The Monday Report

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This story features BANK OF QUEENSLAND LIMITED, and other companies.
For more info SHARE ANALYSIS: BOQ
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Bank Bounce

I suggested on Friday morning that given Australian bank stocks had fallen all week long once it was announced Commissioner Hayne’s interim report would be released on the Friday, it left the banks open to a bounce on “the fact”. The report was indeed scathing, but the country would have been surprised by anything less. There were no official recommendations, as it is still early in the process.

The ASX200 rallied from the opening bell as the computers again tried to push the market up through the 6200 level. It worked for a little while – the index peaked at 6219 at 11am and was still holding above 6200 through lunchtime but just ahead of the Hayne report release, it slipped back under again.

When the report hit the wires, the index shot straight up 34 points, before drifting off at the death to close what was a week, a month, and a quarter, above the 6200 level.

The financials sector closed up 1.2%. Moves in other sectors were mixed and otherwise unremarkable. Utilities rose 1.0%, but that sector is 2% of the index market cap compared to financials’ 31%.

Thus, leaving the banks out of the equation, there was little in the way of window dressing or book-squaring evident on Friday as is often the case at an end of quarter. This is probably because the June quarter closed at 6197 and September at 6207. Little need to push it in either direction.

Caixin released its version of China’s manufacturing PMI for September on Friday ahead of the week-long Chinese holiday. Forecasters were expecting a dip to 50.5 from 50.6 in August but the index hit 50.0 – which represents a dead stop. It is the first month in fifteen that Caixin’s PMI has not indicated growth of some quantum.

No prizes for guessing why. Export orders fell in the month at the fastest pace in over two years. The tariffs are taking their toll.

Locally, private sector credit data for July showed 0.5% growth, which was the best result since March. The boost was all about business credit, which rose 0.8%, while housing was relatively steady at 0.4% growth. Within that 0.4%, investor loans grew by only 0.1%.

Total credit was up 4.5% year on year in July. Of that, housing is still the primary driver at 5.4%, with business catching up at 3.8%. Of the 5.4%, owner-occupier loans represent 7.4% to investor loans’ 1.5%. While the trend in house prices is to the downside, ANZ’s economists see signs of the pace of that decline slowing in the months ahead.

But back to the banks. Since the release of the interim report, the Labor Party has pushed for the Royal Commission to be extended. The government, having tried to avoid a Royal Commission for a long time in the first place, is not in any position other than to suggest it will consider the idea. This aside, the market would otherwise have been waiting until February for the commissioner’s final report and recommendations, suggesting the RC would “go away” at least for that period and take the heat off bank stocks.

The futures closed down -23 points on Saturday morning despite Wall Street closing flat. As we enter the December quarter, we will still be watching the banks.

And it’s October. Be afraid.

What have the Romans given us?

On Friday night Italy’s new anti-establishment government significantly increased its budget deficit target in order to pay for promises made in its election campaign. Italy is thumbing its nose at the EU.

If this were 2011, back in the days of the PIIGS and possible Grexit, Wall Street would likely have panicked. If this were 2016, the response may have been similar, given the Brexit vote sparked fears of a rolling exit of EU members as anti-establishment parties gained traction.

But on Friday night, Wall Street shrugged. Just as it it shrugged off the Turkish currency crisis recently and since April has shrugged off the escalating US-China trade war. Indeed, while Wall Street closed as good as flat on Friday night, that close marked the best quarter for Wall Street since December 2013.

The Dow rose 9% in the period, and the S&P500 and Nasdaq each rose 7%.

The US economy grew 4.2% in the June quarter and expectations are also strong for the September quarter – the first estimation of which is due toward the end of this month. US corporate earnings grew in excess of 20% in both the March and June quarters and guidance suggests a similar result in September.

The first September quarter earnings results will begin to roll out in a couple of weeks.

Data released on Friday night showed headline personal consumption & expenditure (PCE) inflation falling to an annual rate of 2.2% in August from 2.3% in July, and the core PCE (the Fed’s preferred inflation measure) remaining steady at 2.0%.

The US economy is firing, but not overheating, the numbers suggest. Whatever may be happening elsewhere in the globe, America is the place to be.

The best performing stock in the Dow over the quarter was Apple – America’s biggest company – which rose 22%. The best performer in the S&P500 was chipmaker Advanced Micro Devices. It rose 100%. AMD is not a small company.

It was a big quarter for the US energy sector, thanks to a big gain in the oil price. But while once oil was king on Wall Street, these days the sector represents only around 5% of the S&P. The leader of the rally from June has been, in general terms, “tech”, wherein the big growth stocks lie.

Now that “tech” is spread around three different S&P sectors – technology, communications services and consumer discretionary – it’s a bit harder to isolate “tech” performance. One has to look more at the likes of the Nasdaq 100 or ETFs specifically targeting the FANGs etc to see where the real growth lies.

How long will it last? That is the question everyone is now asking.

October goes down as the scariest month on Wall Street (1929, 1987, 2008) but in fact September is historically the worst. October is often the most volatile, but it can go either way.

Friday’s Chinese data suggest this quarter will be the one in which the first real signs of trade war fallout begin to emerge. November brings the US mid-term election. Before that we see US earnings season.

Strap in.

Commodities

There were some big moves up in base metal prices in London on Friday night, although nickel missed out, but this likely reflects the fact China will now be closed for a week.

Having fallen sharply on Thursday night due to strength in the greenback, gold jumped right back on Friday night with the greenback slightly higher. Italy, one presumes.

The Aussie is 0.2% higher at US$0.7221.

The SPI Overnight closed down -23 points or -0.3% on Saturday morning.

The Week Ahead

The first of the month brings manufacturing PMI numbers from across the globe and the third brings services PMIs. With China shut all week, those official numbers will be missing for a while.

The US will see numbers for construction spending tonight, private sector jobs on Wednesday, factory orders on Thursday and the trade balance on Friday, along with non-farm payrolls.

The RBA will meet tomorrow.

Australia will see PMI numbers this week, building approvals on Wednesday, the trade balance on Thursday and retail sales on Friday.

The number of ex-dividends per week is now winding down but there are still some ASX200-300 names on the list this week.

Bank of Queensland ((BOQ)) will report earnings on Thursday and AGL Energy ((AGL)) and Magellan Financial ((MFG)) will hold their AGMs.

Today is a public holiday in NSW, ACT and South Australia. Friday was a public holiday in Victoria. Together they mean little in the way of stockbroker research, to the point FNArena will provide only an abbreviated service today.

Rudi will appear on Sky Business on Tuesday via Skype around 11.15am; 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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