The Monday Report

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This story features FLIGHT CENTRE TRAVEL GROUP LIMITED.
For more info SHARE ANALYSIS: FLT
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Comeback

The futures had signalled a -50 point fall for the ASX200 on Friday morning and justifiably so, with Wall Street running scared once more on a range of global issues at a time sentiment is being tested by the pullback. But while the index did indeed fall almost -60 in the opening rotation, that was the bottom for the session.

By lunchtime we were back close to square. Steep falls in some sectors were reduced to lesser dips, while oil price strength ensured energy (+0.2%) and utilities (+0.7%) finished in the green.

The only other sector to finish in the green was the most influential. The latter part of last week saw bargain hunting in the financials and Friday was no exception, with the sector closing up 0.4%. While the RC grilling continues and the banks start wheeling out their RC provisions ahead of upcoming earnings reports, investors are looking at a sector now beaten down twice.

Once from the RC itself – the long slide through the middle of the year — and again on Wall Street’s October swoon. Ongoing RC risk and a housing market tipping over are being weighed up against those yields on the possibly dubious mantra of “surely it can’t get any worse”.

Outside the banks, other large caps continued to be on the wrong side on Friday such as your BHPs, CSLs and Telstras, while volatility continues in IT (-1.1%) on Nasdaq weakness.

I suggested on Friday that Beijing would need to choose its GDP result carefully, and perhaps missing forecasts by only 0.1 of a percentage point reflected that, even if it was the first time in three years the result did not come in smack on forecast. China’s GDP grew by 6.5% year on year in the September quarter, down from 6.7% in June, and below a 6.6% forecast.

September monthly data showed industrial production growing by 5.8% year on year, down from 6.1% in August and below 6.0% expectation. Retail sales grew by 9.2%, up from 9.0% and above 9.0% expectation. Fixed asset investment grew by 5.4% year to date, up from 5.3%.

Beijing remains confident that the December quarter result will also be 6.5%, confirming the target set at the beginning of the year for annual growth. The government intends to continue supporting the economy in the face of US tariffs, rather than suggesting any attempt at negotiation and compromise. But analysts suggest the mixed numbers are reflecting the impact of tariffs to date offset by front-loading ahead of the final round of tariffs yet to be set by the US.

Trump still has US$267bn of Chinese exports he has warned he will impose tariffs on, being the final tranche that would imply a tariff on every exported good. When the last tranche was triggered, Trump warned any retaliation would result in the final tranche being “automatically” triggered. China retaliated, and as yet nothing.

The Chinese data had no apparent impact on the ASX200 as it steadied to a flat close. It might have been different had the Shanghai index not recovered 2.6% on the day after Thursday’s big fall.

All a Gamble

The big talking point on Wall Street from the open on Friday night was an earnings report from consumer staple distributor Proctor & Gamble (Dow) which featured the strongest sales growth in five years. The stock jumped 8.8%, which is largely unheard of for this serial plodder.

After a disappointing Thursday session the result provided some renewed spark for those hoping to put in a bottom following the week’s rocky sell-off, and indeed the Dow shot up over 200 points.

But it didn’t last. While the defensives in the Dow enjoyed solid sessions the cyclicals continued to slide. The Nasdaq fell another -0.5% and the Russell small cap index plunged another -1.2%.

The Nasdaq and Russell had been the high-flyers since the correction back in February as the Dow has struggled against the weight of tariffs. The October plunge for the Nasdaq has not surprised, given the tech growth story had appeared to get somewhat out of hand. Of more concern is the Russell.

Small caps rallied on the back of tax cuts and general tariff immunity and having soared a long way, were ripe for a pullback. But this collection of 2000 companies represents a wider economy without specific concentration and some observers are concerned that unless the Russell can stabilise, hopes for a bottom being in place may be misguided.

The Dow fell back to close up only 64 points and all of that can be attributed to P&G. The critical level for the S&P500, from a technical perspective, was deemed to be 2768. A breach of that level could signal another leg down.

The S&P closed as good as flat for the session, at 2767.

This week is the busiest on the US earnings season calendar. Some of the big tech names will feature this week – Intel, Google and Amazon. Much hope is riding on solid results.

Meanwhile, the US ten-year bond rate ticked up again on Friday by 2 basis points to 3.20%. Early in the session it was revealed US existing home sales fell -3.4% in August to their lowest level since November 2015. Rising bond rates mean rising mortgage rates, and that is leading to a weakening housing market despite record low unemployment.

While this is no great surprise, Wall Street is beginning to worry that the flow-on will begin to impact on the wider economy.

Commodities

Nothing unusual in commodity markets on Friday night, outside of oil.

An unexpected build in US crude inventories had kept a lid on oil prices through the week but the Khashoggi affair is ensuring a counter-balance of price strength. Trump has vowed to respond, while at the same time indicating there’s no way he’d drop the US$110bn arms supply deal to the Saudis that’s in the pipeline.

Thus how a reluctant Trump will respond, if at all, is uncertain. Sanctions on oil exports might send a message but if oil prices shoot up, would be economically counterproductive.

The Aussie is a tad higher at US$0.7112.

The SPI Overnight closed down -12 points or -0.2% on Saturday morning.

The Week Ahead

Looks like we’ve got another hung parliament. Not sure how, or whether, the local market will respond in some fashion today but given the amount of policy the government has not delivered up to now, will anyone notice?

Speaking of anyone noticing, New Zealand is closed today.

US data releases this week include the Richmond Fed index tomorrow and new home sales, FHFA house prices, a flash reading of September manufacturing PMI and the Fed Beige Book on Wednesday.  Thursday it’s pending home sales and durable goods.

Friday brings the first estimate of US September quarter GDP. Economists are forecasting 3.3% growth, down from June’s knock-it-out-of-the-park 4.2%.

Japan and the eurozone will also flash PMIs on Wednesday. The ECB meets on Thursday and thus Italy will be back in focus.

Locally, it’s a quiet week economically but a very busy one on the local stock front. Quarterly reports and updates continue to flow while the AGM season ramps up.

Too many to highlight other than on a daily basis. Today sees a production report from Western Areas ((WSA)) while Flight Centre ((FLT)) and Sealink Travel Group ((SLK)) hold competing AGMs.

Rudi will appear on Your Money today, 1-2pm.

The Australian share market over the past thirty days…

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