The Monday Report

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

By Greg Peel

Is It Over?

The ASX200 opened sharply lower on Friday morning as the futures had foretold. Immediately the market began to push back, no doubt wondering why we would be down -70 points a day after being up 70 points when nothing had really changed in the interim.

Well what had changed, it appeared, was a sudden suspicion central banks globally had decided to coordinate efforts to begin bringing rates back to normal, whatever normal is these days. Wall Street was weaker on Thursday night on that thesis. But it is a conclusion that could have been drawn on Thursday in the Australian market, yet we shot up to 5800.

That we might have to put down to fund manager window-dressing for end of year. If that’s the case, they went a day early and were not prepared to go again on Friday. When the early attempt to recover failed, selling came in waves thereafter for the rest of the session.

While every sector finished in the red and every sector suffered a fall of more than -1%, the hardest hit stocks were the yield plays, underscoring the fear-of-rising-rates argument. Utilities fell -2.0%. Stocks such as Transurban ((TCL)) and Sydney Airports ((SYD)) helped industrials down -2.2%. The banks fell -1.4%, having starred in the rally the day before.

The biggest fall was nevertheless reserved for healthcare (-2.5%), likely because healthcare had run hard for the week, driven specifically by CSL ((CSL)). It fell -2.8% on Friday. Consumer discretionary fell -2.2%, but here we can point to the private equity pull-out of the Fairfax Media ((FXJ)) takeover bid playing a part. Fairfax fell -8.3%.

On Friday night global bond yields continued to rise, with the US ten-year gaining another 4 basis points to 2.30%. But if the US stock market is worried, it was not evident in the fact the Dow was up about 140 points with ten minuted to go on Friday night, before succumbing to a very swift sell-off that commentators put down to end-of-quarter squaring.

So we might be able to write off last week’s volatility on the local market as being EOFY-related, and not structural. Despite several volatile sessions the index has actually gone nowhere. We’ve simply bounced hard back and forward between 5700 and 5800, more or less.

The futures are suggesting a 21 point gain this morning. It’s a new day, it’s a new dawn, it’s a new FY. Does life return to normal?

More Rotation

Australian banks stocks have a habit of following movements in US bank stocks, but while US banks are beneficiaries of rising rates – which boost short end net interest margins but have little impact on mortgages, which are based off the 30-year rate in the US – Australia’s pricing of mortgages off the cash rate and its high level of household debt conspire to make rising rates a dangerous proposition downunder. And rising rates will only serve to crimp already sluggish business credit demand.

Rising rates continued to drive US bank stocks higher on Friday night, while the ongoing oil price rebound is having the same effect on the energy sector. These two sectors, along with telcos, have been the worst performers on Wall Street year to date. The best performers have been Big Tech and healthcare.

Friday night saw another round of investors buying banks and energy stocks and selling healthcare and Big Tech. The Dow closed up 62 points or 0.3%, the S&P rose 0.2% to 2423 and the Nasdaq fell -0.1%.

The broad market S&P finished up 8% for the half. Commentators have noted that has nothing to do with fiscal policy, given Trump is yet to actually achieve anything yet beyond immigration controls which Wall Street is uncomfortable with anyway. The primary drive has been fundamental – an improving economy, albeit a bumpy ride, and most importantly, improving earnings. But it must be noted the 8% was achieved off the back of the Trump rally of late 2016.

Fiscal policy is therefore still priced in. The biggest risk to Wall Street will not be a disappointing June GDP result or less than fabulous June quarter earnings (which start to drop in a couple of weeks) but failure on Trump’s part to achieve tax reform and other measures to an extent Wall Street has been promised.

The WTI price shot up another 3% on Friday night. After having consistently risen for 24 consecutive weeks, the US rig count dropped last week. It may have only been a shutdown of a whole two rigs, to leave the count at 756, but it may well be the sign of the tipping point the oil market has been expecting. It looks like we can pretty much lock in, at least tentatively for now, a price of US45/bbl as being about the line in the sand for shale breakeven.

On the economic front, US consumer spending rose only 0.1% in May having risen 0.4% in both April and March. Given incomes rose 0.6% — the biggest jump since 2012 – that money has clearly gone into savings rather than spending. Economists had expected the personal consumption and expenditure (PCE) measure of inflation to rise 0.1%, but it fell -0.1%, as it did in April.

Early in the year, the PCE rose to as high as 2.1% annual. As this is the Fed’s preferred measure of inflation, one might say the Fed’s target rate of 2% had been achieved, justifying rate rises. The Fed would be looking at the lower core rate nevertheless, but April saw the headline rate fall to 1.7% and with May data it’s down to 1.4%.

Yet the US ten-year yield rose again on Friday night. The benchmark began last week at 2.13% and closed at 2.30%. It was not individual data releases driving the bond sell-off, as they were more to the weak side, it was this aforementioned suspicion global central banks are on the move.

We can thank Mr Draghi for that, even though ECB officials tried to water down comments from Draghi the world took as being hawkish.

Commodities

West Texas crude rose US$1.47 to US$46.34/bbl.

Lead fell -1% and nickel rose 1% as other metals remained quiet on the LME.

After a solid week, iron ore fell -US30c to US$62.60/t.

The US dollar index managed to tick up slightly to 95.64 and gold fell US$4.20 to US$1241.20/oz.

The Aussie was flat at US$0.7683.

The SPI Overnight closed up 21 points or 0.4% on Saturday morning.

The Week Ahead

Tuesday is July 4 and thus US markets will be closed. Monday sees a token half-day on the NYSE that will be attended only by a handful of skeletons.

US data releases this week include construction spending tonight and the June manufacturing PMI, ADP private sector jobs numbers on Wednesday along with vehicle sales, factory orders and the minutes of the June Fed meeting, and the services PMI and trade balance on Thursday.

The services PMI is a day late given the holiday, otherwise manufacturing PMIs are due across the globe today and services on Wednesday, with the exception of China, who releases both today.

Friday in the US sees the biggie – non-farm payrolls.

The minutes of the ECB’s last meeting will be closely scrutinised on Thursday.

It’s a busy week for data locally, beginning with the manufacturing PMI, ANZ job ads, building approvals and house prices today. Tomorrow it’s retail sales, Wednesday the services PMI, Thursday the trade balance and Friday the construction PMI.

The RBA will meet tomorrow and there’s a growing feeling among economists Dr Lowe might be in on this global central bank conspiracy, but that seems hard to imagine given repeated warnings of high levels of household debt. Not to mention an Aussie dollar that hasn’t really been behaving itself lately.

For the first week of the new year there are no corporate events scheduled on the local market bar a few ex-divs.

Rudi will appear on Sky Business on Tuesday, via Skype, at around 11.15am. Then again on Thursday, noon till 2pm. He'll repeat the Skype communication on Friday, probably around 11.30am, scheduling and events permitting.
 

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