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

Renewed Interest

The futures had suggested up 17 points on Friday morning following another record breaker on Wall Street but the ASX200 shot out of the gates with a lot more gusto. Sellers initially tried to slap it down but failed, with buying continuing throughout the session.

A very dreary local market suddenly received a shot in the arm. Early in the week it seemed Australia was simply out of favour with the world. The banks were influential on Friday with a 1.0% gain as investors appeared to have decided enough is enough. Materials chimed in with a 1.2% gain despite general weakness in commodity prices overnight. Telcos rose 1.1% to suggest the large caps were leading the charge.

Buying was reasonably consistent across sectors, with a couple of exceptions. Utilities had found safe haven buyers earlier in the week but on Friday fell -1.7%, in stark contrast to the rest of the market. Energy was flat in the face of the lower oil prices and consumer discretionary underperformed with its 0.5% gain.

Why the change of heart?

There were some specific influences. Iron ore futures tracked higher during the day, with spot ultimately closing up 2% on Friday night. There has been a lot of talk lately of bank internal estimates of the cost of the levy not adding up to nearly as much as the government hoped to collect. Goldman Sachs put out a note suggesting Telstra’s dividend is more than safe. But perhaps in the end the gap to a record-breaking Wall Street was becoming overly stretched.

And while safe haven yield was abandoned in utilities, the banks, the big miners and the telco are all significant dividend payers offering attractive yields at lower share prices.

So perhaps the downside has a limit, but what is the upside from here? Friday saw the index once again moving up towards the 5800 mark, but the best that gives us is a small gain year to date.

Pick a Number

On Thursday night economists had expected the ADP private sector jobs number in the US to come in at 185,000 but instead it marked 253,000. The Dow rose 135 points. On Friday night economists forecast 185,000 for non-farm payrolls. It came in at 138,000. The Dow rose 62 points.

The Dow closed up 62 points or 0.3% while the S&P rose 0.4% to 2439 and the Nasdaq gained 0.9%.

Not only was the official jobs number a big miss, the previous two months results were revised down by a net 66,000 jobs. Yet all three major indices again marked new record highs. Is it because Wall Street now assumes the Fed won’t raise in June. No, because (a) this implies the ADP number would have sparked selling and (b) the Fed futures market still has a June hike at near 90%, little different post the jobs result.

It is interesting to note that the US ten-year yield fell -6 basis points to 2.16%, below strong technical support at 2.17%. The bond market saw it as a bad number. The US dollar index fell -0.6%. But the stock market liked it.

Some commentators pointed to the unemployment rate, which fell to 4.3% from 4.4% in April to mark its lowest level in sixteen years. The underemployment rate also fell. The low rate suggests the US labour market is now becoming tighter, thus one cannot expect further 200,000 plus results from here on and indeed 138,000 is not too bad.

The drop in unemployment did, however, reflect a fall in the participation rate. Wages grew 0.2% in the month to mark 2.5% annual growth, which is a solid pick-up from prior years. Perhaps the “tight” market call is the right one. At least in the US, wages are growing faster than inflation. Not so the case in Australia.

So another day, another round of records, and still no real progress on fiscal reforms. The US stock market is being bought up because it is being bought up – don’t fight the momentum. It’s still the TINA trade, and earnings results are there to support equity strength. Yet concern continues to grow over the concentration of Wall Street strength in the Big Tech names, which continue to lead the indices higher without a lot of broad market support.

We need only look at another stark outperformance for the Nasdaq on the day.

Commodities

Otherwise, markets suggested that while June might be locked in for a Fed hike, subsequent hikes this year are in question. Bond yields fell, the US dollar index dropped -0.6% to 96.67, and gold jumped US$13.10 to US$1278.50/oz.

Iron ore rose US$1.10 to US$56.30/t. Commentators have pointed out that the iron ore price has a history of falling in May and rebounding in June.

Nickel bounced back 1% in London but zinc continued its slide, down another -1.5%, and copper lost -0.5%.

West Texas crude fell -US$31c to US$47.72/bbl.

The Aussie is up 0.8% at US$0.7434.

The SPI Overnight closed up 10 points on Saturday morning.

The Week Ahead

More terror in the UK, but while sympathetic, in this day and age markets simply press on. The UK election will proceed on Thursday night.

The ECB will also hold a policy meeting on Thursday night. Many believe it's high time Draghi started winding in the stimulus given the recovery clearly now apparent for in the eurozone economy, but the ECB president continues to point to low inflation as reason to stick with it.

The RBA will meet tomorrow but little change is expected in tone. The big event locally this week is Wednesday’s March quarter GDP result which, like any good limbo dance, is a case of “How low can you go?” Market consensus is hoping for 0.3% growth to mark 1.6% annual, but market consensus is nervous.

We still have some quarterly data numbers to crunch ahead of final forecasts, being today’s company profits and inventories number and tomorrow’s current account, including the terms of trade.

Monthly data this week includes ANZ job ads and the services PMI today, the trade balance on Thursday and housing finance on Friday.

It’s service sector day cross the globe today including Caixin’s take in China number. Beijing will release inflation numbers on Friday.

The US will see factory orders tonight along with the PMI, in an otherwise quiet week for data.

New Zealand is closed today.

Things are quietening right down now on the corporate schedule, notwithstanding the chance of any further “confession session” guidance warnings ahead of EOFY.

Wednesday  sees Wesfarmers ((WES)) providing a strategy briefing and Vicinity Centres ((VCX)) hosting an investor day.

Rudi will appear on Sky Business on Thursday at noon and via Skype around 11.15am on Friday.
 

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