The Monday Report – 18 May 2020

This story features GRAINCORP LIMITED, and other companies. For more info SHARE ANALYSIS: GNC

By Greg Peel

Golden Days

The ASX200 opened up 70 points on Friday, and sagged through the morning before spiking again in the afternoon to be up 84 with an hour to go. Late selling ahead of the weekend trimmed that gain.

The session saw lower volumes than had been the case during the week, probably because players were keen to get out and see if they could find a restaurant or pub open.

The index closed the week up 14 points, which about sums up the current mood. All week we saw jagged moves of still-elevated volatility without any theme beyond the No Idea trade. It’s become a watching game, as the economy does actually begin to reopen.

Leading the sectors by a margin were materials, up 3.3%, featuring positive moves for the iron ore miners but also renewed excitement for gold miners. Four of the top five index winners on the day were gold miners, punctuated by another good session for Graincorp ((GNC)), up 7.1% as investors praised the company’s insight in offloading its barley business. United Malt ((UMG)) fell -4.4% to be the second worst index performer on the day.

Energy (+1.9%) had another strong session in line with the oil price recovery, while all other sectors closed in the green bar IT. It fell -1.0%, with Xero ((XRO)) falling -5.6% post-result.

China’s industrial production rose 3.9% year on year in April, having fallen -1.1% in March, beating 1.5% forecasts. Retail sales fell -7.5%, up from -15.8% in March but below -6.0% forecasts. Fixed asset investment fell -10.3% year to date, up from -16.1% in March.

The conclusion is that while China’s economy is getting back to work, the impact is not flowing through to consumer confidence. Consumer confidence is arguably now the greatest point of focus for all economies. It’s one thing to reopen businesses but will consumers feel safe enough (a) to emerge from their caves and (b) to spend what little money they currently have?

One might foresee a negative feedback loop – businesses reopen but demand does not rebound, perhaps as so many workers have only JobKeeper to sustain them, such that employers may need to rethink whether they do in fact retain the workers currently on JobKeeper when it expires in September.

On Friday consumer discretionary rose 0.5% and staples 1.0%.

Michael Hill International ((MHJ)) announced close to 100 Australian and 25 New Zealand stores will be operating again from May 16, with the balance to reopen over the coming month. Canadian stores will reopen from late May. Online sales continue to track above the record set at Christmas last year. A few of the underperforming stores in each country of operation won't reopen.

The shares fell -8.3%.

Financials rose 1.6%, driven, supposedly, by a bounce overnight for the US bank sector. That bounce was prompted by a big seller in Wells Fargo seemingly completing its order, so as to what the connection is is anyone’s guess.

Deja Vu

US retail sales fell -16.4% in April when forecasts were for -12.4%. March was the month when US consumers raided supermarkets but come April, with more toilet paper than anyone knew what to do with, the loss of discretionary sales shone through.

US industrial production fell -11.2%. It was the largest monthly drop on record (101 years) but not quite as bad as a -12.5% forecast.

These data were not, nevertheless, the reason the Dow fell -270 points early in Friday night’s session. That was largely prompted by a White House announcement banning the sale of computer chips to Huawei from 120 days hence.

“Based on what I know,” said Global Times editor Hu Xijin on Twitter, “if the US further blocks key technology supply to Huawei, China will activate the ‘unreliable entity list,’ restrict or investigate US companies such as Qualcomm, Cisco and Apple, and suspend the purchase of Boeing airplanes.”

Huawei was originally established using source code (allegedly) stolen from Cisco.

The fear is escalating tensions, including demands regarding the source of the virus, will lead to escalation in the trade war and a back-tracking of the phase one deal signed only this January – an eternity ago.

But Wall Street turned itself around during the session and rallied back to a slightly positive close. The S&P500 was nonetheless down -2.3% for the week – the worst week since March.

Helping to drive the turnaround was news the Democrat-led House is set to pass a second fiscal package worth US$3trn, with US$1trn specifically earmarked to support state and local governments. The Republic-led Senate has already dismissed the bill, but the White House has indicated it is prepared to put together a second deal.

Meanwhile, the Fed has warned of the economic disaster ahead were the virus to reappear. Not that it has exactly disappeared from the US, where the case-count has hit 1.3 million. The Fed is credited as the driver behind Wall Street’s sharp rebound, supported by fiscal relief, and more recently fuelled by the prospect of re-openings.

Here we have another potential negative feedback loop.

The conundrum is the longer the economy remains shut down, more widespread the impact will be on American livelihoods than the virus itself. Thus it is worth taking the risk and reopening as soon as possible. Health experts have warned that a second wave is inevitable if the economy reopens too soon, and were that to happen, see Fed above.

For the moment, Wall Street remains range-bound.

Commodities

Escalating geopolitical tensions equal an escalating gold price, but the opposite for base metals.

No holding iron ore back, nonetheless.

The WTI crude price is now almost back at US$30/bbl, some US$72 above the April low hit on May contract expiry, with the June contract due to expire tomorrow night.

Geopolitical tensions are also likely behind a -0.7% fall in the Aussie to US$0.6418.

The SPI Overnight closed up 32 points or 0.6% on Saturday morning.

The Week Ahead

Japan releases its March quarter GDP today.

The minutes of the last RBA meeting are out tomorrow and the Fed meeting on Wednesday night.

Flash manufacturing PMI estimates for May will be released across the globe on Thursday.

The ABS will release preliminary numbers for Australian April retail sales on Friday.

Elders ((ELD)) reports earnings today, James Hardie ((JHX)) Ozforex ((OFX)) and TechnologyOne ((TNE)) tomorrow, and Aristocrat Leisure ((ALL)) on Thursday.

Adelaide Brighton ((ABC)) and Atlas Arteria ((ALX)) hold AGMs tomorrow and Sydney Airport ((SYD)) on Friday.

The Australian share market over the past thirty days…

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