The Monday Report

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

By Greg Peel

Hangover Sets In

The ASX200 fell -36 points on Friday to take its net fall from Wednesday’s peak to -60 points, paring back the excitement of a Coalition victory to 91 points, or 1.4%, for the week. With adjustments now made in relevant sectors for policies that are now dead and buried, it’s back to the realities of the global macro backdrop.

The energy sector (-3.1%) was the hardest hit on Friday as one would expect following a -5% overnight fall in the oil price. Oil bounced back somewhat on Friday night so today should see some relief.

Consumer staples came in next worse (-2.0%) as sector heavyweight Woolworths ((WOW)) cops it from all sides.

Two weeks ago UBS downgraded the Stock to Neutral citing overvaluation, and last week Ord Minnett followed suit with a downgrade to Lighten. On Friday, Citi downgraded to Sell citing the pending entry of the next Aldi into the market – German rival Kaufland – in the expectation another price war will ensue. And major shareholder Perpetual ((PPT)) warned the supermarket it must exit its pubs business, profits for which are not from beer, if the fund manager is to remain invested.

Woolies fell -2.7% on Friday.

Discretionary was one of only three sectors to close in the green, modestly, with buying ongoing for Aristocrat Leisure ((ALL)). Healthcare was supported by a good day for Ansell ((ANN)), which topped the charts with a 3.5% gain, while telcos again held fast.

Materials (-0.3%) also hung in there as the gold miners came back in to focus, offsetting ongoing falls in the lithium miners due to global oversupply.

The gloss finally came off the banks (-0.5%) after the step-jump adjustment last Monday.

Utilities (-1.2%) had a bad day because AGL Energy ((AGL)) fell -2% on the oil price.

As we head into the last week of May we note the “Sell in May” mantra has worked this year on Wall Street but not so here due to both the election and the perception of pending RBA rate cuts. Westpac’s economists became the first on Friday to forecast three cuts in 2019, as opposed to a consensus two.

My tip will be the RBA will not cut below 1%, as three cuts would imply, given the former governor is on record as saying anything below 1% is ineffective. Look out for “unconventional measures” if we get there, but also pressure on the government to ditch their mindless surplus obsession and start providing some fiscal assistance.

The futures are down -2 this morning and Wall Street is closed tonight. The UK is also closed meaning no base metals market, and a lame duck prime minister will probably put her feet up for once.

Tentative

Wall Street closed modestly higher on Friday night but still ended the week down, marking five straight weeks of losses – the longest since June 2011.

A  tweet from the president suggesting the US could ease up on its ban on Huawei as “some part” of a wider trade deal provided some comfort, but given Trump reiterated Huawei was “very dangerous from a security standpoint” the tweet looked more like an attempt to halt a sliding market than any genuinely positive news on trade.

At the same time the Commerce Department indicated it was considering tariffs on those countries deemed to be manipulating their currencies. China has been in the cross-hairs for some time, but Germany is also on the list.

This suggests the global trade war is heading further away from resolution but how one proves a country to be a currency manipulator is abundantly unclear. If a currency is falling on slowing growth then a falling currency is quite understandable.

The idea that the US will be able to muddle through a trade war when others won’t continues to gain traction, now that Wall Street is beginning to adjust valuations on the basis the war is here to stay. Durable goods orders fell -2.1% in April, It was revealed on Friday night, but economists had forecast -2.4%.

Yet the biggest hit is yet to come, were Trump to move forward with his final, all-encompassing tariff tranche. Shares in retailer Foot Locker fell -16% on Friday night on an earnings miss and, like all major retail chains before it over the past couple of weeks, a warning of the impact of a 25% tariff on the company’s products, in this case footwear.

Footwear and apparel are just two of the segments yet to be hit by tariffs, and if they are, it is the US consumer who will feel the pain.

It is unsurprising that after another down-week traders looked to square up ahead of the long weekend. Some reprieve was granted, nonetheless, for the energy sector, with the oil price rebounding, and for financials, given the plunging US ten-year yield bounced back 3 basis points away from its 2017 low.

The last week of May will be interesting.

Commodities

Trump is sending troops to the Middle East as tensions with Iran continue to build. That was enough to inspire a bounce-back in the WTI price of 1.5%. Oil is being pushed and pulled at present between increasing US production, decreasing global demand, lost barrels from Venezuela and Iran, and rising geopolitical tension.

A sudden jump in the nickel price has been attributed to short-covering ahead of the expiry of the Shanghai futures contract. Otherwise, metals enjoyed some reprieve from a weaker greenback.

The -0.3% fall in the US dollar index translated to a 0.4% gain in the Aussie to US$0.6930.

The SPI Overnight closed down -2 points on Saturday morning.

The Week Ahead

After tonight’s holiday, US data this week include house prices tomorrow night, trade and pending home sales on Thursday and consumer sentiment and PCE inflation on Friday. Thursday also sees the first revision of the March quarter GDP result.

China issues trade numbers tomorrow and the May PMIs on Friday.

Locally we’ll see building approvals on Thursday and private sector credit on Friday. Thursday also brings March quarter private sector capex.

Fisher & Paykal Healthcare ((FPH)) will report earnings today and Mesoblast ((MSB)) and Select Harvests ((SHV)) do likewise on Friday.

Galaxy Resources ((GXY)) holds its AGM tomorrow, Gold Road ((GOR)) on Wednesday, Costa Group ((CGC)) and FAR ltd ((FAR)) on Thursday and Sundance Energy ((SEA)) on Friday.

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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