The Monday Report

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This story features AGL ENERGY LIMITED, and other companies.
For more info SHARE ANALYSIS: AGL
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Thursday

The ASX200 fell -25 points on the open on Thursday, as the futures had suggested, and immediately bounced back to be down only marginally. Trading floors began packing up for the long weekend at lunchtime and the index drifted for the rest of the afternoon. The January futures expiry boosted what might otherwise have been a low volume session.

Futures expiries for non-quarterly contracts are typically not major events as outstanding positions are a lot smaller than those for the far more popular quarterly contracts, ie March, June, September, December.

On Thursday morning I noted that the utilities sector seemed to be performing well despite rising US rates but we must remember that sector heavyweight AGL Energy ((AGL)) rather distorts perceptions, given its upstream business and subsequent correlation to the oil price. AGL fell on Thursday, and utilities dropped -1.3% to mark the biggest sector move on the day.

AGL lookalike Origin Energy ((ORG)) is not in the utilities sector but in energy. Go figure. Looks like one big LNG plant makes the difference. Two stocks that could not be more utilitarian if they tried – toll collector Transurban ((TCL)) and airport fee collector Sydney Airports — are both industrials, which means those interest rate proxies get lost in a melting pot of diversification.

Elsewhere, moves were limited. Materials was the biggest winner with a 0.5% gain, while healthcare finally took a breather (-0.2%) and the banks also dipped (-0.2%).

All in all a bit of a nothing day ahead of the break, with the index closing smack on 6050 – roughly mid-range for 2018.

Thursday Night

Note that the above table represents offshore moves on Friday night. On Thursday night the Dow closed up 140 points, up 0.5%, while the S&P gained 0.1% to 2839 and the Nasdaq fell -0.1%.

Once again we see why the Dow in reality should be ignored as a benchmark, but there’s just too much history behind it. Solid gains for components 3M (earnings result) and Boeing accounted for most of the Dow points alone. Boeing has the highest share price in the Dow (US$342) with a market cap of US$204bn.

Apple has the biggest market cap at US$870bn but trades at US$171, therefore has less influence in Dow points than Boeing. General Electric is no slouch with a market cap of US$140, but its US16 share price – by far the lowest among the thirty – means it has little influence at all. 

All three are in the S&P by market cap weight, along with 497 other companies. Apple has the biggest influence, along with Amazon, which, believe it or not, is not in the Dow.

By a rough measure, around a quarter of S&P500 companies are currency-agnostic, meaning their products and services are all sourced within the US and sold in the US. Of the balance, companies that are net importers, such as sellers of Chinese fridges, gain from a lower US dollar and companies that are net exporters, such as Newmont Mining (99% of earnings derived offshore) and McDonalds (66%) lose from a lower dollar. The latter group outweighs the former in number.

On Wednesday night US treasury secretary Tim Mnuchin bucked a hundred years of treasury secretary protocol in suggesting a weak US dollar was a good thing in the short term. The dollar index subsequently fell -1% on the session. He has since been forced to back-pedal, suggesting he was taken out of context.

That didn’t stop the US dollar tanking again in Thursday night’s session from the outset, down almost another -1% to around 88.50, until Donald Trump was interviewed on TV. The dollar will get stronger and stronger, The Donald declared, and that’s a good thing. Within a heartbeat the US dollar rallied to be positive on the day.

Given a greater proportion of large US companies are disadvantaged by a stronger dollar, what had been another earnings-driven rally for the S&P reversed to a flat close.

The strange thing is, the US dollar is tanking largely because the euro is surging. On Thursday night the ECB left its cash rate at 0% and suggested it would stay that way for an extended period of time. So they bought the euro. The Fed, in contrast, is anticipated to hike rates three, maybe four times in 2018. But they’re selling the greenback.

It’s contradictory. The belief is, nevertheless, both the ECB and BoJ will eventually have to capitulate due to economic strength, so currency markets are getting ahead. The US dollar will have a natural floor, given once dollar weakness forces the prices of imported goods up in the US, inflation will rise, underpinning the Fed tightening policy.

Could that produce the long-awaited Wall Street correction trigger? The dollar bounces?

Commodities (Thursday night)

The bounce in the US dollar spooked gold traders. Gold fell -US$10.30 to US$1348.00/oz.

Trading on the LME was wrapping up before the dollar commenced its bounce, hence base metals prices were mostly stronger, led by nickel with a 1.5% gain.

Iron ore rose US30c to US$75.05/t.

West Texas crude fell -US57c to US$65.23/bbl.

The Aussie fell back -0.5% on the dollar’s bounce, to US$0.8038.

The SPI Overnight closed down -14 points or -0.2% on Friday morning.

Friday Night

Friday night’s offshore moves are noted in the above table.

The Dow was at it again on Friday night, with a lot of the gain provided by tech dinosaur Intel (+10%) following an earnings surprise. However, this time the Dow did not stand out as a misleading indicator, given the S&P jumped 1.2% and the Nasdaq 1.3%, with Amazon once again a major contributor.

The first estimate of US December quarter GDP came out on Friday and at 2.6% growth, fell short of 3% expectations. However, Wall Street was not disappointed, deciding anything above the Fed’s suggested trend growth rate of 1.8% is a good result, and 2.6% is not a bad follow-up to September’s 3.2%.

For the last few years, the March quarter has been the thorn in the US economy’s side, posting very small or even negative growth because of weather events. The US has already had its share of destructive weather this winter so perhaps this time the March quarter might prove more normal on that front. But March will be the quarter in which tax cuts first make their mark.

Wall Street thus has great expectations. No one is prepared to sell before the true impact is revealed through corporate earnings and economic data. Valuations notwithstanding, investors just keep buying.

To date, Wall Street has performed better this January than last January – the one in which Trump euphoria reigned supreme. The Dow posted a gain every month in 2017. The last time that happened was in 1927. We won’t mention what happened in 1929.

After its wild ride on Thursday night, the US dollar index slipped back -0.2% on Friday night post the GDP result, to 89.06.

Commodities

Base metal prices responded on Friday night to the bounce in the US dollar post trading on Thursday night.

Gold remained relatively steady, but oil finished a strong week helped by a net weaker dollar and inventory drawdowns.

Iron ore’s -US45c fall nets out to little changed over two sessions.

The Aussie leapt 0.9% on Friday night to US$8110.

The SPI Overnight closed up 30 points on Saturday morning, netting to a 16 point gain over two sessions.

The Week Ahead

The move in the Aussie comes ahead of this week’s December quarter CPI data, due on Wednesday. The market is forecasting annualised inflation to rise to 2.1% from 1.8% in the September quarter. The RBA’s core measure, or trimmed mean, is forecast to rise to 1.9%.

Australia will also see new home sales today, the NAB business confidence survey tomorrow, private sector credit on Wednesday, building approvals on Thursday and the PPI on Friday.

Thursday is the first of the month, hence manufacturing PMIs are due in Australia and around the globe. Beijing will release official Chinese manufacturing and services PMI numbers on Wednesday.

The first estimate of eurozone December quarter GDP is due tomorrow.

The US will see personal income & spending numbers tonight, house prices and monthly consumer confidence tomorrow, pending home sales, the Chicago PMI and the private sector jobs number on Wednesday, and construction spending and vehicle sales on Thursday along with the PMI. Friday it’s factory orders, and non-farm payrolls.

The Fed holds its first meeting this week under new chair Jerome Powell. The statement is due on Wednesday night.

In the local stock market, quarterly reports from the resource sectors wind up by month’s end. Iluka Resources ((ILU)) reports today, Beach Energy ((BPT)), Evolution Mining ((EVN)), Fortescue Metals ((FMG)), Newcrest Mining ((NCM)), Sandfire Resources ((SFR)) and Syrah Resources ((SYR)) tomorrow, and AWE Ltd ((AWE)), Independence Group ((IGO)) and Origin Energy ((ORG)) on Wednesday.

This week marks the beginning of the February earnings result season. Early reporters include Credit Corp ((CCP)), CYBG ((CYB)) and Navitas ((NVT)) tomorrow, GUD Holdings ((GUD)) on Wednesday and James Hardie ((JHX)) on Friday.

The result season picks up pace next week before the avalanche of the final two full weeks of the month.

Rudi will appear on Sky Business on Thursday at noon and again via Skype-link on Friday, probably around 11.15am.

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