The Overnight Report: Retreat From Paris

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

By Greg Peel

The Dow closed up 135 points or 0.7% while the S&P gained 0.8% to 2430 and the Nasdaq rose 0.8%.

Poor Intentions

Another very choppy session on the local market to begin the month of June rather puts paid to my argument that Wednesday’s choppiness was due to end-of-month and index realignment. Rather, it would suggest Australian investors are really unsure as to what path to follow at present. The ASX200 did, nevertheless, manage another modest gain.

Yesterday’s private sector capex numbers for the March quarter were rather disappointing from an economic growth perspective. There were three main elements to the release – actual capital expenditure in the quarter, the final estimate of what businesses plan to spend in FY17, and the second estimate of what businesses plan to spend in FY18. Economists are always quick to point out estimates in the distance are rarely reliable as indicators of actual spending.

Actual spending rose 0.3% in the March quarter, with both mining and non-mining investment showing increases. FY17 spending estimates did not change from the prior estimate in the December quarter numbers. The FY18 estimate suggests a small decline in non-mining investment as mining investment continues its relentless slide.

Eventually that mining investment decline will run its course. But in the meantime, the disappointment is a lack of any sign of non-mining taking the baton to balance the economy.

Retail sales rebounded strongly in the month of April. A rise of 1.0% outstripped forecasts of 0.3%, and turned around March’s -0.2% drop. The annual rate of growth returned to 3.1% from a paltry 2.2%.

But 3.1% is hardly shooting the lights out either. And the rebound from March has a lot to do with a return to normal service following Cyclone Debbie. The truth remains, household debt is growing faster than wages, and consumer spending must suffer as a result.

To that point, house prices fell -1.1% in May – the weakest result in eighteen months.

Beijing’s official manufacturing PMI, released on Wednesday, showed a flat result on April at 51.2. Caixin’s independent equivalent, released yesterday, showed a fall into contraction to an eleven-month low of 49.6, down from 50.3.

Sector moves on the ASX yesterday were mixed.

Morgan Stanley decided that if anyone is to be impacted by the arrival of Amazon, it will be "non-food retail sales". From yesterday's report: "The market underestimates Amazon's impact on its ~A$20bn non-food retail sales. Valuation looks stretched given negative revisions." The broker downgraded Wesfarmers ((WES)) as a result and traders dumped the stock, sending consumer staples down -1.0%. Discretionary, on the other hand, rose 0.6% on the better retail sales numbers.

Materials (-0.2%) balanced iron ore weakness and gold strength but the oil price rose and energy fell -0.3%, suggesting the China data were to blame for resource softness.

News that Primary Health Care ((PRY)) may buy Healthscope’s ((HSO)) medical sectors lifted both stocks, and the healthcare sector by 1.8%.

Defensives fared well, with utilities up 2.2% and telcos up 0.5%, and industrials chimed in with 1.1%.

The index continues to graft its way away from the critical 5680 level. Strength in Wall Street overnight should provide for further graft today.

All in the Data

Donald Trump officially withdrew the US from the Paris Agreement on climate change late in the session yesterday, and Wall Street kicked on the close. But it was not the withdrawal which drove new record highs for all three major indices last night.

The ADP private sector employment report showed an addition of 253,000 jobs in May when 185,000 was forecast. Forecasters have now scrambled to upgrade their expectations for tonight’s non-farm payrolls result.

In contrast to China, the US manufacturing PMI is looking healthy with a tick up to 54.9 from 54.8.

It was these releases that sent US indices on an upward trajectory through the morning, with the Dow then stalling out with a hundred point gain in the afternoon.

It was no secret Trump was to announce the Paris withdrawal, and a “talking point” memo had been released well ahead of the announcement. Coal and oil stocks enjoyed small rallies, as did resource service companies, but nothing substantial. Funnily enough, Exxon Mobil has been among those corporations petitioning the White House not to withdraw. The question remained, nevertheless, as to whether Trump planned to thumb his nose at Paris, or renegotiate the deal.

Despite the president’s stated opinion that climate change is a hoax, he did indeed announce an intention to renegotiate the terms rather than abandon emissions targets altogether. This is a positive, as it appeases all camps. The claim is that the burden on the US taxpayer resulting from the Paris agreement is disproportionate. But that said, the process of actually exiting the treaty may take as long as Trump’s presidential term.

Perhaps the final takeaway, in the short term, of the announcement is that this is finally a fiscal policy that has come to pass. What’s next?

Commodities

The slide in the iron ore price continues. It fell US$1.00 to US$55.20/oz.

Nickel and zinc again posted falls in excess of -1% in London while copper managed a modest gain.

West Texas crude fell -US60c to US$48.03/bbl.

Gold is slightly lower at US$1265.40/oz with the US dollar index rebounding 0.3% to 97.21.

The Aussie is down -0.7% at US$0.7376, mostly due to the disappointing capex numbers and further forecasting suggesting the March quarter GDP result will be very minimally positive at best.

Today

The SPI Overnight closed up 17 points or 0.3%, balancing Wall Street strength against commodity price weakness.

The US jobs numbers are the highlight in an otherwise quiet 24 hours for global data releases.

Rudi will connect with Sky Business through Skype this morning, probably around 11.15am, to talk about broker calls and equity market moves. Next week he'll be in Melbourne, to present his latest findings and insights to members of the local Australian Investors Association (AIA) chapter.
 

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