The Monday Report

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            [1] => ((NXT))
            [2] => ((JHX))
            [3] => ((TLS))
            [4] => ((CBA))
            [5] => ((RIO))
            [6] => ((MQG))
            [7] => ((NAB))
            [8] => ((WLD))
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            [1] => NXT
            [2] => JHX
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            [4] => CBA
            [5] => RIO
            [6] => MQG
            [7] => NAB
            [8] => WLD
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)

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

By Greg Peel

Shame, Really

Friday’s session on the local market was a very solid one, capping off three days of gains and taking the ASX200 through the 6100 level and on towards the previous high in January. The jitters that struck the market earlier in the week, largely related to US interest rates, appeared to have abated.

Unfortunately everything changed again on Friday night, and the futures closed down -65 points or -1% on Saturday morning. Depending on just how much of a cold we catch today given Friday night’s sneeze on Wall Street – whether a US pullback is honestly worth local panic – will determine whether the mid-range 6050 level can hold today.

So a quick wrap of Friday’s trade…

Goldman Sachs must be a bit long oil because on Thursday night it issued a report forecasting a Brent price in excess of US$80/bbl later this year. Throw in the M&A speculation that’s been ignited in the sector since suitors began battling it out to acquire AWE ltd ((AWE)), and we saw energy lead the charge on Friday with a 2.4% gain.

Rumours that private equity might be about to move in on data centre operator NextDC ((NXT)) had that stock up 10% and the IT sector up 1.0%.

NextDC topped the ASX200 winners board on the day, followed by James Hardie’s ((JHX)) 7% jump post earnings release. We tend to think of the materials sector as a proxy for iron ore first and then other bulks and metals thereafter, but it also includes building materials. The materials sector was up 0.5%.

Investors were happy with the news Telstra ((TLS)) plans to write down to zero its failed foray into intelligent video in the US. Telcos rose 1.1%.

And the banks quietly returned to favour last week, as it appears the worst may now be all out there for Commonwealth Bank ((CBA)). Friday saw another 0.7% gain.

It was the sort of Friday that would have had investors and brokers leaving for the weekend with smiles on their faces. Oh well…

Be Careful What You Wish For

“January non-farm payrolls are due tonight in the US. With too-fast rate rise fear now festering, will we be back to the old ‘good news is bad news’ model. Could a strong number tip Wall Street over?” – Friday’s Overnight Report

Yes.

Wall Street began Friday’s session in a jittery mood after a week in which rising US bond yields were main focus. The earnings season to date has returned over 10% growth as expected but Thursday night’s weaker than expected aftermarket results for Apple and Google, followed by even weaker than expected Friday morning results for oil giants Exxon and Chevron, ensured Wall Street was set for a fall from the open, jobs report or not. When the jobs report came out, that was that.

The US added 200,000 jobs in January when 177,000 were expected. In past years when the Fed was first thinking of tapering QE and then of raising rates it came down to strong jobs numbers that spooked Wall Street on a “good news is bad news” theme. Last year the focus of the non-farm payrolls report was not so much the raw jobs number per se, but the wage growth result. The labour market was enjoying solid growth, but where was the wage growth?

This lack of wage inflation prevented the Fed from being too aggressive on interest rate hikes. It was a Goldilocks situation for equities – strong earnings and still-low interest rates.

Towards the end of the year, wages growth began to show the first signs of revival. Friday night’s report showed wages grew by 0.3% in January, pushing the annual growth rate to 2.9% from 2.6% in December, to the highest level since the GFC.

That, in a nutshell, is why the Dow fell -665 points. It’s the biggest one-day points fall since Brexit and before that we’d have to go back to the GFC itself, but given Wall Street has basically tripled from that time, today’s -600 point fall equates to around a -200 point fall back then, and back then the record was a day of nearly -800 points down.

But -2.5% is not to be sniffed at, nor -2.1% for the S&P. Friday capped off a week of weakness on Wall Street which wiped out most of January’s sterling gains.

There was also the small issue, mid-session, of the latest twist in the Russia probe saga. The memo that paints the FBI in a bad light is the sort of thing Wall Street spent all last year shrugging off as unimportant, and the same will likely be true with regard the latest scandal, but commentators suggest it was enough to keep those buyers, who might otherwise have been ready to jump in on Friday and pick up bargains, just holding off for now.

There was some attempt to make a recovery of sorts in the last hour but it was not to be, and Wall Street closed on its lows.

It’s all about the Fed. All week the debate had hotted up over whether the Fed might hike three times in 2018, or four. Friday’s jobs report had Wall Street worrying that the Fed might be caught napping by the jump in wage inflation, and overreact. Wall Street is not so worried about rising rates – many a bull market has been delivered throughout history despite rising rates – it is worried that the Fed will become too aggressive too quickly, try to play catch up, and upset the whole apple cart.

The selling was market-wide. Every Dow sector closed in the red and very few S&P500 components managed a gain on the day. US banks are a beneficiary of rising rates, particularly rising long yields. The US ten-year yield spiked up 7 basis points to 2.85% on the release of the jobs reports, but the financials were slapped over -2%.

This is one reason why “healthy pullback” commentary was again evident, despite the magnitude of the falls. Once the dust of this particular panic session settles, surely the smart money will be looking to pick up the banks and other sectors at knock-down prices.

But this may not prove to be simply a one-day event. The US indices had long ago left their 200-day moving averages well behind, and had become historically overbought by certain measures. This may not be over tonight.

Commodities

Signs of US wage inflation provided the catalyst for the first real bounce in the greenback for some time. The US dollar index rose 0.6% to 89.17. This was always going to make it a tough session for commodities.

Gold, of course, saw the most direct correlation. The highest flyer this year among the base metals has been nickel, so no surprise it fell -4%. Otherwise, base metal moves were not that bad, and zinc was up, as was iron ore.

Being the most highly traded commodity in the world, oil is particularly impacted by the dollar, and if we throw in the big Goldman Sachs-base rally the session before, it was not going to be a good night for WTI.

The silver lining? Aussie traders have bottled. The Aussie is down a full -1.4% at US$0.7929.

As noted, the SPI Overnight closed down -65 points or -1.1%, compared to the S&P500’s -2.1% loss.

The Week Ahead

The local reporting season begins in earnest this week, following a trickle of early movers last week. If the macro environment is going to prove a drag as the season unfolds, it may prove difficult for forecast-beaters to really make their mark. But it’s very early days.

On the local economic front, we’ll see ANZ job ads today along with the services PMI, retail sales and the trade balance tomorrow, and housing finance on Friday. The RBA meets tomorrow and will be very happy to see the currency finally take a hit.

Services PMIs will be delivered across the globe tonight.

The RBNZ meets on Thursday and the Bank of England on Thursday night.

Thursday also sees the release of China’s January trade numbers, followed by inflation numbers on Friday.

It’s a quiet week for US economic data releases.

The big names reporting this week in the local season include Rio Tinto ((RIO)) and CBA. Macquarie Group ((MQG)) will provide an operational update tomorrow and National Bank ((NAB)) a quarterly update on Thursday.

It is at this point I don’t try to list highlights for the whole week during reporting season, as there are too many. I do it daily. Today gives us Wellard ((WLD)).

Rudi will appear on Sky Business on Tuesday, around 11.15am, via Skype-link to discuss broker calls. He'll appear in the Holt Street studio on Thursday at noon and repeat the Skype-link experience on Friday, probably around 11.10am.

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