The Monday Report – 02 March 2020

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This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: HVN
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Farewell February

On Saturday Beijing revealed China’s manufacturing PMI fell to 35.7 in January from 50.0 in December. Needless to say that’s a record, both in speed of fall and level reached. Think that’s bad? The services PMI fell to 29.6 from 54.1.

The numbers are, of course, misleading. At 50.0, China’s manufacturing industry was struggling to expand in light of the trade war, and may even have been poised to improve given the lifting of some tariffs in the phase one deal signed early in January. Then along came the virus, and factories shut down. Similarly, whole cities shut down. Both PMIs reflect an economy on hold, rather than an economy that had deteriorated to record depths.

At some point China will reopen.

Meanwhile, the Australian market posted its biggest single day’s fall in the virus sell-off to date on Friday in falling -3.3%. The damage was all done from the open. By lunchtime the ASX200 had rallied back from over -200 points down to be only -150 down, but afternoon selling foiled that rally attempt. It was the end of the month, and a Friday. Books needed to be squared, and presently, anything could happen over a weekend.

Among the sectors, IT was the hardest hit (-4.7%) for the usual reason, while materials stood out in also falling -4.7%. This downside outperformance was all about the gold price, which on Friday rolled over.

I mentioned last week that during the GFC, gold initially rallied as a safe haven trade but then turned and fell sharply as investors cashed in gold holdings to pay for margin calls on leveraged equity positions. With Wall Street down -10% for the week, Friday night saw gold down -US$55/oz.

All other sectors fell around -3% except for utilities (-1.0%) and telcos (-1.4%), which did bravely attempt to take on a defensive role.

Harvey Norman ((HVN)) was the biggest victim in the index, falling -14.1%. It was not so much about the company’s first half result but about early second half data showing the impact first of the bushfires and then of the virus.

IDP Education ((IEL)) fell early in the virus scare but came screaming back on its result release that implied little virus impact. Yet on Friday it fell -10.8%. As did WiseTech Global ((WTC)), which simply continues to be carted. Joining in with -10%-plus falls were gold miners.

Upside moves of any note were hard to find, but NextDC ((NXT)) did buck the trend with a 6.3% gain on result.

The good news, if we can call it that, is that the Dow was down over -1000 points on Friday night but rallied back to close down -350, or -1.5%. Out futures closed down “only” -40 points, or -0.6%, on Saturday morning.

Can we march into the new month with a bottom in place? Maybe tomorrow’s RBA meeting might be influential.

Not the GFC

On Friday night the Fed chair issued a statement. It is highly unusual for the Fed to issue an unprompted statement outside of scheduled meetings, testimonies or speeches. Jerome Powell said the central bank is “closely monitoring” the coronavirus epidemic emanating from China and its potential to slow economic growth.

Wall Street is now pricing in a March rate cut as a given. The policy meeting is nonetheless not until the 18^th.

The statement did not bring about the turn on Wall Street immediately, but perhaps was one element driving a rally to the close. That rally may only have represented computers squaring up for the month, having been the prime momentum sellers in a week in which Wall Street fell over -10% and marked its worst week since the GFC.

But as commentators are at pains to point out, this is not another global financial crisis. The global financial system is not in meltdown as it was in 2008. Major US companies are not preparing to file for bankruptcy. The US government is not preparing to bail anyone out. Credit spreads on corporate debt have not blown out to record levels.

Yet the US ten-year bond yield did drop -17 basis points on Friday night to mark another historical low – much lower than during the GFC. Bear in mind bond yields were almost at historically low levels before the virus, while back in 2007 they were considerably higher.

Driving the bulk of losses in the stock market over the week were a mere six companies that between them lost over -US$1trn. These are the companies that up until the week before were the stocks that just kept on pushing higher while all about were losing their heads. Apple, Amazon, Microsoft, Google, Facebook, Visa. Before there was any sort of virus scare, many had pointed to the dangerous situation of such concentration of investor positions in such a small group of stocks.

So reality has bitten.

From here, who knows? The virus situation will either get worse or stabilise. Central banks are anticipated to swing in to action. China already has, but Korea chose not to. The Fed may be set to but the jury is still out on whether the RBA will move tomorrow.

It may not be of much help.

Commodities

A big turnaround for the gold price – another crowded trade.

The fall in oil prices has accelerated. Surely OPEC will be forced to act.

It’s starting to look like Banana Republic time once more for the Aussie. It’s down -1.7% at US$0.6472 despite the greenback falling -0.4%.

The SPI Overnight closed down -40 points or -0.6% on Saturday morning.

The Week Ahead

The result season is officially over, although there are a couple of stragglers yet to report. Bega Cheese ((BGA)) had postponed its result release until today, while Myer ((MYR)) is scheduled to report on Thursday.

This week sees the early trickle of ex-dividends turn into a flood, and that flood will continue through the month. Fortescue Metals ((FMG)), Origin Energy ((ORG)) and Qantas ((QAN)) are among those on the list today.

The rest of the world posts manufacturing PMIs today and services PMI on Wednesday.

Australia will also see monthly data for job ads today, building approvals tomorrow, trade on Thursday and retail sales on Friday.

We will also see December quarter data for company profits and inventories today and the current account tomorrow before Wednesday’s GDP release.

Be afraid.

It’s jobs week in the US, culminating with the non-farm payrolls numbers on Friday. On Wednesday the Fed releases its Beige Book.

And yes, the RBA meets tomorrow. It might be that the currency has already done the work.

The Australian share market over the past thirty days…

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