The Monday Report

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This story features ANZ GROUP HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: ANZ
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Overwriting

The ASX200 plunged on the open on Friday in typical computer-led style, responding to the overnight news of the US reimposition of tariffs on steel and aluminium for Canada, Mexico and the EU. The trade wars are back on again.

But the -40 point drop proved fleeting as the humans stepped in and halved that loss by late morning, before the market tracked sideways for the rest of the session, Friday style.

While the macro story of trade war fears may have dominated global markets late last week, on Friday it was very much the domestic story of the ongoing bank investigations that impacted the local market. ANZ Bank ((ANZ)) is facing possible criminal charges for alleged cartel collusion between itself and its underwriting partners during the bank’s 2015 book-build capital raising.

ANZ fell -1.5% on the news and the financials sector lost -0.9% to provide a big chunk of the ultimate -21 point fall for the index.

The sellers were back in telcos (-1.0%) and in utilities (-0.8%) given US bond rates have reversed again. The buyers were back in healthcare (+0.6%) as the trade war hit the Aussie dollar, while the resource sectors traded ups and downs on commodity price moves.

The index failed to make it back to the 6000 mark, perching just below by the close on Friday with a bit of an “anything could happen on the weekend” feeling, beyond just the US jobs report. And it was a fair call.

Plenty did happen, and on Saturday morning the futures closed up 34 points.

So the game’s back on.

Bring it back home

It was a volatile week on Wall Street with Italy dominating proceedings early on, before that issue seemingly evaporated for the time being once a government was actually formed. That government is euro-sceptical, but not advocating an exit.

Then came reignited trade wars as Trump reimposed his tariffs. That issue is yet to be resolved, with talk now of the US negotiating unilateral trade deals as an alternative to NAFTA. As for the EU, that story is ongoing.

But all was forgotten on Friday morning when the May non-farm payrolls report was released.

The US added 223,000 jobs in the month when 200,000 was forecast. The unemployment rate fell to an 18-year low 3.8% from 3.9% in April.

Importantly, wages rose 0.3% in the month to a 2.7% annual rate. We recall that numbers late year for wage growth of more like 0.1% caused concern with regard eroding consumer spending power, before January’s shock 0.5% jump sent Wall Street into correction mode on Fed rate rise fears. Those fears ultimately abated when the January number appeared to be a bit of a blip, and 0.3% seems to be a more comfortable middle ground.

It’s always difficult to gauge just how Wall Street will react. That 0.5% number in January sparked fears of four Fed rate hikes in 2018 instead of three. The three/four debate has risen and subsided in the months since on subsequent data releases, but on Friday the odds for a fourth rate once again strengthened.

Yet this time the stock market rallied.

Mind you, a fourth hike is now seen only as around a 35% chance, up from 20%. A rate hike this month, which was at 100% at one stage before falling back again on European issues and trade war considerations, rose back to 85% on Friday night.

But the US ten-year bond rate shot up 8 basis points to 2.90%. A move like that usually unnerves the stock market, but in this case it’s more a reflection of the recovery from the Italy-inspired plunge earlier in the week. Despite having fallen as low as 2.75%, the ten-year yield is now little moved on the week.

News also came through during the session that Trump’s meeting with Kim Jong-un was back on as previously scheduled, being June 12 in Singapore. While Wall Street cheered the news, an already buoyant market did not much respond, having assumed such an outcome was likely. The stock indices step-jumped from the open on the jobs numbers and basically stayed there all day.

Any concerns with regard the pending vote of no confidence against the Spanish prime minister were not evident. Spain now has a new prime minister who, while socialist, is not espousing any anti-EU sentiment. He may nevertheless have to deal with a rekindled independence movement in Catalonia, given the election result in that region.

The jobs numbers have reinforced the belief the US economy is in a strong position and still growing despite the lateness of the cycle. Considerations outside the US are for now, forgotten. Until next time.

Commodities

The will they/won’t they debate regarding increased oil production from Saudia Arabia and Russia continues. Initial fears subsided earlier in the week when the parties suggested they would wait at least until the end of the year to make a decision, but with an OPEC meeting looming on June 22, nervousness remains.

Another talking point in oil markets is the ever widening gap between WTI and Brent prices. Friday night’s -2% fall in WTI with only a -1% fall in Brent means the differential has now blown out beyond US$10/bbl. The problem is US shale production is running faster than domestic transportation and storage infrastructure can handle, leading to an increasing storage premium.

We saw this happen earlier this decade, when by 2011 the spread blew out to almost US$30/bbl. Since then one major pipeline has been flow-reversed and others have been constructed, but US shale production just keeps running ahead.

Nothing much else of note regarding commodity prices on Friday night. The Aussie is steady at US$0.7566.

The SPI Overnight closed up 34 points or 0.6% as suddenly we re-embrace Wall Street.

The Week Ahead

It’s GDP week in Australia, with consensus suggesting the numbers on Wednesday will show 0.8% growth in the March quarter, up from 0.4% in December, to a 2.8% annual growth rate, up from 2.4%.

Beforehand, we’ll see quarterly numbers for company profits today and the current account tomorrow, including the terms of trade.

Monthly data this week include ANZ job ads and retail sales today and the trade balance on Thursday. In what is fast becoming each month’s greatest non-event, the RBA meets tomorrow.

China will release its trade numbers on Friday. Except they’ll be May numbers when ours are only April.

A quiet week in the US economically sees factory orders tonight and the trade balance on Wednesday.

Services PMIs are due across the globe tomorrow.

New Zealand is closed today.

On the local stock front, Wesfarmers’ ((WES)) analyst meeting on Thursday is the only highlight on the corporate calendar.

On Friday, S&P/ASX will announce the rebalancing of local indices, who’s in and who’s out. The changes become effective the following Friday.

Rudi will appear on Sky Business on Tuesday via Skype around 11am; again on Thursday from midday 'til 2pm; and again on Friday via Skype, probably around 11am.

The Australian share market over the past thirty days…

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