The Monday Report (On Tuesday)

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This story features RETAIL FOOD GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: RFG

By Greg Peel

Thursday

Early last week the ASX200 fell below strong support at 5800 on ongoing trade concerns but failed to capitulate, rebounding on the news the US and China were actually negotiating. On Wednesday the index fell again from the open, rebounded, but failed at 5800 and fell back again.

On Thursday the index had another go at 5800 from the open, and failed once more. What had been strong support has now become resistance. With the March quarter ending on the day and a four-day break ahead, in which anything could happen, book squaring was to the downside.

Consumer staples (-1.3%) was one of the day’s worst performers, as Nestle's announced move into a2 milk products in China continued to reverberate. Bellamy’s ((BAL)) fell -8%, pipped only by embattled Retail Food Group’s ((RFG)) -9% fall.

The sell-off in US tech stocks appeared to have impacted on the likes of Wisetech Global ((WTC)), down  -7%, and Altium ((ALU)), down -6%, sending the IT sector down -1.4%. Lower US rates helped utilities to the only gain on the day (+0.2%), but telcos fell -1.3%.

Perhaps the most notable sector move of all were the banks, which were flat.

Australia’s banks – and omitting RC fallout for now – are somewhat trapped in an enigma. US banks are currently rising and falling each day in line with US rates. Higher rates lead to improved margins. Australian bank often blindly follow US banks, but then higher rates should also benefit Australian banks.

Except that Australia’s record household indebtedness means higher rates leads to higher asset risk. And given Australian banks pay much higher yields than their US counterparts, and among the highest yields in the market, fully franked, lower rates makes those dividends more attractive.

So take your pick.

The ASX200 closed out the March quarter down -5.04% to mark the third worst March quarter in 25 years.

The good news on Friday morning was that Wall Street had, by contrast, posted a strong close for the March quarter. The SPI futures closed up 10 points on Friday morning.

Thursday Night

After a choppy previous session in which Wall Street struggled to find direction, the US indices all rebounded on Thursday night. Given the rally was against the run of play of current sentiment, particularly for tech stocks, commentators put it down simply to end of quarter window-dressing, as fund managers attempted to improve their quarterly returns.

The Dow closed up 254 points or 1.1%, the S&P rose 1.4% to 2640 and the Nasdaq rebounded 1.6%.

The month of March saw the biggest monthly drop since January 2016, as the Dow fell -3.5%, the S&P -2.7% and the Nasdaq -2.9%. The March quarter saw the Dow lose -2.7% and the S&P lose -1.2%, having been down as much as -10% in February. It was the first quarter of losses following nine consecutive quarterly gains – the longest run since 1997 when the word “dotcom” started to become popular.

After a dismal week of responding to the Cambridge Analytica scandal, Facebook rebounded 4.4%. After a week impacted by a fatal electric car crash in California, Tesla rebounded 3.2%. Window dressing may have been the order of the day but some bargain hunting may also have been evident.

In the spotlight early in the session were the US personal income & spending numbers for February.

After a strong December quarter, consumer spending sagged to 0.2% growth in the month as incomes rose 0.4%. The personal consumption & expenditure (PCE) measure of inflation ticked up to 1.8% at the headline and 1.6% core, the latter being the Fed’s preferred measure.

Given the Fed is looking for 2% inflation, we might conclude that there is nothing to be concerned about on that front for the time being.

Monday Night

The assumption that Thursday night was all about end-of-quarter window dressing was all but confirmed last night when Wall Street opened down sharply from the open. When the S&P500 breached its 200-day moving average without a blink, the selling, and the volume, accelerated.

The Dow was down as much as -750 points at the low before some late buying provided for a less onerous close, but the S&P500 ultimately closed below its 200 MA for the first time since Brexit. The Nasdaq copped the brunt of the selling.

There was some relief on the trade war front last week when it was revealed China and the US were actually in negotiations over trade, rather than simply lobbing bombs at each other on a tit-for-tat basis. But it appears those negotiations may not have amounted to much.

Beijing has announced tariffs on 130 imported US goods, ranging from 25% on pork, wine and other goods to 15% on fruit and no less than 120 different commodities. The move comes as retaliation to Trump’s 25% tariff on Chinese steel and 15% on aluminium along with US$60bn in tariffs on other goods , yet to be detailed, for which intellectual property theft is alleged.

Looks like the trade war is on in earnest. And that was never going to be good news for Wall Street.

Add in the ongoing fallout from the Facebook saga, and assumptions of increased regulations on social media that will impact on earnings, and we have another reason why tech was the second worst performer on the S&P.

Add in further Twitter attacks on Amazon by the president last night, accusing the company of not paying its share of sales tax (which is apparently incorrect) and of destroying the US Post Office (which has been quietly dying for years for obvious reasons just as is the case in Australia), and we can see why consumer discretionary was the worst performer on the S&P.

But all sectors finished in the red. All of the above, and the perception of overblown PE multiples, particularly for tech stocks, have wiped out the benefits of US tax cuts and global growth that drove a surging 2017 and first months of 2018.

The major indices are all down -10% from the previous highs once more. Importantly, the S&P closed last night exactly on the previous low seen in early February, when inflation was the fear.

Wall Street is retesting the low, as many assumed it must. Whereto from here?

Commodities

Moves in base metal prices on Thursday night were mixed, with aluminium and lead down around a percent and copper and nickel up around a percent. The LME was closed last night.

Over two sessions, iron ore has risen US2.35 to US$65.40/t.

Gold was steady on Thursday night but shot up last night on a “flight to safety”.

Outside of concern over growing US production, oil prices fell -3% last night in line with equities, on general trade war fears.

Over two sessions, the Aussie has been up from $US$7660 to US$7680 and back again.

Note that the SPI Overnight was closed for the holiday last night. The last close in the futures was up 10 points, but that is now obviously misleading.

The Week Ahead

It’s jobs week in the US this week, which brings us back to worrying about US inflation again when the non-farm payrolls numbers are released on Friday. The private sector result is due on Wednesday.

The US will also see vehicle sales numbers tonight, factory orders tomorrow and trade on Thursday.

It is a new month, and that means manufacturing and services PMIs from across the globe, but staggered dependent on who was on holidays and who wasn’t.

China’s official PMIs, released over the weekend, showed a better than expected rise to 51.5 for manufacturing in March, up from 50.5 in February, and a rise to 54.6 for the services PMI from 54.4.

Chinese markets will be closed on Thursday and Friday.

In Australia we’ll see ANZ job ads, house prices and the manufacturing PMI today, building approvals and retail sales tomorrow and the trade balance and services PMI on Thursday.

The RBA meets today.

There are a handful of stocks going ex-div this week, mostly on Thursday, while Scentre Group’s AGM on Thursday signals a round of AGMs is due this month.

Rudi will make his weekly appearances on Sky News Business, starting with a Skype-cross today, probably around 11.15am. On Thursday he'll appear inside the studio, noon-2pm, and on Friday he is due to repeat the Skype-cross, probably around 11am.

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