The Monday Report

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By Greg Peel

Friday Blues

The ASX200 fell on Thursday thanks to the White House announcement that the next set of tariffs to be imposed on Chinese imports, if no resolution is forthcoming, will be at 25% instead of a prior 10%. It was a fair call, given such an escalation in a trade war they keep telling us hasn’t happened yet.

But Wall Street did not fall as might have been expected, so on Friday morning the index recovered almost all Thursday’s lost ground. But not for long. The sellers moved in late morning and all was ultimately given back.

The “Friday” factor was likely at work, given these days it’s dangerous to hold position over a weekend in which one tweet can change the world. And the US jobs report was due, which can provide for Wall Street volatility. There were local factors at work as well.

The Treasurer drew upon a Productivity Commission report on Friday recommending greater choice in banking for Australians. The RC is also now moving into the field of superannuation, which one can only assume is littered with landmines. The financials sector closed down -0.7% to provide the greatest drag on the index.

Materials fell -0.9% on weaker commodity prices while energy went the other way, rising 1.0% on a stronger oil price.

The Nasdaq had rebounded on Wall Street, prompting a 2.1% recovery for the local IT sector. The Aussie had fallen, helping healthcare up 0.5%.

One notable move among the sectors was consumer discretionary, up 0.6%, in the wake of the June retail sales data.

Retail sales rose 0.4% in the month, ahead of 0.3% expectations. Volumes of sales rose 1.2% over the June quarter when 0.8% was forecast. The numbers surprised economists who had assumed higher oil prices and falling house prices would keep wallets in pockets. But the correlation between sales in dollars and volumes implies retail prices have been falling, indeed by -0.1% over the quarter, and consumers are taking advantage.

Department stores saw the strongest volume growth. Now in palliative care, department stores are in a permanent state of discount. Prices fell in all categories bar smashed avocados and Big Macs.

June represented the first month of trading for Amazon Australia. Shaw Stockbroking notes Myer sales in the month beat Amazon by 2000%.

Best You’ve Got?

The US added 157,000 jobs in July, below forecasts of 195,000. Once upon a time this result would have sparked a huge rally on Wall Street, but for the past couple of years, Fed rate rises have been accepted as representative of a strong economy.

Which means that such a miss might have sparked a sell-off, but there is still concern the Fed will hike too fast. The critical number these days – wages growth – remained steady at 2.7% annual. The unemployment rate fell to 3.9% from 4.0%, but this low number has to be taken in the context of a downward trend in participation.

The bottom line is there was nothing in the report to alter Fed policy, so nothing to worry about.

More worrying is the trade war. Or is it?

Earlier in the year, any talk of a trade war set off anxious selling. Nowadays any escalation is met with a shrug. On Friday night China announced a retaliatory new tranche of tariffs of 5% to 25% on US$60bn worth of US imports. Wall Street rallied.

Round one ended in a draw – US$35bn-US$35bn.

Round two has the US out in front on US$200bn, with the Chinese managing only US$60bn.

This is possibly why Wall Street had reason to shrug, given a pervading assumption that in a trade war, America will win.

This is commonly held belief, and not without reason. However, as the US mid-term elections loom, pressure is building from within the Republicans, particularly representatives of those states most affected by tariffs now in place either way – soybean farmers, to use one example. On the other side, there is no representation in the Chinese Communist regime. President Xi can do what he wants while President Trump faces the potential of losing his Congressional majority.

The US trade deficit rose -7% in June to mark the first increase in four months, keeping the US on track to post its largest annual deficit in a decade.

Commodities

The US dollar remained flat on Friday night following the mixed jobs report – a miss on job numbers but relief on wage inflation.

Metal prices were nevertheless all stronger, if only modestly. Again we might draw upon 80 versus 200.

Data suggested Saudi oil production rose to almost a record high in July. Oil prices fell, despite Iranian naval exercises that suggest perhaps a blockade of the vital Straits of Hormuz is being considered in retaliation to US sanctions.

The Aussie is up 0.5% on a flat greenback, mostly due to the stronger than expected retail sales numbers.

The SPI Overnight closed up 21 points or 0.3% on Saturday morning, just as it had done on Friday morning.

The Week Ahead

The US earnings season remains ongoing, and continues to provide for Wall Street resilience in the face of all else.

This week sees the Australian reporting season ramping up following a trickle to date. From this point there are too many stocks to highlight for the week, so please refer to the FNArena Calendar.

Also be sure to follow the FNArena Corporate Results Monitor each day for the results scorecard.

China will report trade data on Wednesday and inflation numbers on Thursday.

Japan reports June quarter GDP on Friday.

The US will see its PPI on Wednesday and CPI on Friday.

In Australia, we’ll see ANZ job ads today and housing finance numbers tomorrow. The RBA meets tomorrow for reasons unknown. Philip Lowe will speak on Wednesday and Friday sees the release of the quarterly RBA Statement on Monetary Policy.

The RBNZ meets on Thursday.

Rudi will appear on Sky Business on Tuesday via Skype around 11.15am; and again on Friday via Skype, probably around 11am. No studio appearances for the remainder of August due to potential for reporting season overload.

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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