The Monday Report – 10 February 2020

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            [3] => ((ORE))
            [4] => ((CIM))
            [5] => ((KMD))
            [6] => ((AZJ))
            [7] => ((JBH))
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This story features PINNACLE INVESTMENT MANAGEMENT GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: PNI
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

I love a sunburnt country

Floods up and down the east coast. At least they’ve extinguished the bushfires and the ongoing risk this season. Oh to be an insurance company right now. Must have been a fun weekend.

Friday on the ASX200 was a day to square up ahead of the weekend after Thursday’s big rally, taking a lead from a less convincing rally on Wall Street. With no end in sight to the spread of the coronavirus, assumptions of a swift economic rebound being not too far off are being reconsidered.

Beijing has poured billions into the Chinee economy but on Friday the local resource sectors led the losses. Energy fell -1.7% as oil prices slipped back again and data suggested reduced demand for LNG. Materials fell -1.1% as a cyclone approached the Pilbara.

Thereafter, consumer discretionary was the worst performer on -0.5%, while down-moves for other sectors were less significant, and consumer staples (+0.3%) posted the only sector gain of the session.

Staples continue to be the go-to safety trade along with healthcare, although healthcare sat it out on Friday (-0.1%) after a steep run.

The RBA Statement on Monetary Policy, released on Friday, included a reduction in Australia’s 2020 GDP growth forecast to 2.25% from 2.50%, which many an economist believes is still too ambitious. The market cannot expect any help from the RBA any time soon, unless:

“If the unemployment rate were to be moving materially in the wrong direction and there was no further progress being made towards the inflation target, the balance of arguments would tilt towards a further easing of monetary policy.”

And if so, how low do we go?

“The threshold for undertaking QE has not been reached in Australia and I do not expect it to be reached. So, it is not on our agenda at the moment.”

Among individual stocks, gold miners again appeared in the ASX200 leaders board while Pinnacle Investment ((PNI)) kicked on with another 3.4% in the wake of its result. REA Group’s ((REA)) result was worth 3.1% and 3.2% for major shareholder News Corp ((NWS)).

On the downside, the Tesla-led spark for lithium miners continued to fade with Orocobre ((ORE)) down -7.0% and Cimic Group's ((CIM)) post result pop proved fleeting, with that stock down -4.9%.

Outside the index, it was a case of “from the mountains to the sea” for Kathmandu ((KMD)), which updated first half guidance to 40% earnings growth in the wake of its Rip Curl acquisition.

Wall Street has also used Friday as a reason to square up following a solid rally, not wishing to carry risk over the weekend. This has become a common theme. But with the S&P500 down -0.5%, our futures closed up 7 points on Saturday morning.

Good News Bad

The US added 225,000 jobs in January when 165,000 were forecast. The unemployment rate rose to 3.6% from 3.5% on greater participation and wage growth of 0.2% fell short of 0.3% expectation but the upshot is the Fed has no reason to cut at this stage, even with the coronavirus threatening global growth.

The PBoC has promised further stimulus injections and the Bank of Japan has also moved to provide support. Automakers Toyota and Honda have extended their factory closures in China but it’s not just about worker health – it’s also falling immediate demand. In that vein, Fiat Chrysler has warned it may have to close a factory in Europe.

For Wall Street, the potential impact to the US economy of a big drop in Chinese growth remains an unknown. Comparisons with the SARS impact are of no help because the Chinese economy was a much less significant component of the global economy back in 2002. One hint might have been provided by winter clothing retailer Canada Goose, who on Friday night issued a profit warning due to the “material negative impact” of the virus on sales.

Thus as the case-count and death toll continue to rise, Wall Street is again becoming nervous. Nervous enough to consider Friday a good time to sell after the week’s big recovery rally. Yet despite weakness on Friday, the Dow still closed up 3% for the week, the S&P 3.2% and the Nasdaq 4%.

Earnings results keep rolling in, with Friday night’s star Uber jumping 10% after bringing forward its maiden profit expectation to the fourth quarter 2020 from a prior “sometime in 2021”.

Wall Street is thus poised at this point, not sure just when it’s safe to assume the virus will prove only a temporary setback.

Commodities

Saudi Arabia has pushed for a provisional -600,000 barrels per day production cut to offset the virus impact on oil demand but Russia does not want to be rushed. There is thus yet no decision from OPEC-Plus with the next scheduled meeting not until March, although that may be brought forward.

Oil prices responded negatively.

After rebounding modestly during the week on China stimulus, base metal prices once again gave way to growing virus impact.

The cut in the RBA’s growth forecast came as no surprise but the Aussie has fallen -0.9% to US$0.6673 even as the central bank shrugs off thought of emergency easing.

The SPI Overnight closed up 7 points on Saturday morning, presumably as the ASX200 pulled back ahead of Wall Street.

The Week Ahead

The local earnings season gets into full swing this week as the pace of reports starts to build. Today’s list includes Aurizon Holdings ((AZJ)) and JB Hi-Fi ((JBH)) but from this point the numbers become too large to provide extensive highlights. Please refer to the FNArena Calendar (https://www.fnarena.com/index.php/financial-news/calendar/) or, even more practical, the dedicated calendar at the bottom of FNArena's Monitor of corporate results: https://www.fnarena.com/index.php/reporting_season/

Economic data this week include the NAB business confidence and Westpac business confidence surveys (apparently both tomorrow) while the RBA governor will again speak on Thursday.

China reports inflation data today, for what it’s worth.

Ditto UK December quarter GDP tomorrow. It’s a whole new ball game from here.

Japan is closed tomorrow.

The RBNZ holds a policy meeting on Wednesday.

The US sees CPI numbers on Thursday and retail sales on Friday, along with consumer sentiment.

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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