The Monday Report

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

By Greg Peel

There’ll always be a New England

The local stock market popped from the open on Friday, shooting up 22 points before 11am. The lead from Wall Street had been positive, backed by strong earnings results both before and after the bell. Expectations were that Friday night’s session on Wall Street would also be positive.

But there remained the small matter of the pending High Court decision on those bloody foreigners coming in and stealing jobs from true blue dinky-di Aussie politicians. The government was confident common sense would win out and it appeared the market was prepared to accept that view, but the index nevertheless traded sideways through to around 2.15pm when the decision was brought down.

The ASX200 then plunged -65 points. Barnaby Joyce must have at least taken solace that he is worth so much to the stock market, but of course it is the uncertainty created by a government no longer with a lower house majority that rattled investors.

Once the computers had finished going haywire, the index settled on a 30-odd fall from the peak to be down -13 for the session, basically sitting poised on the 5900 pivot point.

The biggest sector loser on the day was understandably financials, given any increasing risk of the Coalition imploding increases the risk that ultimately there will be a bank Royal Commission. The -0.6% fall for the sector was a standout to the downside, and came despite Macquarie Group ((MQG)) rising 4% on a strong earnings result.

Beyond the banks we ended the week the way we had started – largely directionless, trading back and forward around 5900, with sectors trading up one day and down the next and exhibiting no uniformity.

With Tony Windsor out of the race, predictions are that the New Zealand’s favourite son will romp back into parliament in the New England by-election and return to the deputy prime ministership. So really it’s all just been a temporary distraction, assuming Labor does not proceed with its threat to bog down the whole system for months with legal challenges to a hundred ministerial decisions made by a Kiwi.

Back in the real world, there’s an awful lot going on this week in terms of global economic data, central bank meetings, more US earnings releases, and another bank (NAB) result locally. So we all go back to ignoring local politics again given that’s simply a road to frustration.

Get on or get out of the way

Two particular US earnings reports on Friday night left us with Amazon up 13% and department store chain JC Penney down -15%. This despite Amazon being up 45% for the year and JC Penney down -65%.

Enough said?

The stage had been set late in Thursday’s session when tech leviathan Amazon, tech elders Microsoft and Google, and tech dinosaur Intel all posted surprise earnings beats after the bell. Amazon’s result was particular shocking, given analysts had assumed the company’s recent acquisition spree would weigh on the numbers.

It was not the case, so we had Amazon up 13%, Microsoft up 6%, Google (Alphabet) up 4% and Intel up 7% from Friday’s opening bell. So dominant were these results that old hands on the NYSE were shaking their heads in disbelief at the boards on the close. The Dow rose 33 points or 0.1%, the S&P gained 20 points or 0.8%, and the Nasdaq surged 2.2%.

The disparity between the Dow and Nasdaq moves in percentage terms was the greatest seen since 2002, when the Nasdaq began rebounding for the Tech Wreck. At one stage it appeared the S&P might even beat the Dow in points terms, despite being roughly a tenth of the size, and no one could remember that happening before. It wasn’t to be, but 20 to 33 still left commentators gobsmacked.

Given the extent of the rally in Big Tech over 2017, solid earnings reports were a necessary requirement this quarter for these flagbearer companies, and they duly delivered. But is it simply confirmation of current pricing? Can they do it again?

In more general terms, Wall Street was also taken aback by the first estimate of US September quarter GDP, released pre-session on Friday. Expectations were for a drop to 1.7% growth from the June quarter’s 3.0% growth, reflecting the impact of the hurricanes. But instead, the result came in at 3.0% once more.

One might assume, thus, that the quarter was actually an absolute cracker for US GDP and the hurricanes trimmed that back to 3.0%. But there’s the small matter of what the first estimate represents.

I stand to be corrected here, but I have always been of the understanding the first estimate is an extrapolation of the first month of the quarter – in this case July – the first revision an extrapolation for the first two months and the second revision a full three month result. The hurricanes hit in September. I would thus be expecting a downward revision in the number delivered in December.

Perhaps Wall Street saw it that way too, given if we take Big Tech out of the equation, it wasn’t really much of a session to be excited about. If we consider that both Microsoft and Intel are Dow components, a 0.1% net gain for the average highlights losses elsewhere. Indeed, drug-maker Merck fell -6% after a disappointing result and the oldest stock in the Dow – General Electric – continued to slide (-2.5%) away after posting a disappointing result a week ago.

The materials sector was weak given falls in commodity prices, and the banks did little. Yes, it was another triple record, but a very sub-sector specific one. Let’s just say you’re not in the game if you don’t have your head in the cloud.

Commodities

The US dollar index initially leapt on Friday night on the GDP result. It later trimmed gains to finish 0.2% higher at 94.84 following news the president is leaning towards Jerome Powell – a dove – as Fed chair. But before that news broke, trading closed in London.

It was still the biggest weekly gain for the greenback in 2017 but the result was some swift profit-taking in base metals. Aluminium and nickel fell -1.5%, copper and zinc -2% and lead -3%.

Iron ore fell -US$1.90 to US$58.70/t.

One might have expected a drop for gold on greenback strength, but the shenanigans in Spain are ensuring a dose of lingering geopolitical premium. Gold rose US$6.30 to US$1273.10/oz.

Saudi Arabia and Russia have agreed to extend OPEC/non-OPEC production cuts beyond March. It doesn’t mean all other members will agree, but West Texas crude jumped US$1.31 or 2.5% to US$53.98/bbl. Brent hit 60 for the first time in two years.

The Aussie had taken a tumble during the week on both greenback strength and particularly the weak local CPI result. Its 0.2% gain to US$0.7675 likely suggests profit-taking.

The SPI Overnight closed up 34 points or 0.6%.

The Week Ahead

Not sure where those 34 points are going to come from. Sure, the S&P rose 0.8%, but take out Big Tech, which does not exist in Australia, and what are we left with? For once the Dow is probably more indicative, with a 0.1% gain.

Iron ore and base metal prices have tanked, offset by oil strength. The banks are back in front of ASIC again today, other than ANZ, which has already settled.

The Bank of Japan will meet tomorrow and likely make no changes. Ditto the Fed on Wednesday night. Only the Bank of England, on Thursday, is at risk of a policy change, being the first rate hike post-GFC. But it may yet be a little early.

The eurozone will report its GDP result tomorrow.

Beijing will release official manufacturing and services PMIs for China tomorrow. Everyone else follows across the week.

US data next week include personal income & spending tonight, consumer confidence, house prices and the Chicago PMI on Tuesday, and vehicle sales, construction spending and the private sector jobs report on Wednesday. On Friday it’s factory orders and trade, and non-farm payrolls.

Economists are looking for a big rebound from the hurricane-affected September result.

In Australia we’ll see private sector credit tomorrow, building approvals and the trade balance on Thursday, and retail sales on Friday.

National Bank ((NAB)) will report its earnings result on Thursday. Otherwise the local stock calendar is choc-o-block with AGMs, which I will highlight on a daily basis. Nothing of note today, other than Reliance Worldwide's ((RWC)) AGM.

Rudi will appear on Sky Business on Tuesday, via Skype, at around 11.15am. He'll appear twice on Thursday; from noon till 2pm and again between 7-8pm for the Switzer Report. On Friday he'll repeat the Skype connection, probably around 11.15am.
 

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