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

Don’t Mention the War

The ASX200 exploded out of the gates on Friday morning, gaining 50 points in the first half hour as the computers chased each other up. But it was to no avail. Whether or not the humans were ready to call the open overdone, as is often the case, the market turned swiftly on news of the US air strike on Syria.

By lunchtime the index was down -18 points, managing to scrape back to a -6 point loss by the close. Gold stocks found renewed buying on the geopolitical risk theme. The energy sector had already been among the leaders on a jump in the oil price but enjoyed added late support on the Middle Eastern story, ending the day up 1.8%.

In contrast, miners of anything other than gold were sold down, as the iron ore price started to tumble, while Telstra ((TLS)) continues to face its own demons from more analyst questioning of whether the famed dividend can be maintained. Utilities chimed in with a 1.7% gain, being the true defensives.

It was a swift change in mood for a market otherwise anticipating the US jobs number and any news from Florida on the Trump-Xi meetings. Trump had only the night before warned he had no qualms in acting unilaterally if he saw fit, and that he wouldn’t be telling anyone beforehand. Even then, the strike took the world by surprise.

Trump did warn the Russians, and much has been said and written on the subject in media over the weekend.

Yes, you can mention the war

Traders on the ASX would have watched the Dow futures contract tumbling post air strike as they put in their orders to sell. Ahead of the open on Wall Street, the futures traded as low as down -100 points. It appeared the highly anticipated jobs number might take a back seat.

And it may have, if the result had come in around the 175,000 new jobs expected. But it came in at a mere 98,000.

The Dow futures had already recovered most of their initial loss before the open, such that the physical rose briefly into the green ahead of the jobs number. Then it fell again, rose to be up 60-odd points after lunch, and then fell back to a whimpering close of down -6 points. The S&P closed down -0.1% at 2355 and the Nasdaq was flat.

Three questions arose from Friday night’s session: What are the implications of the air strike, what do we conclude from the weak jobs number and why did President Xi leave Florida without the usual joint statement from the leaders?

The gold price had spiked as high as US$1270/oz on air strike news but fell back again to be little changed over 24 hours at US$1253.80/oz. The US ten-year bond yield initially plunged to 2.26%, below the critical 2015 low support level of 2.27%, before rebounding back to 2.38%. Add in a stock market that fell (in the futures) before the open ahead of a flat close and we can conclude that initial fears were overcome, with the strike receiving general support from most quarters.

The sector leaders on the day were, unsurprisingly, defence industry stocks and energy. Oil rose another 1%.

As for the jobs number, while disappointing at a mere 98,000, the suggestion is that heavy snow storms in March which shut down the construction industry likely explain the variation to the 175,000 forecast. Meanwhile, the unemployment rate fell to 4.5% from 4.7% to mark its lowest level in a decade, with no change in the participation rate, and the underemployment rate fell to a post-GFC low.

Where does this leave the Fed? Well, the last time the unemployment rate was at 4.5%, pre-GFC, the fed funds rate was over 5%. So 1% looks a tad low. But 98,000 looks weak, suggesting the Fed isn’t about to shift from its three rate hike forecast to four or more just yet. That’s a positive for the stock market.

What was the outcome of the Trump-Xi talks? No one knows. Trump signalled solid progress having been made but given Xi rode off into the sunset without a word, the Chinese side of the assessment is unclear. Perhaps Xi decided Trump was otherwise preoccupied and thought it best just to depart quietly.

Trump has since sent an aircraft carrier to sit off the Korean peninsula. Did he get a green light?

The world is looking a shakier place as we head towards the Easter break.

Commodities

West Texas crude closed up US59c at US$52.33/bbl.

The US dollar index surged 0.4% to 101.13, despite the weak jobs number, or because of the 4.5% — take your pick – likely as a safe haven trade. This helped gold return from its brief spike, up US$2.20 over 24 hours at US$1253.80/oz.

Base metals were mixed in London, with lead and zinc down -1.5% and nickel up 1%.

Iron ore is the big mover, down a whopping -US$5.90 or -7% to US$75.00/t.

The Aussie is down -0.5% at US$0.75.02.

The SPI Overnight closed up 14 points or 0.2%, despite the big iron ore price drop, likely because Wall Street did not tank on geopolitical fears.

The Week Ahead

It’s a short week for developed markets, with all the majors closed on Friday. US markets close but the holiday is not all-encompassing, thus there will still be economic data releases.

The US will see the PPI on Thursday and the CPI, retail sales and consumer sentiment on Friday.

In Australia we’ll see housing finance today, the NAB business confidence survey tomorrow and Westpac consumer confidence survey on Wednesday. On Friday it’s our own jobs number, along with an RBA Statement on Financial Stability.

On the local stock front, Rio Tinto ((RIO)) will hold its AGM on Wednesday and Macquarie Atlas Roads ((MQA)) on Thursday.

This week marks the beginning of the March quarter production report season for the resource sector. Fortescue Metals ((FMG)) and Whitehaven Coal ((WHC)) report on Thursday.

Rudi will appear on Sky Business on Tuesday, via Skype, at around 11.15am to discuss broker calls. On Wednesday he'll host Your Money, Your Call, 8-9pm and on Thursday he'll re-appear in the studio at noon.
 

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