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Wall St, commodities push ASX towards higher open – The Australian Financial Review

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The Dow and S&P 500 hit record highs over the weekend after weak economic data dulled prospects of more interest rate hikes this year.

by Timothy Moore

Record highs on Wall Street and gains for oil, gold, aluminium and copper over the weekend have set the stage for a positive open for local shares. ASX futures are up 14 points, or 0.3 per cent, to 5704. The Australian dollar leapt more than 1 per cent higher to its highest in more than two years after fresh US economic data challenged bets that the Federal Reserve would lift rates once more before the end of the year.

Also bolstering early optimism will be advances in oil on hope that global demand is proving stronger than previously thought even as the debate over supply rages. The potential for a delay in the next US rate hike has renewed interest in gold as a safe haven. As for base metals, they continue to underpinned by improving sentiment on China’s growth outlook. China will release a raft of data today including June retail sales, fixed asset investment and industrial production as well as second-quarter GDP.

The key news from the weekend however is that the latest US consumer price report showed inflation there is stuck in neutral. Consumer prices were unchanged in the US in June from May, and 1.6 per cent higher year-over-year — the smallest advance since October. The year-on-year CPI has has been declining steadily since February, when it was 2.7 per cent.

Core CPI, which excludes food and energy prices, increased 0.1 per cent in June, the same as in April and May.

While the Fed is keen to extend its rate-hike cycle, and return to more normal levels, the economy is resisting. And the concern of low inflation appears to be escalating, said Bank of Montreal deputy chief economist Michael Gregory.

Mr Gregory said there might be far greater, long-term, forces at work. “It could be that we’re underestimating the natural unemployment rate (4.6 per cent) or potential growth (a bit under 2 per cent), implying the output gap is actually larger, and both meaning there remains slack-driven disinflationary forces in the US economy,” he said in a weekend comment.

Pointing to technology-enabled disruption and globalisation, Mr Gregory said “one wonders whether 2 per cent inflation is actually too high of a target” at least for now. Chicago Fed boss Charles Evans also has flagged technology as restraining prices.

“When the Fed first formally announced its 2 per cent inflation target in January 2012, core PCE inflation was running in the 2.0-to-2.1 per cent y/y range,” Mr Gregory said. “It slipped below 2 per cent in May 2012 and has never hit it again since (it’s currently a 11⁄2-year low of 1.4 per cent).

“If the true measure of price stability, accounting for technology-enabled disruption and globalisation, is less than 2 per cent inflation, then a monetary policy aimed at 2 per cent would run the risk of generating excessive inflationary pressure. And, because of these two forces, this pressure would end up pumping asset prices more than consumer prices. Could this be one of the reasons why we’ve had record equity prices?”

In the wake of Fed chair Janet Yellen’s two days of testimony to Congress last week in which she said it’s “premature to conclude that underlying inflation is falling well short of 2 per cent”, and the Bank of Canada’s decision to lift rates for the first time in seven years, this week the focus will be on the Reserve Bank.

On Tuesday, the RBA will release the minutes of its most recent policy meeting. The cash rate is widely expected to be held at 1.5 per cent through the end of 2018.

The minutes “will be scanned for further nuances on the economy and for any hints of board’s sensitivity to currency”, said NAB economics director David de Garis.

In addition, investors will be paying close attention to comments by three RBA officials in the days ahead. On Wednesday, Alex Heath, the central bank’s head of economic analysis, will speak at a conference. On Friday, assistant governor Michelle Bullock speaks at the Melbourne Institute’s Australian economic and social outlook conference. Finally – and also on Friday – there’s deputy governor Guy Debelle who will be speaking on global influences on domestic monetary policy in Adelaide.

Today’s Agenda

No local data

On Tuesday, June new motor vehicle sales and the release of the RBA’s latest policy meeting minutes. On Wednesday, June WBC leading index and a speech by RBA’s Alex Heath. On Thursday, NAB business confidence second quarter and the June labour force report: employment change, unemployment rate and participation rate. On Friday, speeches from two RBA officials: Assistant governor Michele Bullock and deputy governor Guy Debelle. 

Overseas data: China June retail sales, June fixed asset investment, June industrial production, 2nd Qtr GDP; UK Rightmove house prices July; US NY Empire manufacturing July

Bank of America, Goldman Sachs and Morgan Stanley all are due to report results this week as well as Netflix, Qualcomm and Microsoft, among others

Market Highlights

SPI futures up 14 points or 0.3% to 5704

AUD +1.3% to 78.32 US cents

On Wall St, Dow +0.4%, S&P 500 +0.5%, Nasdaq +0.6%

In New York, BHP +2%, Rio +1.4%

In Europe, Stoxx 50 -0.1%, FTSE -0.5%, CAC flat, DAX -0.1%

Spot gold +0.9% to $US1228.70 an ounce

Brent crude +1.3% to $US49.06 a barrel

Iron ore -% to $US65.74 a tonne

Dalian iron ore +1.9% to 489 yuan

LME aluminium +0.2% to $US1927 a tonne

LME copper +0.9% to $US5926 a tonne

10-year bond yield: US 2.33%, Canada 1.89%, Germany 0.59%, Australia 2.71%

From Today’s Financial Review

ATO ruling puts companies in ‘red zone’

Queensland attacked for ‘gaming’ energy market

Health insurance ‘at critical juncture’

United States

The Dow and S&P 500 hit record highs on Friday after weak economic data dulled prospects of more interest rate hikes this year.

A decline in financial shares limited the day’s gains, even though JPMorgan Chase & Co and other big banks delivered quarterly results that beat Wall Street expectations.

Data showed consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and subdued expectations of strong economic growth in the second quarter.

“The data is pointing to this continuation of fairly accommodative policy, which has obviously served the market well over the last few years. So as far as the market is concerned, it’s sort of more of the same,” said Lee Ferridge, head of macro strategy for North America at State Street Global Markets in Boston.

Chances of a rate hike in December fell to 48 percent after the release of data, from 55 percent late Thursday.

The Dow Jones Industrial Average was up 84.65 points, or 0.4 per cent, to 21,637.74, the S&P 500 gained 11.44 points, or 0.5 per cent, to 2459.27, and the Nasdaq Composite added 38.03 points, or 0.6 per cent, to 6312.47.

The CBOE Volatility index closed at its lowest since December 1993.

For the week, the Dow was up 1.1 per cent, the S&P 500 was up 1.4 per cent, and the Nasdaq rose 2.6 per cent.

The Nasdaq’s percentage gain for the week was its biggest so far this year.

Europe

European stocks were little changed as banks dropped after their US counterparts reported weaker trading revenues, countering gains in commodity shares.

The Stoxx Europe 600 Index added less than 0.2 per cent at the close. The benchmark climbed in the past two days after comments by Yellen spurred expectations the central bank won’t rush to tighten policy. Stocks are up 1.8 per cent this week in the biggest five-day rally in more than two months.

Stoxx 600 basic-resource shares climbed to a three-month high after South Africa’s Chamber of Mines said the country’s government has suspended implementation of a controversial mining charter that would require a larger stake to be black-owned.

Analysts at Barclays said they remained positive on the European mining sector, which has gained just 4 per cent so far this year after rallying more than 60 per cent in 2016.

“Chinese rates are falling, demand indicators across the economy appear healthy, industry capex discipline is holding, M&A is generally off the agenda, and resulting strong cashflows are being utilised for balance sheet reconstruction and distributions to shareholders,” Barclays analysts said in a note.

European earnings get underway in earnest later this month. Overall, analysts are calling for about 9 per cent year-on-year earnings growth for top European firms, compared to about 8 per cent for the US, according to Thomson Reuters I/B/E/S.

Asia

Hong Kong stocks rose for the fifth straight day on Friday, recording their best weekly gain in a year, as the previous week’s correction attracted bargain hunting from mainland China investors.

The Hang Seng index rose 0.2 per cent, to 26,389.23, while the China Enterprises Index gained 0.5 per cent, to 10,728.07 points.

For the week, Hang Seng jumped 4.1 per cent, the best showing since mid-July, 2016. The HSCE rose 4.6 per cent.

China stocks ended mixed for the week, with the blue-chip index closing at an 19-month high, while start-ups had their worst week since last July, as investors sought firms with solid fundamentals amid an extended correction in small-caps.

The blue-chip CSI300 index rose 0.4 per cent, to 3703.09 points, while the Shanghai Composite Index added 0.1 per cent to 3222.42 points. For the week, CSI300 gained 1.3 per cent, while SSEC inched up 0.1 per cent.

The tech-heavy start-up board index ChiNext slumped 4.9 per cent to post its worst week since July 2016, as lacklustre first-half earnings forecasts deepened worries over their growth prospects. Many small-caps tumbled, losing as much as 30 per cent or more in the past week.

“We do not see any reason why investors will plough money in growth stocks for now, given expectations of dim results at these firms amid tight liquidity conditions,” said Yan Kaiwen, an analyst with China Fortune Securities.

Japan’s Nikkei share average edged up on Friday as disappointing earnings from Fast Retailing, the world’s third largest apparel retailer, offset gains made after Wall Street pushed higher.

The Nikkei index finished up 0.1 per cent at 20,118.86 and a robust 1 per cent higher for the week, though investors grew cautious ahead of a long holiday weekend.

Weighing on the Nikkei, market giant Fast Retailing, the owner of clothing chain Uniqlo, saw its shares skid 4.6 per cent after it reported a quarterly operating profit of ¥49.9 billion for the three months through May late Thursday. That fell short of a ¥52.85 billion Thomson Reuters Starmine SmartEstimate based on estimates of six analysts.

The broader Topix added 0.4 per cent to 1625.48, for a 1.1 per cent rise for the week.

Currencies

The Aussie rose 1.3 per cent to US78.32¢ at 4.57pm on Friday in New York (Saturday AEST), reaching as high as US78.34¢ a little earlier in the session. It’s now 8.6 per cent higher against the greenback this year.

The Canadian dollar reached a 14-month high against the greenback over the weekend after the Bank of Canada raised rates by a quarter-point this week and left investors anticipating further hikes. With the latest gains, the currency has breached a series of key areas, known as Fibonacci retracement levels, which for chart-watchers points to a rally below $C1.25, from about $C1.2650 now. It hasn’t been that strong since May 2016.

If the technical analysts are right, it means the consensus on Wall Street is due for an adjustment. The median forecast in a Bloomberg survey is for the loonie to weaken to $C1.32 by year-end.

“The CAD outperformance trend looks like it’s firmly entrenched,” said Niall O’Connor, a technical analyst at JPMorgan Chase. “It’s a reason to buy CAD against the dollar on corrective retracements.”

The next major resistance level is $C1.2461, some say. Should it break, the loonie could embark on a rally similar to the currency’s 16 per cent advance from January to May of last year, according to O’Connor.

“Short-term, it’s probably a bit overdone, but CAD outperformance seems likely to extend,” he said.

Commodities

Oil extends advance on optimism demand: Oil edged higher for a fifth day amid optimism that the market isn’t in as bad shape as thought.

Sprott, the precious metals-focused money manager, sees the potential for gold rising through $US1400 an ounce by the end of 2017 as weaker-than-expected economic growth drives stock prices lower.

China’s steel prices drop: These are great times for China’s gargantuan steel industry, but they could soon be over.

Three-month London Metal Exchange aluminium ended up 0.2 per cent at $US1927 a tonne, having gained 1.7 per cent in the previous session.

“While production may be reduced in China, it is being expanded elsewhere. In the US for example, a smelter with a capacity of a good 160,000 tonnes per annum looks set to go back into operation next year,” Commerzbank said in a note.

Zinc fell 0.6 per cent to $US2786 a tonne as warehouse inventories monitored by the Shanghai Futures Exchange jumped 16.2 per cent from last Friday to 77,786 tonnes. Also, LME data showed a 28,500 tonne, or 41 per cent, daily increase in “on-warrant” or available inventory.

Nickel ended 4 per cent higher at $US9580 a tonne, its strongest daily percentage gain since November. Philippine President Rodrigo Duterte promised on Wednesday to resolve an impasse caused by a ministerial order to close more than 20 mines in the world’s top source of nickel ore, but told miners to end practices that damaged the environment.

LME copper ended up 0.9 per cent at $US5926 a tonne, helped by encouraging economic reports from top consumer China and as weak US consumer prices and retail sales data dimmed chances of another rate rise this year.

Chile’s Antofagasta has reached a new wage agreement with supervisors at its Centinela copper mine, defusing the risk of a strike amid a volatile labour environment in the South American country.

Lead closed up 1 per cent at $US2316 while tin closed flat at $US19,810.

Australian Sharemarket

Shares lost some of their early momentum on Friday afternoon, but solid buying in the big four banks kept the market in the black.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each closed up 0.5 per cent on Friday, and up 1.1 per cent over the week to close at 5765.1 points and 5808.7 points, respectively.  

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with Reuters, Bloomberg, AAP

Comments? Questions? Let us know what you think of Before the Bell. You can reach Timothy Moore at  timothy.moore@fairfaxmedia.com.au