The Monday Report – 04 December 2023

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This story features PREMIER INVESTMENTS LIMITED, and other companies.
For more info SHARE ANALYSIS: PMV
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

You Better Watch Out

Following a rally on Thursday that was unconvincing, featuring month-end squaring and an MSCI index rebalance, it was unsurprising the ASX200 fell back from the open on Friday, down -46 points in the first hour.

The index spent another hour thinking about it, and then commenced a choppy rally to the bell, closing down only -14. Most notably, following a rally on Wall Street on Friday night, our futures closed up 65 points on Saturday morning.

Heading into December, sentiment is positive.

The comeback rally on Thursday came despite the Aussie ten-year rising 8 points, in line with end-of-month profit-taking in the US bond market. This weighed on technology (-1.1%), and the consumer sectors, both down -0.8%.

This despite news from the Premier Investments ((PMV)) AGM that Black Friday sales this year were the best ever. Premier rose 2.8%.

Communication services fell -0.4% and utilities -0.3% but what was remarkable on Friday was the number of sectors that simply came back to square by the close. The banks fell less than -0.2% while all of healthcare, industrials, real estate and even materials closed flat.

For materials, it’s still a case of the greater influence of iron ore and gold while lithium miners continue to be carted, albeit Gonneville developer Chalice Mining ((CHN)) fell -8.2% to be the index worst performer for reasons of its own.

Paladin Energy ((PDN)) was back in the green nonetheless, topping the index with a 6.4% gain, as it should do given a surging uranium price.

The gold price was up another US$36/oz on Friday night.

Energy was the only sector to close in the green (+0.2%).

Friday night brought further steep falls in US yields into the new month following the brief square-up on Thursday. By rights Aussie yields should follow suit today.

That will be interesting, given the RBA meets tomorrow. While most economists don’t believe another rate hike will be forthcoming, Bullock’s recent hawkishness suggests anything could happen.

On Friday the Aussie two-year closed at 4.15%, -20 points below the current cash rate and -45 below if we get a hike tomorrow, notwithstanding we should see yields fall today.

We’re also counting down to the September quarter GDP result on Wednesday.

And We’re Done

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” said Fed chair Jerome Powell in a speech on Friday night. Sounds hawkish? Not, not at all.

Wall Street has been of the belief for a while now the Fed is done hiking rates, despite no hint of confirmation. Rather, the mantra to date has been one of “we might have more work to do” to fight inflation, but in his speech Powell noted inflation “is moving in the right direction”.

It was what Powell didn’t say, rather than what he did say, that Wall Street found as sufficient confirmation – no more hikes, let’s talk about cuts

The bond market has been way out in front of the Fed in pricing in rate cuts next year. The US ten-year fell -13 points on Friday night to 4.23% and the two-year fell -15 points to 4.57%. The two-year is basically pricing in three rate cuts.

What has Wall Street back in bullish mode, other than it’s now December, is that rate cuts are expected for a good reason and not a bad one. A bad reason would be cutting rates to offset the recession the US economy has fallen into. A good reason would be cutting because inflation has come down, and rates no longer need to be as restrictive.

If the Fed doesn’t cut, it risks being the cause of a recession. Given the Fed’s track record, there is a risk rates remain where they are for far too long.

There is evidence the US economy is indeed slowing. The September quarter GDP came in at 5.2% growth and as we head into the last month of the December quarter, the Atlanta Fed’s running GDP monitor is sitting at only 1.5%. But the point is the economy is slowing, not contracting.

It looks like it may come in for a soft landing.

The standout feature of Friday night’s trade, emblematic of the new trend that has emerged from November, is the Nasdaq was the underperformer of the three major indices, despite plunging bond yields, while the Russell 2000 small cap index rallied 3%.

Breadth is expanding. While there is no rush to sell the Mag7, there's no rush to buy them up any further. Investors are now looking at the S&P493, and at small caps, to find both value and growth.

This is a bullish sign.

Commodities

The jump in the gold price reflects the drop in US yields.

Oil prices have now wiped out the risk premium priced in ahead of the OPEC-Plus production meeting last week. Production cuts among members are only voluntary, meaning they won’t happen.

The US dollar has fallen only -0.3% but the Aussie has shot up a full 1.0% to US$0.6669.

The SPI Overnight closed up 65 points or 0.9% on Saturday morning.

The Week Ahead

We have the RBA meeting tomorrow and the September quarter GDP release on Wednesday.

Leading into the GDP result will be data for company profits and inventories today and the current account tomorrow. Monthly numbers are due this week for job ads and trade (October).

In the US it’s jobs week, with the private sector report out on Wednesday night and non-farm payrolls on Friday night.

The US will also see numbers for factory orders and trade (October).

China also reports trade (November).

Tuesday brings services PMI reports from across the globe.

The local AGM season is all but over, save for a few stragglers over the next couple of weeks. This week’s meetings include those of Bank of Queensland ((BOQ)) and Soul Pattinson ((SOL)).

Metcash ((MTS)) reports earnings today. Rio Tinto ((RIO)) hosts an investor day on Wednesday.

The Australian share market over the past thirty days…

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