By Greg Peel
Manipulation
It looked like a worrying start to the June quarter for the local market on Friday but really it was a reversal of the solid end to the March quarter on Thursday. On Thursday, fund managers bought up the market in general to fool you into thinking they’d actually generated better returns when in fact they were clueless. On Friday they simply sold back those trades.
So for all intents and purposes, the June quarter starts today. And where from? Well, 5000 of course. Prisoners of our own device.
Economic data were never going to matter on Friday. On any other day, news that China’s official manufacturing PMI swung back into expansion in March for the first time in eight months would have been met with cheers. Beijing’s index rose to 50.2 from 49.0 in February. Caixin’s independent measure did not quite make expansion but a move up to 49.7 from 48.0 at least corroborates the trend.
More important than China’s manufacturing sector is its services sector, which Beijing is supporting in favour of over-capacitated manufacturing. The government’s services PMI rose to 53.8 from 52.7, which also reversed the weak trend of the last couple of months.
And for the record, what’s left of Australia’s own manufacturing industry posted a PMI increase to a breakneck 58.1, up from 53.8. That’s the fastest pace of expansion since April 2004.
March is often a vacuum month for Australian corporates coming, as it does, in the wake of the February results season. Quite often not a lot happens to generate any market news and this year has been no exception. April features school holidays, which we’ve already had in Victoria and Queensland and are about to have in NSW, just to increase the potential for quieter markets.
But we do see the corporate news begin to ramp back up again in April, beginning with resource sector quarterly production reports and then moving on the ever increasing number of quarterly reports provided by the rest of the market. We are ever so quietly moving towards a US-style quarterly reporting calendar. If only we could adopt the US practice of providing homogenous EPS results for clear comparison rather than Australia’s antiquated obsession with this thing called “profit”, which is often misleading.
Around the Grounds
There may not be much left of Australia’s manufacturing industry but in Japan, manufacturing is the economy’s primary driver. It will thus be concerning for the Abe government that Japan’s manufacturing PMI fell to 49.0 from 50.2, representing the first move into contraction in eleven months.
It was steady as she goes on the other side of the world, with the eurozone’s PMI inching up to 51.6 from 51.2 and the UK similarly to 51.0 from 50.8.
Wall Street was relieved to see the US manufacturing PMI flip back into expansion at a better than expected 51.8, up from 49.5.
And suddenly, no one cared
The US added 215,000 jobs in March, although you’d have been hard-pressed to find that out on Saturday morning. The unemployment rate ticked back up to 5.0% from 4.9% but that was because the participation rate reached its highest level in two years.
As late as last year the US monthly non-farm payrolls report releases drew audience numbers exceeded only by the World Series and Super Bowl, but now the data have become relatively consistent across past months and Janet Yellen has emphatically set a dovish policy agenda, it really wasn’t going to matter what the jobs outcome was on Friday night.
If anything, a June Fed rate hike cannot be ruled out, but that does not represent a change in market view. The most important number within the data suite – wage growth – showed a better than expected 0.3% increase following a disappointing 0.1% drop in February. This is the inflation indicator Fed-watchers are targeting, but the flip-over hints at statistical noise.
On the strength of both better than expected jobs numbers and manufacturing numbers, Wall Street rallied on Friday. The Dow closed up 107 points or 0.6% while the S&P gained 0.6% to 2072 and the Nasdaq rose 0.9%.
The most interesting point to note about the rally is that it came in direct defiance of a fall in the oil price.
Oil fell 4% on Friday night and as a result, the Dow opened down over a hundred points. But traders who made the assumption the near perfect correlation still stands were in for a rude shock. Oil fell because Saudi Arabia suggested that Doha meeting or not, if Iran does not agree to a production freeze then Saudi Arabia will not agree to a production freeze.
If the near 50% rebound in the WTI price from its February low is all about hopes of co-operation between OPEC and non-OPEC producers in a concerted effort to reduce supply and support prices, then either oil traders are very stupid or the rally actually has nothing to do with such speculation. The rally is all about a market that became very oversold on panic and a subsequent short-covering scramble.
Throw in some early signs of falling US production, despite still rising inventories, lower US rig counts and a growing number of marginal producers falling by the wayside and we have sufficient reason for a rebound in oil. We can also cite a lack of major financial disaster in the US banking industry stemming from oil producer defaults and bankruptcies, as was at one point feared, as easing concerns.
The oil price had stabilised over March, but with nothing new going on, and short-covering now exhausted, it is of no surprise oil should fall back again. Perhaps Saudi Arabia was an excuse rather than a source of great angst but either way, oil is not going back to US$50/bbl until the trends noted above become more entrenched.
The fact Wall Street turned around and closed on a high note on Friday is testament to waning fear of another plunge in the WTI price to an even lower low.
Commodities
West Texas crude was down US$1.48 or 3.9% at US$36.68/bbl on Saturday morning and Brent was down US$1.65 or 4.1% at US$38.68/bbl.
Normally we would see positive results for both Chinese and US manufacturing provide a boost to base metal prices but the LME appears to be suffering from a bout of schizophrenia of late, suggesting price moves are more about metal-specific production and inventory levels than they are about the macro-economic picture.
On Friday night, with the US dollar index as good as steady at 94.58, tin rose 0.5%, aluminium 1%, lead 2% and zinc 3% while copper fell 1% and nickel fell 2%.
Iron ore rose US80c to US$54.00/t.
The solid US data helped gold down US$9.20 to US$1221.90/oz.
The Aussie rose 0.3% to US$0.7684.
With the Thursday-Friday shenanigans out of the way, the SPI Overnight closed up 23 points or 0.5%.
The Week Ahead
That Aussie will no doubt be a focus of attention when the RBA meets tomorrow. A rate cut is not expected but the market will be looking for hints the board might be prepared to act, or at least talk down the currency.
Ahead of the meeting we see local retail sales and building approvals numbers today along with ANZ job ads and the TD Securities inflation gauge. Tomorrow brings the trade numbers and the services PMI and on Thursday it’s the construction PMI.
Service sector PMIs will be posted across the globe on Tuesday, including Caixin’s China number.
In the US it’s factory orders tonight, trade on Tuesday along with the PMI, and chain store sales on Thursday. The minutes of the March Fed meeting will be published on Wednesday but they have already been trumped by Yellen’s speech last week. Yellen speaks again this week, on Thursday.
There’s a late trickle of ex-divs in the local market this week and Bank of Queensland ((BOQ)) will report earnings on Thursday. On Friday, both Dexus Group ((DXS)) and Investa Office ((IOF)) will hold EGMs to vote on the proposed portfolio management takeover.
Rudi will appear on Sky Business on Tuesday, via Skype-link, 11.15am and again twice on Thursday (Trading Day 12.30-2.30pm & Switzer TV between 7-8pm), and via Skype-link at around 11.10am on Friday.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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