iron ore has dropped into the eighties and seemingly steadied again, while base metals lack any real trend.

The week will nonetheless be dominated by the Fed policy meeting and Janet Yellen’s press conference on Wednesday night. Friday night’s strong US jobs number all but cemented a rate hike, if it wasn’t cemented already. Judging by Friday’s trade, the local market sees this as a good thing. A rate hike implies a strong US economy, and a strong US economy is always a positive.

Lacking Energy

Wall Street was pumped up for a cracker of a jobs report on Friday night, taking the earlier private sector number of 298,000, well above forecast, as a hint non-farm payrolls could comfortably beat as well. As it was, a result of 235,000 did beat prior forecasts but may have disappointed some.

Unemployment ticked down to 4.7% despite an increase in the participation rate. The only downer was wage growth, which at 0.2% fell short of 0.3% expectation.

The US dollar fell on the news, down -0.6% on its index to 101.24. The US ten-year yield also fell, down -2 basis points to 2.58%. Given the strong jobs number implies a rate hike is booked in for Wednesday, these two moves are incongruous. But we might suggest either (a) the market was primed for an even bigger number and was disappointed, (b) wage growth is really the only number that matters and it was weak, or (c) the dollar and yields had already run up in anticipation of a rate hike and so Friday saw a bit of “sell the fact”. Whatever the case, the only potential source of volatility this week, all things being equal, is if the Fed doesn’t raise.

Then the discussion will move to just when the next hike might come. This will come down to the language of the FOMC statement, what Janet Yellen says in her press conference, and the infamous “dot plots”, which depict the forecasts of each voting member. The Fed has so far suggested three hikes in 2017, but no one originally expected the first one to be as early as March. Could we get four? This will be the real point of focus by week’s end.

The Dow rose 45 points or 0.2% on Friday night while the S&P gained 0.3% to 2372 and the Nasdaq added 0.4%. Despite Friday’s gains, each index finished lower for the week, breaking a four week winning streak for the Dow and six weeks for both the S&P and Nasdaq. The drag on last week came courtesy of the oil price.

WTI fell again on Friday night, down another -2% to under US$49/bbl, and down -9% for the week. Having sat around the mid-fifties for so long, chances were the longs would become frustrated. All year oil has been supported by confirmation OPEC members were indeed sticking to their production quota cuts. But last week an OPEC spokesperson undermined the positive mood by suggesting there’s no reason the production cuts will be extended past their initial six month timeframe.

And few expect they will be. OPEC members have never stuck to quotas before, thus as the oil price slips back again it is unlikely they will stick for long this time. Falling oil prices need to be met with increased production if government budgets are to be preserved. Higher production will send prices lower, so it’s a matter of who will break first and try to rush more oil into the market.

The risk for the oil price is to the downside. The fall in the oil price over the week ensured energy was the worst performing sector on Wall Street, while other sectors remain largely in limbo as investors wait, and wait, for fiscal policy announcements.

Commodities

West Texas crude fell -US$1.04 to US$48.47/bbl.

Volatile nickel took another -3% dive in London on Friday night after the Indonesian government lifted its export ban on a further group of local miners. All other base metal prices rose, but none by more than 1%.

Iron ore rose US40c to US$85.70/t.

Gold was not fooled by the drop in the greenback and is relatively steady at US$1203.40/oz.

The Aussie was fooled and is 0.6% higher at US$0.7550.

The SPI Overnight closed up 3 points on Saturday morning.

The Week Ahead

The Fed meeting on Wednesday night is basically all that matters. The Bank of Japan will meet on Thursday but will need to play off what the Fed does. The Bank of England will meet on Thursday night but given Brexit could be triggered by parliament at any time now, no change is expected.

US data releases this week include the CPI, business inventories, housing sentiment and the Empire State activity index on Wednesday, housing starts and the Philadelphia Fed index on Thursday, and industrial production and consumer sentiment on Friday.

China will release industrial production, retail sales and fixed asset investment numbers tomorrow.

In Australia we’ll see the NAB business confidence survey tomorrow and the Westpac consumer confidence survey on Wednesday, followed by our own, but largely irrelevant, jobs report on Thursday.

There is another round of stocks going ex-dividend this week, Wesfarmers ((WES)) will update on Bunnings UK today, and Myer ((MYR)), the second most shorted stock on the market, will release its earnings result on Thursday.

Today is a public holiday in Victoria, SA, the ACT and Tasmania. The ASX is open but will be a bit quiet, and some broking houses will be closed.

The US went onto to summer time over the weekend so for now the NYSE will close at 7am Sydney time.

Rudi will appear on Sky Business on Tuesday, around 11.15am, to discuss broker calls via Skype-link. He'll appear in the studio on Thursday, from 12.30-2.30pm, and again on Friday, around 11.15am, via Skype.
 

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