The Monday Report

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

By Greg Peel

Immaterial

The futures suggested a weak start for the ASX200 on Friday but instead the index rocketed up from the opening bell to threaten the 6300 level by late morning. The sellers duly moved in, and after a bit of argie-bargie the market finally drifted off in the afternoon, Friday-style.

It appears clear 6300 is going to be a tough nut to crack.

Healthcare (+1.3%) was the strongest sector on the day, likely driven by the lower Aussie, but elsewhere sector moves were all positive and fairly consistent, suggesting market-wide buying. Cyclicals and defensives alike enjoyed gains.

But not materials. It went the other way, falling -1.1%. Materials is currently looking like a player down injured and receiving attention while the game continues on around it.

Trade war fears continue to send metals prices lower and on Friday, trade war reality began to actually bite.

US aluminium giant Alcoa posted a weak earnings result but more importantly, lowered September quarter guidance. Alcoa blamed the US aluminium tariff as the impetus.

The impact was felt in Australia through a -4.2% fall for Alumina ltd ((AWC)), with which Alcoa has a joint venture, and more so through an -8.0% fall for CSR ((CSR)), an aluminium producer.

Notably, all of the top five ASX200 losers on Friday were materials sector components, producing among them aluminium, rare earths, gold and nickel.

With no sign of the trade war being resolved anytime soon the path continues to look weak for commodity prices, except through the influence of currency. On Friday night the US dollar fell sharply, which halted the slide for metals and affected rebounds across the board, at least for now.

The Aussie, too, rebounded on the back of the greenback and is up 0.9% this morning.

The futures have again called a weak opening for today.

Markets Trumped

On Friday night Donald Trump reinforced his views, declared in an earlier interview, that the Fed should not raise rates twice more this year and that China, the EU et al are manipulating their currencies at the dollar’s expense.

As a property developer, of course Trump doesn’t like higher borrowing costs but the rate issue is tied into the currency issue in that Trump fears a loss of the competitive advantage that he, “your favourite president”, has been establishing.

On Friday morning the PBoC lowered the renminbi benchmark rather sharply, prompting JP Morgan analysts to suggest that while benchmark falls recently could be forgiven on the basis of trying to support a slowing Chinese economy, Friday’s devaluation smacked of pure manipulation.

China cannot win a trade war on tit-for-tat tariffs because they are the lesser trading partner, but they can win through other means.

Mind you, when it comes to the EU and Japan, didn’t the US write the currency manipulation book? Anyone remember QE1, QE2, QE2.5 and QE3?

While the US stock market is largely taking Trump rants in its stride, and is still hanging on the expectations the trade war will ultimately be resolved, concern was felt in other markets.

The US dollar index dropped -0.7%. Were the Fed not to raise twice more this year, one might expect the US ten-year yield to be lower. But the main issue in fixed income markets at present is the flattening yield curve, which, if the Fed hits the brakes, would be less likely to invert given the short end would not rise as far.

Hence on Friday we saw the yield curve steepen a little by virtue of the two-year yield standing still and the ten-year rising 5 basis points to 2.90%.

The response was text book in stock markets, with financials leading the session offset by rate sensitive sectors such as utilities and REITs. The end result was a flat session, to end a flat week.

The flat week belies the fact a full week of earnings results saw some very positive numbers on a net basis. Wall Street is being pushed from one side and pulled from the other.

This week is the biggest on the calendar in terms of number of S&P500 companies reporting.

Next week’s results include those of Amazon, Facebook and Google. Friday night saw Big Tech elder Microsoft (Dow) beat expectations and lifting guidance for a 1.8% share price gain in an otherwise flat market.

Commodities

Saudi Arabia said on Thursday night it will reduce oil production in August to avoid oversupply. Oil prices bounced as a result and went on with it on Friday night, with some support from the weak greenback.

WTI nevertheless closed lower for the week – the third in a row.

Elsewhere, the greenback seemed to be sufficient impetus for a bit of a rebound in base metal prices that have been falling like a stone of late, and in gold, which has also lacked support.

Iron ore was a little less excited.

The Aussie is up 0.9% at US$0.7422.

The SPI Overnight closed down -18 points or -0.3% on Saturday morning.

The Week Ahead

At the end of this week the first estimate of US June quarter GDP is due, with forecasts suggesting a jump to 4.0% from March’s 2.0%.

Ahead of that release, the US will see existing home sales tonight, FHFA house prices tomorrow along with the Richmond Fed index and a flash estimate of July manufacturing PMI, and new home sales on Wednesday.

Thursday it’s durable goods and Friday consumer sentiment, along with the GDP.

The UK posts its GDP result on Thursday. Japan and the EU also flash PMIs on Tuesday.

In Australia the big event this week is the release of June quarter CPI numbers on Wednesday. An annual rate of 2.3% is expected, up from 1.9% in March.

The PPI follows on Friday after June quarter import/export prices on Thursday.

It’s a big week for resource sector quarterly reports beginning with Iluka Resources ((ILU)) on Tuesday, followed by St Barbara ((SBM)) on Wednesday. Thursday it’s Beach Energy ((BPT)), Fortescue Metals ((FMG)), Newcrest Mining ((NCM)) and OceanaGold ((OGC)), with Sandfire Resources ((SFR)) on Friday.

Macquarie Group ((MQG)) holds its AGM on Thursday.

GUD Holdings ((GUD)) and CYBG ((CYB)) report earnings on 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…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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