The Monday Report

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

By Greg Peel

Hanging On

The ASX200 plunged -100 points on the open on Friday, following another -1000 point drop in the Dow, and easily took out support at 5800. However by 10.30am, with the opening rotation completed, the index was back at 5800.

Wall Street had closed at a critical level on Thursday night, with late selling taking the S&P500 back to its prior low for the week. A breach of that level would imply a further drop to the 200-day moving average, while holding that level would provide some hope a bottom could be found. As it was, US overnight futures markets began to rise.

The ASX200 clawed its way back and managed to survive a wobble around midday when Asian markets opened sharply lower. Ultimately the initial loss was halved by the close, likely suggesting the local market had sufficient faith in Wall Street holding its low on Friday night.

We might also consider that at some point, investors in Australia acknowledge that just because Wall Street has corrected sharply, it doesn’t mean we have to as well. We never followed Wall Street up. Commodity prices aside, nothing really changed last week with regard Australia’s outlook. And just because the Fed might start aggressively raising its cash rate, it doesn’t mean the RBA has to follow suit.

Indeed Philip Lowe made exactly that point late last week, noting that a rise in US or global rates generally does not by default mean the RBA will have to raise too. The central bank’s quarterly Statement on Monetary Policy, released on Friday, forecast in excess of 3% GDP growth over 2018 and 2019 but inflation rising only gradually, reaching 2.2% by mid-2020.

There will not be a rate rise in 2018. The RBA is particularly focused on the unwanted strength of the currency, and what better way to ensure weakness in the currency than not to raise rates while all about you are raising theirs.

Friday’s trade suggested somewhat of a turnaround for the local market, albeit still closing -0.9% down. All sectors finished in the red, in contrast to the sector rotation seen on Thursday. Energy was again the biggest loser, falling -2.1%. It was a sell-day for telcos, and they lost -2.0%. Healthcare and consumer discretionary both saw -1.5% falls, but on the other end of the scale, the banks fell only -0.5%.

With the benefit of hindsight we can suggest that buying into Friday’s close was a brave call – traders typically avoid carrying their risk across a weekend – and quite possibly the right one. Wall Street did indeed bounce on Friday night, although it was another dramatic and volatile session.

One would presume a 300 point gain for the Dow, particularly under the current circumstances, would suggest a solid opening for the ASX200 this morning as well. But the futures closed down -28 points on Saturday morning.

We can presume the futures traders have taken on board the fact the S&P500 fell -5.2% for the week and the ASX200 fell only -4.6%, and the fact commodity prices again suffered on Friday night. Oil, in particular, fell a further -2.5%, suggesting that once again the local energy sector will be the biggest loser on the day.

Heart Attack Stuff

The US equity futures continued to show a rebound on the opening bell on Wall Street. The Dow duly opened up 350 points. But clearly the selling had not yet been exhausted. Leveraged investors still needed to get out, and by lunchtime the Dow was down -500 points.

That is where the S&P500 breached its 200-day moving average. A break of that level would mean a -10% correction could easily become a -20% correction.

But it held. Wall Street very quickly recovered the lost ground, the sellers tried again mid-afternoon, but volumes picked up on the buy-side and ten minutes before the bell the Dow was up 500 points on the day. Very late selling brought that back to 330 points.

Tradition has it that markets do not bottom on a Friday, given rarely, as noted earlier, do traders risk carrying positions across a weekend. But the fact volumes picked up late on Friday suggests genuine buying. Given constant talk of the “great buying opportunity” provided by a correction Wall Street sorely needed, perhaps the 200-day moving average on the S&P was the point at which the brave said “that’ll do me”.

The problem now is the matter of retesting the low. Thursday night’s close on Wall Street was a retest of the low made very sharply on the Tuesday night. Corrections usually only end when the low is retested, and holds, at least once if not twice. We now have a new low.

Looming on the horizon is Wednesday night’s CPI data release. We recall that this whole episode was triggered by an unexpected rise in US wage inflation. The CPI is forecast to have eased back slightly in January from December’s level. If this is the case, and inflation is as low, or lower, than feared, Wall Street has the excuse to enjoy a rebound.

The Fed prefers the PCE measure of inflation to the CPI but Wall Street is not going to quibble about trivialities on Wednesday night if the CPI comes in higher than expected.

Throughout this volatile period, a common comment has been that while inflation fear may have triggered the correction, the extent and sharpness of the pullback has nothing at all to do with economics. It’s all about investors holding foolhardy leveraged, high risk positions and having no choice but to exit. Beneath the mayhem, the US economy remains strong, and a pullback from too-high stock valuations to more reasonable stock valuations is not something that will upset that strength.

At least, as long as the pullback doesn’t become decidedly more extensive.

It is worth noting that while intraday moves have been marked, the US ten-year yield remains at 2.85% — exactly where it was a week ago when Wall Street tipped over. Gold, too has not done little more than drift down, suggesting no “flight to safety”.

Commodities

The US oil rig count grew by 26 last week, it was revealed on Friday night, to mark the biggest weekly increase in over a year. For an oil market already reeling from a strong bounce in the US dollar, a record surge in US production, and a “risk off” rush to the exits, this was somewhat of a straw and camel outcome.

West Texas crude fell -2.5%, falling below US$60/bbl for the first time in 2018.

The US dollar index rose again, up 0.1% to 90.38.

Lead was the only base metal not to cop further selling in London.

Iron ore finally succumbed, but I don’t think we can read too much into that. The Chinese New Year break begins on Thursday.

The Aussie actually rose 0.3%, but this probably reflects the fact it tumbled sharply on the Thursday following Dr Lowe’s no rate rise” comments.

The SPI Overnight closed down -28 points or -0.5%.

The Week Ahead

The US earnings result season is actually still underway, but macro volatility is clouding the issue. The Australian result season gets into full swing this week, and will also have to attempt to make a mark against a backdrop of uneasiness.

The calendar is filling up now, so I’ll simply note today’s highlights of reports from Amcor ((AMC)), Ansell ((ANN)), Bendigo & Adelaide Bank ((BEN)) and JB Hi-Fi ((JBH)).

The bank Royal Commission begins today.

Local data this week include the NAB business confidence survey tomorrow and Westpac consumer confidence on Wednesday. Friday brings the January jobs numbers.

Japan is closed today, and the Japanese December quarter GDP result is due on Wednesday.

China will close for a week from Thursday.

Wednesday sees that critical US CPI release, along with retail sales, followed by industrial production, housing sentiment and the Empire State and Philadelphia Fed indices on Thursday, and consumer sentiment on Friday.

Rudi's appearances on Sky Business this week will start on Tuesday morning, around 11.15am, via Skype link to discuss broker calls. Then on Thursday he'll appear in the studio, noon-2pm and on Friday he'll repeat the Skype experience, probably around 11.10am.

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