The Monday Report

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            [2] => ((SIG))
            [3] => ((BBN))
            [4] => ((NAB))
            [5] => ((ANZ))
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            [1] => REA
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            [3] => BBN
            [4] => NAB
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This story features NEWS CORPORATION, and other companies.
For more info SHARE ANALYSIS: NWS
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Range Holds

It was not a matter of whether the Australian market would fall on Friday but by how much, and whether the drop would take the ASX200 through the bottom of the longstanding range. As it was, the index fell -86 points from the open to 5674 – just below the 5680 support level.

And there it found support. By lunchtime the index had struggled back to over 5700 before fading a little to the close. The range has not been broken. It is unlikely to be broken today given Wall Street also found buyers on Friday night at the 50-day moving average support level for the S&P500.

Selling on Friday was widespread and consistent among the cyclical sectors, with money moving into defensives. Utilities and consumer staples both finished slightly in the green and telcos only slightly in the red. Other sectors all fell -1% to -1.5% with the exception of the more vulnerable consumer discretionary sector, which fell -2%. It was not a good session for materials (-1.5%) overall given money rushing into the gold miners.

While gold miners dominated the top ten ASX gainers, company’s reporting earnings on the day dominated the losers. News Corp ((NWS)) lost -5% and REA Group ((REA)), of which News is a major shareholder, lost -6%. Sigma Healthcare ((SIG)) issued a profit warning and fell -8%. Outside of the ASX200, Baby Bunting’s ((BBN)) result sparked an -18% drop.

It was not a day to disappoint.

Not disappointing was National Bank ((NAB)), with a reasonable quarterly update, but this was lost in general bank selling on the day.

Perhaps adding to consumer discretionary’s underperformance was RBA governor Philip Lowe’s testimony to the Senate on Friday, at which he suggested the next move in rates is more likely to be up than down. That’s bad news for retailers, but not any great shock to anyone. Dr Lowe added that there won’t be a hike for quite some time given low wage inflation, which should at least be comforting for the sector.

While the local results season has now strictly been running for two weeks, we’ve only seen the tip of the iceberg so far. This week sees the number of reporters step up substantially and the following week sees another substantial step-up. The question is as to whether the micro will be the driver of market responses and price movements over the next two weeks or whether the macro will swamp all meaning.

In other words, will tensions escalate further?

The market believes they won’t, beyond the threatening rhetoric. But that’s no reason not to be prepared for further selling.

Fear Not

The residents of Guam have been advised not to look at the bright flash of a nuclear explosion as it can cause blindness. Guam is a small island. If you’re there to see a nuclear flash I think blindness may be the least of your issues. One is reminded of films shown to American schoolchildren in 1962 instructing that if the siren is heard, safety is ensured by hiding under one’s desk.

But few honestly believe it will come to that. Hence Wall Street found support on Friday night after Thursday night’s tumble, with the Dow closing up 14 points, the S&P gaining 0.1% to 2441 and the Nasdaq bouncing 0.6%. It was by no means a convincing relief rally, given the Dow had been up over 60 points as late as 2pm, but more panic selling did not transpire and the S&P500 held its 50-day moving average.

Wall Street also had a little help from July CPI data.

The US headline CPI rose by only 0.1%, as did the core rate. Economists had forecast 0.2% for both. It’s the fifth month in a row the CPI has come in below expectation. Both headline and core are now running at 1.7% year on year, below the Fed’s 2% target.

The result underscores a growing assumption that the Fed will go ahead with balance sheet unwinding but remain on hold with its funds rate through 2017. Rates will not be rising as the bombs are falling, it seems.

The news provided no solace for department store chain JC Penney, which fell -17% having posted yet another big loss. The company’s shares are now trading at around half the price they were in 1982. I’ve said it before but: Ask not for whom the bell tolls.

The bounce in the Nasdaq from a -2.1% loss on Thursday to a 0.6% gain on Friday represented investors jumping back into FANG & Co, suggesting once again there are plenty of willing buyers for runaway stocks if better value opportunities present. But that said, the market is still hedging its bets at this nervous time.

The VIX volatility index ticked down a tad but at 15.5, is still holding the 40% jump from Thursday. Gold moved a little higher to US$1288.70/t. Aided by the weak inflation numbers, the US ten-year yield is moving closer to its 2017 low with a -2 basis point drop to 2.19%.

One factor that has drawn attention is the forward curve on the VIX index. The VIX trades somewhat like a futures contract in having successive expiry dates out into time. The front contract is the one watched closely, which is currently at 15.5. But move out into time and later expiries drop sharply.

This suggests investors are concerned about the possibility of near term volatility but not about any long-running problem. They don’t see World War III. History shows that when the VIX goes into “backwardation” – successively lower prices over time – it’s a bullish sign.

But for now, Wall Street will wait and watch.

Commodities

Iron ore fell -US$1.80 to US$74.30/t.

After a strong few days, nickel fell -3% in London. Zinc fell -1.5% while the other metals were flat.

Gold rose US$2.90 to US$1288.70/oz with the US dollar index falling -0.4% to 93.07.

West Texas crude rose US27c to US$48.77/bbl.

The Aussie is up 0.2% at US$0.7890.

The SPI Overnight closed down -3 points on Saturday morning.

The Week Ahead

Local corporate results, and lots of them. Too many to now pick highlights so please refer to the FNArena Calendar.

The minutes of the July RBA meeting are out tomorrow. Wednesday brings the June quarter wage price index and Thursday the July jobs numbers.

China will release July industrial production, retail sales and fixed asset investment numbers today.

The minutes of the Fed meeting are out on Wednesday and the ECB on Thursday.

The US will also see retail sales and the Empire State index tomorrow, housing starts on Wednesday, industrial production and the Philadelphia Fed index on Thursday and consumer sentiment on Friday.

Among all the earnings results locally, ANZ Bank ((ANZ)) will provide its quarterly update tomorrow.

Rudi will appear on Sky Business twice this week, both times via Skype. He'll discuss broker calls on Tuesday morning, at around 11.15am, and he'll do it again, probably around 11.30am, on Friday.
 

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