The Monday Report

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This story features WESTPAC BANKING CORPORATION, and other companies.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Stabilised

On Thursday the bulk of the local market was sucked down in the vortex of the bank Royal Commission announcement, scuppering the immediate chance of a push through 6000 for the ASX200. It would have been interesting to see yesterday how investors would have responded after Thursday’s dust had settled, had there not been particular offshore lead.

But there was. The Dow had its best day of the year on US tax reform progress, and that was too much for the Australian market to ignore. We thus saw the index pop straight up to 6000 on the open.

A bit of selling, and then another push higher to 6010 by 11.30am. But that was it. Friday blues took over and we drifted to a more modest close at 5989.

Lunchtime saw a specific dip on the release of Caixin’s independent Chinese manufacturing PMI. It came in a 50.8 for November, down from 51.0 in October, to mark its lowest level in five months. Forecasts were for 50.9. Beijing’s official number posted on Thursday went the other way, surprising to the upside. Caixin’s number is more focused on SMEs.

The energy sector (+1.7%) proved the best performer on the day on the overnight news OPEC had agreed to extend its production cuts for twelve months, albeit with the caveat of a review in six months’ time. Beach Energy (+8.6%) was the biggest ASX200 winner on the day.

The healthcare sector had been chugging along steadily as a reliable defensive before being caught up in Thursday’s downdraught. Normal programming was restored on Friday as healthcare bounced back 1.3%. Materials (+0.5%) chimed in with a little help from iron ore price strength, and while having suffered on Thursday, the banks stabilised with a 0.1% gain.

The question now is: For how long will investors consider the bank Royal Commission a force of evil, given the process will take a year? Will no one buy the banks in that period until ramifications are known, or by the time we’re through Christmas and New Year might it all all just be last year’s news?

For the way things are going, what looked like an ambitious timetable of passing a US tax reform bill before Christmas might now just become reality, and that will impact our market, one way or the other.

The Russian Front

As Wall Street opened on Friday night, news was there remained a handful of senators unconvinced about the Senate tax bill, to the point a vote was not yet possible. The indices dipped marginally from the open but buying then resumed to take the Dow to up around 50 points.

But around 11am, that gain turned into a -350 point plunge for the Dow in the space of thirty minutes. News broke that former national security advisor Michael Flynn had agreed to plead guilty to the charge of lying to the FBI regarding the Russia probe. The guilty plea was not in itself the cause of panic. It was the implication that he was willing to grass on those further up the food chain.

How much further up the food chain?

It was several months ago when Wall Street last took a major bath in a session on the possibility of Trump being impeached. The Russian probe has since gone on and on, forgotten about for weeks before jumping back into the spotlight on some new development. Wall Street is not specifically scared that no Trump means no tax reform (indeed, were Vice President Pence to take over many believe that would be a more positive outcome) but is concerned of the wider implications of the Leader of the Free World being outed for treason.

Soon it became apparent the food chain would likely lead to Jared Kushner, Trump’s son in law, rather than Trump himself. But if that wasn’t enough, news came through that with a bit of a tweak here and a fiddle there, it looked like enough senators were now prepared to vote for the tax bill.

Wall Street swiftly recovered its losses and at one stage actually made it back past breakeven on the session. At the closing bell, the Dow was down -40 points or -0.2%, the S&P lost -0.2% to 2642 and the Nasdaq fell -0.4%.

Long after Wall Street closed for the week, the tax bill passed, by 51/49. Wall Street closed on the belief a positive vote was possible, maybe even likely, but not confirmed.

And then later in the weekend, Trump put his foot in it by saying “Flynn lied to the vice president and to the FBI”. Only on Friday did Flynn plead guilty to lying to the FBI. Former FBI director James Comey said previously he was asked by Trump to drop the investigation into Flynn. Trump denied the claim, and sacked Comey.

It appears Trump has dropped himself into an obstruction of justice charge, which is an impeachable offence.

Commodities

It was a slightly delayed reaction but on Friday night oil markets decided that Thursday’s news of an extension to OPEC/non-OPEC production cuts of twelve months with a review in six months was a net positive. West Texas crude rose US$1.06 to US$58.35/bbl.

Can WTI break the 60 mark? That will come down to the demand side, given the hole in the supply side being left by OPEC/Russia curtailments is rapidly being filled by renewed growth in US shale production. Last week the US rig count rose by 2 to 749.

Beijing is stepping up its pollution inspections of zinc and lead producers just as seasonal demand for batteries increases in China. Friday night saw lead and zinc both jump 3% in London. The day’s round of manufacturing PMIs produced net positive results in Europe and Asia, hence aluminium, copper and nickel all rose 1%.

Iron ore rose US$1.50 to US$69.30/t.

The US PMI dipped slightly but at 58.2 manufacturing is still expanding rapidly. The US dollar index dipped -0.1% to 92.91 and gold rose US$5.00 to US$1279.60/oz.

The Aussie shot up 0.5% to US$0.7610 on commodity price strength.

The SPI Overnight closed down -6 point on Saturday morning.

The Week Ahead

It’s GDP week in Australia this week. Today sees September quarter component numbers for company profits and inventories, and tomorrow brings the current account including the terms of trade. Economists expect 0.7% growth for Wednesday’s GDP release, taking annual to growth to 3.1% (June 3.0%).

Monthly data this week include ANZ job ads today and retail sales tomorrow along with the services PMI. Thursday it’s the construction PMI and trade balance and Friday it’s housing finance. The RBA is set to meet tomorrow but will probably phone it in.

It’s jobs week in the US, just to swing the attention from fiscal to monetary policy once more. The private sector number is out on Wednesday and non-farm payrolls on Friday.

The US will also see numbers for factory orders tonight, the trade balance and services PMI tomorrow and consumer sentiment on Friday.

Tuesday is services PMI day across the globe, including Caixin’s take on China.

On the local stock front, the AGM season now slows to a trickle. Highlights this week include TPG Telecom ((TPM)) on Wednesday and Westpac ((WBC)) on Friday.

CSL ((CSL)) hosts its annual R&D day on Tuesday.

I’d had the S&P/ASX index rebalancing announcement date down in our calendar as last Friday but apparently they’ve now changed the timing from what was two weeks’ notice to one. Apologies. The announcement is this Friday. 

Rudi will appear on Sky Business on Tuesday via Skype at around 11.15am to discuss broker calls and again on Friday at around the same time.

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