The Monday Report

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

By Greg Peel

Calm Down

A calm finish on Friday to a week of heightened volatility does rather support the view the quarterly derivatives expiry on Thursday, with the ASX200 trading around the important 5800 mark, had a lot to do with the week’s action. Tuesday saw a largely technical turnaround from weakness, Wednesday saw a surprise kick-on from that strength, and Thursday gave a lot of it back again.

The local market finished the week up 1.7% and fears of a technical breakdown through 5680 were quelled. We’re now sitting not far from 5800 and if this level is again breached, talk of 6000 will likely be rekindled.

Utilities (+0.6%) was the best performing sector on Friday while the banks (+0.4%) provided the most upside. Retailers found some buying after a tough period, sending consumer discretionary up 0.5% as the strong jobs numbers continued to reverberate. Miners offered the biggest drag with materials down -0.4%.

All up a fairly flattish session to round out the week.

What will be interesting this week, when it comes to retailers, is what response we may see in the local market from Friday’s night’s Amazon news in the US.

Shaking the Foundations

Amazon has made a US$13.7bn bid for high-end grocery chain Whole Foods. The digital disruptor is once again moving in the other direction, into bricks & mortar. The acquisition will take Amazon’s grocery offering from a handful of outlets to over 400, although the Whole Foods brand will remain as is.

The response on Wall Street was to buy Whole Foods shares up thirty percent to above the bid price. But investors also bought Amazon (+2.4%), which is not always the case with takeovers, suggesting the company’s biggest ever acquisition is a good one. What they sold were shares in other grocery chains such as Kroger (-9%) and Costco (-7%). Kroger shares finished down some -30% for the week.

And Aldi is just now moving into the US, as is Lidl.

Amazon’s news meant the company managed to have an up-day when yet again the shares of Big Tech companies were sold down.  The Dow closed up 24 points or 0.1% while the S&P was flat at 2433 as the Nasdaq fell -0.2%.

Utilities were also highly sought on Wall Street on Friday night while energy provided support thanks to some stability in the oil price.

But all anyone could talk about was Whole Foods.

The acquisition has all sorts of ramifications, and has sparked much debate. If you had to make an Australian Whole Foods comparison it would be Harris Farm – a wide range of quality fresh food and groceries at a higher price than standard supermarket drudge. The main criticism Americans have of Whole Foods is it's too expensive, but that’s why the company’s outlets are all located in well-to-do areas of cities and suburbs. Amazon will bring in its digital logistics and customer profiling expertise and it has been noted that there’s a lot of crossover between those who shop at Whole Foods and Amazon Prime members.

The great fear for other grocery chains is Amazon will be able to bring down prices, making Whole Foods more accessible.

What does this mean for the Australian grocery space?

Well, Amazon has already shaken up the retail market here, particularly in electronics but most notably on department stores. Wesfarmers’ Target and K-Mart and Woolworths’ ((WOW)) Big W are most under threat, along with Myer ((MYR)). Up until now, Amazon’s grocery offering has not been in the spotlight.

Will that threat now be priced in? Or is there a chance Amazon will look to make a similar acquisition in Australia? One point that has been noted by local analysts is that a lot of Amazon’s advantage lies in its delivery capacity, not just price. Unlike the US, Australia is a vast country of limited population beyond a couple of cities. The experience in lookalike Canada is Amazon cannot provide next-day type delivery promises in such a geography, and therefore much advantage is lost.

Anyway, it will be interesting to see today if local supermarket investors run screaming for the hills. Again.

Commodities

West Texas crude stopped sliding and rose US44c to US$44.69 /bbl on Friday. It is looking increasingly like the market has decided US$44 is about as low as the price can go, assuming OPEC sticks to its guns. Any lower, and the surprisingly strong rebound in US shale production will cease, and perhaps rigs will begin to shut down again.

Although the US rig count did go up again last week for the umpteenth week in a row.

Lead, nickel and zinc were all around 1% higher in London.

Iron ore rose US20c to US$53.90/t.

The US dollar index fell back -0.3% to 97.17 but the best gold could do was remain flat at US$1253.40/oz.

Weakness in the greenback meant the Aussie is ever higher, up 0.5% at US$0.7616. At this rate the RBA will be crying “complication” once more.

The SPI Overnight closed up 9 points.

The Week Ahead

The weekend brought a sweeping victory for Emmanuel Macron’s party in the French parliament, erasing any lingering fears of a possible Frexit. Greece got another bail-out payment, so we no longer talk about Grexit, while talks will begin this week on just how to pull off Brexit.

For Wall Street the focus will no doubt continue to focus on Donald Trump and whether he is under investigation or not. Assuming no bombshells, Wall Street will chug on regardless.

A fairly quiet week on the US data front sees existing home sales on Wednesday, FHFA house prices on Thursday and new home sales on Friday, along with a flash estimate of June manufacturing PMI.

Japan and the eurozone will also flash PMIs on Friday.

The RBNZ will hold a policy meeting on Thursday.

It’s also a quiet week in Australia. Vehicle sales numbers are out today and tomorrow sees March quarter house prices, as the June quarter nears its end. The only real excitement will be the release of the RBA minutes tomorrow, but no shocks are expected.

The corporate calendar of scheduled events is now blank to June 30.
 

Rudi will appear on Sky Business on Tuesday 11.15am, via Skype, to discuss broker calls. On Wednesday he'll host Your Money, Your Call, 8-9pm, in the shadows of State of Origin. On Thursday he'll appear at noon. On Friday he'll repeat the Skype-experience.

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