Daily Market Reports | Jul 04 2017
This story features CSL LIMITED.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
By Greg Peel
The Dow closed up 129 points or 0.6% while the S&P gained 0.2% to 2429 as the Nasdaq fell -0.5%.
Soggy Start
After Friday’s big end-of-year sell-off in the local market, the new year was meant to be off to a more positive start with the futures up 21 points. The ASX200 managed only 8 points from the open before the selling began again.
Late morning the buyers arrived finally, and pushed the index back into the green, but again the weight of selling proved too great in what was a fairly low volume session. Selling was mostly apparent in the big cap names.
Consumer discretionary was again a big loser, falling -1.7% as investors continued to flee Fairfax Media ((FXJ)) following the private equity abandonment. Fairfax shares fell another -10%. Utilities continued to be slapped, dropping another -1.6% as the exit from yield plays continues as global interest rates rise. And profits continued to be taken in big cap CSL ((CSL)), sending healthcare down -1.7%.
The big movers on Wall Street in recent sessions have been the banks and energy – the former on rising rates and the latter on a rising oil price. Yesterday saw our banks fall -0.4% and energy manage only a 0.1% gain. Energy was the only positive sector on the day.
Perhaps what we are witnessing is a general concern for the Australian economy. Yesterday’s data showed building approvals fell -5.6% in May. While this is what has been expected for some time, the drop was much sharper than economist forecasts of -1.3%, and a turnaround from April’s gain of 4.8%.
Within the number, apartment approvals dropped -12.6% while house approvals actually rose 0.4%. Total approvals are -19.7% lower year on year. Housing construction and its flow-on impacts – household goods, mortgages – have kept the Australian economy in positive (record breaking) territory as mining investment has declined. The decline in mining investment is starting to ease but it won’t rebound. Housing nevertheless appears destined to only head one way.
And now global interest rates are rising. It is unlikely Australia’s cash rate will rise anytime soon, and while the banks have been repricing their mortgage books, only investment and interest-only loans have been targeted. The word is that average Joe has stretched himself to secure his million dollar flat in the outer suburbs, with mortgage repayments exceeding a third of income.
That’s at never before seen low interest rate levels. What happens when the drag of global interest rate differentials eventually leads to an RBA hike?
The good news is the labour market is apparently in good health, as evidenced a solid 2.7% jump in ANZ’s job ad series for June, to mark annual growth of 10.5%. But the jury is still out on whether the high number of part-time jobs in the market is reflective of a workforce that likes shorter hours, or would kill for more work to pay the mortgage.
The other problem is that the rate of increase in house prices is beginning to slow. Again, as expected. “The annual rate of dwelling price growth has turned, in our view,” said the CBA economists in the wake of yesterday’s house price data. “We expect an easing in dwelling prices over the rest of 2017.”
Falling house prices and rising interest rates are an ominous combination.
Some solace might be taken from China’s economic data. Yesterday Caixin’s China manufacturing PMI for June came in at 50.4 – a swing back into expansion from May’s 49.5. Beijing’s official reading, released on Friday, showed an increase to 51.7 from 51.2.
Without China, we’re dead.
Thinness in volumes on the ASX yesterday likely reflects two factors. Last night was only a half session on Wall Street and tonight US markets are closed, and locally it’s now school holidays in some states including NSW.
Persistent Theme
Last night saw WTI oil notch up its eighth straight session of gains, which is a feat not achieved in seven years. And all it took was the closure of two of 758 oil rigs.
Last night saw the US ten-year bond yield jump another 4 basis points to 2.35%. The German equivalent ran up close to its previous 2017 high.
Whether the ECB likes it or not, global markets have decided it is now time to get out of bonds. It looked like it was time late last year when Trump was elected, and it’s still a long way to go to get to the post-Trump high of 2.63% for the US rate. But the tide has turned.
The oil market has decided we will not see prices below US$40/bbl.
Wall Street continued to buy US banks and energy stocks last night, and continued to sell Big Tech. It is a replay of the initial Trump reflation rally, despite Trump to date having achieved none of his policy promises. Rotation is ongoing, out of the recent winners and into the recent losers, as is evidenced by the Dow being up 0.6% and the Nasdaq being down -0.5%, with the S&P splitting the difference.
The Dow was up over 200 points earlier on before drifting away ahead of the 1pm half-day close, as traders likely squared up and headed for the highways.
Dow Theory suggests you can’t have a bull market on Wall Street unless the Dow Transports, as opposed to the Dow Industrials, leads the way. The Dow Transports hit a new record high last night. Popular wisdom suggests you can’t have a bull market on Wall Street without the participation of a breadth of stocks and sectors. Last night the Russel small cap index hit a new record.
At some point the rotation must run its course and investors will have to settle down to consider what the next move will be. In the meantime, maybe, just maybe, something might be achieved in Washington.
That is unless the idiot finally goes one tweet too far. But then again, that would ultimately be positive.
Commodities
West Texas crude is up US71c at US$47.05/bbl.
Copper stood still in London last night while lead and zinc starred with 1-2% gains.
Iron ore rose US20c to US$62.80/t.
Currency markets last night reflected a battle of the manufacturing PMIs.
There was excitement in Europe after a rise to 57.3 from 57.0, but this was eclipsed by the US with a leap to 57.8 from 54.9. There was disappointment in the UK, with a drop to 54.3 from 56.3, belying the boost that should be provided by the weaker pound.
The euro has been surging of late so last night it was the greenback’s turn. It’s up 0.6% at 96.21. This caused gold traders to bottle, sending gold down -US$21.50 to US$1219.70/oz.
The Aussie is down -0.4% to US$0.7653.
Today
The SPI Overnight closed up 35 points or 0.6%. Can we believe it?
Just how weak has the Australian consumer become? Today’s retail sales data will provide some clues.
Will the RBA join in with the rise of global central bank hawkishness? The board holds a policy meeting today.
No Wall Street tonight.
Rudi will connect with Sky Business through Skype at around 11.15am to discuss broker calls.
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