By Greg Peel

Thursday

Weakness in metals prices sent the local materials sector south by 1.7% on Thursday, while energy managed to hold up despite a fall in the oil price. While oil continues to fluctuate, it has pretty much been jogging on the spot for the last couple of weeks.

Only one other sector fell on Thursday, but a 2.5% plunge in the banks represents a big hit to the ASX200. Reality has bitten, with ANZ Bank ((ANZ)) announcing it would take an additional $100m provision against potential bad loans to the energy sector, while Westpac is setting aside $25m to cover personal loans in the stressed mining states of Queensland and WA.

No doubt investors saw parallels with European banks, which have suffered significant share price falls this year due to exposure to energy as well as emerging markets. Throughout the year, analysts have assured their clients Australia’s banks are not onerously exposed to the resource sector, and nor are the US banks in terms of proportion of all loans. Were they wrong?

No. Panic may have emerged on Thursday but these provisions represent small numbers in the scheme of things. A provision of $25m would about cover Westpac’s board room lunch bill for the year, and even $100m for ANZ is still nothing major compared to the banks’ capital positions. All banks were nevertheless sold down on Thursday on suspicion. Provisions do, of course, reduce the earnings pool from which dividends are paid out on a ratio basis.

The sell-down for the index on Thursday was all about the banks and not a market-wide event. Sector rotation was evident, with the defensive sectors of healthcare and utilities among apparent recipients of liquidated bank shares.

Thursday Night

On Thursday night the Dow closed up 13 points while the S&P was flat at 2035 and the Nasdaq rose 0.1%.

Oil prices fell again early in the US session following Wednesday night’s data suggesting ever more increasing inventories, but relief was found in the weekly rig count, which posted another fall. The Dow was down 100 point at one stage and the US banks, too, suffered from energy market-related selling, but when oil turned, Wall Street returned to a flat close.

The S&P500 nevertheless closed down for the week after a five-week winning streak.

Adding to early weakness was an announced 2.8% fall in US new durable goods orders in February – the third decline in four months. While this was not actually as bad as the 2.9% decline economists had forecast, the breakdown of the data showed weakness in every major industrial sector except autos.

Having enjoyed a revival of sorts post-GFC, US manufacturing has more recently been battling against a stronger greenback, a slowing global economy and the fallout from the energy sector rout.

All of which is another reason to assume the Fed will not be raising its cash rate in April.

The US dollar index was flat at 96.11 on Thursday night and the Aussie was also little changed at US$0.7531.

West Texas crude closed down US24c at US$39.60/bbl and Brent was little changed at US$40.49/bbl.

Zinc has recently taken the mantle as the most volatile of base metals on the LME and it dropped 2.5%, while the pre-Easter session saw all other metals not much trouble the scorer.

Gold fell US$4.20 to US$1216.70/oz.

The SPI Overnight closed down 12 points or -0.2% on Friday morning.

Monday Night

Wall Street was open on Easter Monday but for many it is still a holiday period, coinciding with Spring Break. Europe was closed and trading on US exchanges was very quiet. US stocks indices meandered mildly higher during the session before a shooting incident at the Capitol building in Washington put a brief scare through the market an hour ahead of the close.

The Dow retreated to the flat line once more but as the incident was quickly contained, a modestly higher close was achieved. The Dow closed up 19 points or 0.1% while the S&P closed two points higher at 2037 and the Nasdaq lost 0.1%.

Fed chair Janet Yellen will be speaking tonight, which was another reason Wall Street was not interested in getting carried away last night. To that end, last night’s US data releases included consumer spending and inflation numbers.

Incomes rose 0.2% in February having risen 0.5% in January, while spending rose 0.1% having risen by 0.1% in January. The January spending figure was revised down from a 0.5% increase published a month ago. The personal consumption & expenditure (PCE) index fell to 1.0% year on year from 1.2% in January.

The core PCE, which is the Fed’s preferred inflation indicator, remained unchanged at 1.7% year on year, stubbornly below the Fed’s 2% target.

There is nothing in those numbers to suggest the push from a cohort of FOMC members to hike in April will gain any traction. The March jobs data are due out this Friday. When Yellen speaks tonight, Wall Street will be looking for some clarification on whether the Fed chair remains the head of the US central bank, or whether she now considers herself head of the World central bank.

In other words, there is much debate in US markets as to whether it is the Fed’s role to set policy based on the state of the world economy rather than just the US economy, as is the mandate.

Other data released last night included February pending home sales, which rose 3.5%.

Oil prices are only slightly weaker last night from Thursday night with West Texas down US19c at US$39.41/bbl and Brent down US22c at US$40.27/bbl.

The London Metals Exchange was closed last night.

Over two sessions since Thursday, the spot iron ore price is down US$2.10 to US$55.20/t.

The US dollar index is slightly lower at 95.99 and the Aussie is slightly higher at US$0.7544. Gold is up US$3.20 at US$1219.90/oz.

The SPI Overnight was closed last night, leaving Thursday night’s 12 point fall as the starting point this morning.

The Week Ahead

Not a lot is expected from markets across the globe until Janet Yellen makes her speech tonight. Thursday is the end of the quarter, so there may be some pushing and shoving going on this week ahead of books close.

Books close also comes ahead of the all-important US non-farm payrolls report due on Friday, being the first of the new month. That also means manufacturing PMI numbers from around the globe and both the manufacturing and services PMIs from China.

Other US data releases during the week include Case-Shiller house prices and the Conference Board’s monthly consumer confidence measure tonight, the ADP private sector jobs report tomorrow, Chicago PMI on Thursday and construction spending, vehicle sales and Michigan Uni’s fortnightly consumer sentiment measure on Friday, along with jobs and the manufacturing PMI.

Besides the manufacturing PMI release on Friday, Australia will see private sector credit data on Thursday along with new home sales, and house prices on Friday.

There are just a few more stocks going ex-dividend this week, across Wednesday and Thursday.

Rudi will appear on Sky Business  on Thursday (12.30-2.30pm) and again on Friday around 11.05am through Skype-link to discuss broker calls.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

By Greg Peel

Consolidation

The ASX200 surged almost 50 points early in the session on Friday but eased back by lunchtime ahead of a quiet afternoon. Stronger commodities prices again supported the resources sectors but the banks were flat, and we’re beginning to see evidence of the damage caused by a suddenly much stronger Aussie.

Materials closed up 1.7% and energy 0.8% but healthcare fell 1.1% as offshore exposure and ongoing fears surrounding the upcoming federal budget continue to weigh.

It's Easter this weekend providing for short weeks this week and next, plus next week also sees the end of the March quarter before we then shift into a school holiday period in April. As excitement over the Fed’s more measured policy stance dies down, we should now see a period of consolidation following the solid bounce up to 5200 from 4800 for the index.

The subject du jour is of course commodity prices, and whether they can hold up at these rebound levels. The banks have returned from what were considered oversold levels and as yet there is no expectation of a rate cut from the RBA anytime soon.

That might possibly change tomorrow when Glenn Stevens makes a speech and takes a Q&A, given all that has transpired in central bank and currency land since the March RBA meeting.

Start Again

Wall Street posted its fifth straight week of gains last week and the Dow rallied six sessions in a row for the first time since October. After Friday’s rally, which was really just more of the same from Thursday post-Fed, both the Dow and S&P500 are in positive territory for the year.

The Dow closed up 120 points or 0.7% while the S&P gained 0.4% to 2049 and the Nasdaq added 0.4%.

The major driver of the stock index rebound has been the commodity price rebound and the weaker US dollar, driven by abating Fed hike fears. The lower greenback also feeds into stronger commodity prices. Commodity prices may be back where they began the year but there has not been any change to the outlook for the Chinese economy, which supposedly was one of the scare factors that took Wall Street down in the first place.

That puts the focus squarely back on central bank policy as the provider of stock market stimulus.

Michigan Uni reported on Friday night that its fortnightly US consumer sentiment gauge had fallen to a five-month low 90.0 from 91.7. US consumers are apparently now worried that the US economy is not going to grow as fast as early assumed and that on the rebound in the oil price, gasoline prices will begin to rise ahead of the summer driving season.

The WTI price fell 2% on Friday night because for the first time in 13 weeks, the domestic rig count rose. The bounce was in the order of…drum roll…one rig, but no doubt it had the market wondering whether reductions have now reached their limit.

Nevertheless, the total rig count, which includes Gulf oil that has recently taken a back seat to domestic shale oil, fell by four rigs to 476 last week to a new record low. Since a year ago, 593 rigs have ceased operation. One would think that such a massive shutdown of supply would have to suggest oil prices have seen their lows and should go higher form here but the problem is one of a self-defeating feedback loop. Modern shale oil rigs can be switched back on again in a heartbeat and if oil prices remain supported, many probably will.

And that’s likely why the addition of one lonely domestic rig tipped oil prices over.

It’s also interesting to note, once more, that the correlation between the oil price and Wall Street was negative on Friday night.

It was actually the biggest volume day of 2016, but that’s understandable given the March quarter quadruple witching expiry and the closing bell rebalancing of S&P500 weightings. Given the S&P closed just a tad under 2050, one presumes this strike price was influential in Wall Street’s move on Friday night.

So we’ll see what happens tonight.

Commodities

West Texas crude fell US79c to US$39.33/bbl and Brent rose US12c to US$41.46/bbl.

After falling solidly in the wake of the Fed meeting, the US dollar index rebounded slightly on Friday night, up 0.3% to 95.01. This was a sufficient trigger to spark some profit-taking in base metals prices that have been enjoying the benefits of the weaker greenback up to now. Aluminium and copper fell 0.5%, lead and tin fell 1%, nickel fell 2.5% and zinc was steady.

Iron ore rose US90c to US$56.30/t.

The bounce in the greenback helped the Aussie down 0.5% to US$0.7604 on Saturday morning but gold held its ground, steady at US$1255.10/oz.

The SPI Overnight closed up 29 points or 0.6% on Saturday morning.

The Week Ahead

US data releases this week include the Chicago Fed national activity index and existing home sales tonight, FHFA house prices and the Richmond Fed index on Tuesday, and new home sales on Wednesday. Thursday it’s durable goods, and Friday another revision of December quarter GDP.

Which reminds us the Good Friday is not actually a national public holiday in the US despite markets being closed. And Wall Street opens on Easter Monday. Markets are closed on Friday in Australia, New Zealand, the UK and Europe.

Thursday also sees a flash estimate of March manufacturing PMI in the US, as well as in Japan and the eurozone. The eurozone also sees the release of both the ZEW investor sentiment and IFO German business sentiment indices on Tuesday night.

Australia is devoid of major economic data this week, although as noted, Glenn Stevens’ speech tomorrow will be a must-see event.

On the local stock front, there are still a handful of stocks left to go ex-div this week while out of cycle earnings reports will be forthcoming from Kathmandu ((KMD)) and TPG Telecom ((TPM)) tomorrow and Brickworks ((BKW)) and Nufarm ((NUF)) on Wednesday. Westpac ((WBC)) will provide a strategy update on Thursday.

Rudi will appear on Sky Business on Tuesday morning (11.15am) via Skype-link, then later on Tuesday he'll host Your Money, Your Call (8-9.30pm). On Thursday Rudi re-appears at noon and again between 7-8pm for the Switzer Report.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

By Greg Peel

The Wow Factor

It was another choppy session on Friday to wrap what was the last big day of the local result season, notwithstanding a handful of latecomers reports due today. When the dust settled it was another flat close featuring a mix of red and green among sectors.

The resource sectors were always in for a bad day given overnight falls in the oil and iron ore prices, and the fact the big names have now all published their disastrous results and ended speculation over dividend policies. But there was one big name to report on Friday, and its influence was clear.

It was the first loss in decades for Woolworths ((WOW)), thanks to the Masters write-off, although the underlying result was nothing to smile about either. The size of the loss sent Woolies shares crashing a further 6% on release, but the key here is the word “further”.

Woolies’ share price has been falling through 2016 on a combination of food price deflation, a failure to make a dent in rival Coles, and ultimately the decision to bail out of the train crash that was the Masters foray. Woolies shares were even dragged down further still last week when Wesfarmers ((WES)) posted a disappointing result, even though that was all about coal and not about Coles. So in a classic case of “sell the rumour, buy the fact”, Woolies shares bounced immediately and powered back through the day to a 2% gain.

The ASX200 chart shows a pretty well correlated picture.

Consumer staples finished up on the day but not so consumer discretionary, which suffered due to a poorly received result from Harvey Norman ((HVN)). The banks were off a little but falls in the resource sectors were balanced out by a rare strong day for Telstra ((TLS)), a mega-cap that has been much maligned of late.

Aside from the aforementioned handful of companies to report today, attention in the local market now turns to the economy. Before a backdrop of what has been a disappointingly directionless debate over tax reform, this week will see an RBA policy meeting ahead of Wednesday’s December quarter GDP result. Economists are predicting annualised 2.6% growth, up from the September quarter’s 2.5%.

Fed Follies

Meanwhile, the equivalent US GDP result was revised for the second time on Friday night. Economists had expected a downgrade to a mere 0.5% growth from the previous 0.7% revision, so there was some shock when the number came in at 1.0%.

Suddenly fears were rekindled of a Fed rate hike. However the disparity between the result and forecasts came down to an inventory build. Inventory builds are two-edged swords – in a strong economy they can reflect a deliberate attempt to get on top of growing demand, but in a weak economy they can reflect a misreading of weak demand, and herald possible discounting ahead.

Economists have suggested the latter in this case. The US economy grew 2.4% in 2015, as it did in 2014, again failing to reach the 3% average rate. There is nothing here to suddenly spark the Fed into action.

Inflation might be a different matter. I noted last week that while a rise in the US CPI was another reason Fed fears had again become rekindled, it is well known the FOMC prefers to ignore price inflation and use the personal consumption & expenditure measure as a more realistic gauge of overall inflation. Well, January’s PCE reading of 1.3% was a big jump on December’s 0.7%.

It’s still a long way from the Fed’s 2% target, but the FOMC itself has suggested that while it may yet take a while to get to 2%, if the trend is rising then inflation becomes a risk if monetary policy does not respond in anticipation. Is this enough to secure a March Fed rate hike? Probably not in isolation. The Fed remains “data dependent”, which is code for “no idea at this stage”, and most data readings have been on the weak side of late, particularly the PMIs.

This week sees a raft of US data releases, including the PMIs, and culminating with the February jobs report on Friday night.

Whether or not the PCE reading had much of an impact on Wall Street on Friday is unclear, as at the end of the day the Dow basically tracked the oil price yet again. Oil popped early on another weekly reduction in the rig count, but fell away as the session progressed. Ditto the Dow, which closed down 57 points or 0.3%. The S&P500 fell 0.2% to 1948, splitting the difference on a 0.2% gain for the Nasdaq.

Commodities

West Texas crude was down US10c at US$32.96/bbl on Saturday morning and Brent was up US15c at US$35.35.

Iron ore fell US20c to US$49.00/t.

The flip-flopping base metal market decided on a flip on Friday night, largely due to the better than expected US GDP result and the fact oil was up during the LME session and fell back after the exchange had closed. Copper jumped 2%, lead 3%, zinc 1.5% and nickel 0.5%.

Prices rose despite the offset of the implications of a stronger US GDP result being the US dollar, which rose 0.8% on its index to 98.08. The PCE number would also have been an influence.

Greenback strength meant gold fell US$12.50 to US$1223.50/oz.

And there was some relief for the Aussie on US dollar strength. It suddenly dropped 1.5% to US$0.7131, suggesting there might have been a build-up of long positions heading into this week’s RBA meeting and local GDP release.

The SPI Overnight closed up 7 points on Saturday morning.

The Week Ahead

It is the last day of the month today – Happy Birthday to all those who look 60 but are really only 15 – which can always bring some book squaring argy-bargy. The last few straggler earnings reports will include Slater & Gordon ((SGH)), which is not set to be pretty.

Today’s local economic releases include December quarter company profits and inventories and monthly private sector credit. Tomorrow is manufacturing PMI day across the globe and Beijing will additionally release the official Chinese service sector PMI. Australia will see the December quarter current account, including the all-important terms of trade.

Wednesday it’s the GDP result, and it’s service sector day across the globe, other than the official Chinese result. Australia’s January trade balance is due, followed by retail sales on Friday.

The RBA will meet tomorrow but no change is expected. It will all come down to the language of the statement.

The US will see the Chicago PMI and pending home sales tonight, the manufacturing PMI, construction spending and vehicle sales on Tuesday, and private sector jobs along with the Fed Beige Book on Wednesday.

Thursday it’s the services PMI, chain store sales and factory orders, and Friday it’s non-farm payrolls.

It will be the last US jobs report the Fed will see before its March 16 meeting.

Note that the local market is entering a period in which a number of companies go ex-dividend, dragging on the index. There are quite a few today.

Rudi will appear on Sky Business on Thursday afternoon under the revised program formula & scheduling.

For further global economic release dates and local company events please refer to the FNArena Calendar.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com