ASX seen flat ahead after weak night for commodities

The Australian market looks set to open flat despite a strong lead from international markets overnight. SPI futures were down 6 points or 0.1 per cent, at 5708.

The Aussie slipped overnight as the US dollar took respite, trading at US79.68¢ this morning, down from US80.02¢ on Tuesday.

Can earnings shake life back into the ASX 200?

What to expect this week as the corporate reporting calendar starts. This video was produced in commercial partnership between Fairfax Media and IG Markets.

On Wall Street, the Dow Jones Industrial Average racked up a fifth straight record high, powered by Goldman Sachs, JPMorgan Chase and other banks.

The Dow rose 0.33 per cent to 21,963.92, edging closer to the 22,000 mark, while the S&P 500 gained 0.24 per cent to 2,476.35 and the Nasdaq Composite added 0.23 per cent to 6,362.94.

Britain’s leading shares also made strong gains, pushing the FTSE up 0.7 per cent on the back of support from Rolls Royce and oil giant BP, as well as a raft of robust results.

Locally, in economic news, the Australian Bureau of Statistics releases June’s building approvals data and the selected living cost indexes for the June quarter today.

Rio Tinto is expected to release its half-year results, with all eyes on its dividend announcement. ResMed will report fourth-quarter results.

​The long and short of it

It’s been a weaker session for commodities, notably in energy, with US crude moving back below $US50, amid focus on increased OPEC production levels in July and after what has clearly been a strong rally in price.

1 Fixed income:There has been a heavy tone in US fixed income across the curve, with the US 10-year Treasury yield falling four basis points to 2.25 per cent and traders eyeing the 21 July low of 2.22 per cent. A break here takes the benchmark bond into the June lows of 2.10 per cent and we start talking about a 1-handle again!

Interestingly enough, despite oil falling we haven’t seen any real reaction in inflation expectations and therefore ‘real’ yields have dropped and added further to the recent decline in inflation-adjusted yields. This of course is creating ever more accommodative financial conditions in the US. It is also a headwind for the US dollar, although it was closing the session on a modestly higher footing.

2. North Korea: Perhaps fixed income traders have cast an eye on reports doing the rounds and starting in an article in France24 quoting, “A Republican senator said Tuesday that US President Donald Trump has told him he would go to war to destroy North Korea rather than allow it to develop a long-range nuclear-armed missile.” We then heard from US Republican Senator (Carolina) Lindsey Graham, who detailed on NBC TV, “There is a military option: To destroy North Korea’s program and North Korea itself… They’ve kicked the can down the road for 20 years. There will be a war with North Korea over the missile program if they continue to try to hit America with an ICBM.” Not great reading and the various polls I have seen on Twitter overnight (with decent participation) show US public opinion is favouring pre-emptive action.

3. US economic data needs to convince those betting against the US dollar this week to close and take profits and the ball has started, with the June ISM manufacturing growing at a slightly slower pace from May, with the index printing an in-line with expectations print of 56.3.  Let’s put perceptive on this though, the May result as exceptionally strong and historically a read of 56.3 in manufacturing has been associated with a GDP read of 4.1 per cent, not 2.6 per cent. There has been good expansion in the new orders and new exports orders sub-component of the survey, highlighting external demand is still strong. What is also interesting is we saw core PCE (the Federal Reserve’s preferred inflation read) tick up 10 basis points to 1.5 per cent (1.4 per cent expected) and there was little fanfare here and presumable this was offset by personal income data which was unchanged in June, with the market expecting  a rise of 0.4 per cent.

4. US equities have closed modestly firmer, with the S&P 500 gaining 0.2 per cent and the Dow honing in on 22,000 points. Volumes in both markets have been modestly above the 30-day average, although somewhat lighter volumes have been seen in the Nasdaq.

5. Apple This has changed after-hours with Apple clearly pleasing the market with some cracking June quarter numbers, while its September quarter evenue outlook of $US49 billion to $US52 billion compared favourably to the street’s consensus forecast, which stood at $US49.12 billion. It’s incredible to think they have $US261.5 billion of cash on the balance sheet, which is just a staggering number. Either way, the stock is flying in the afterhours and trading at an all-time high and Nasdaq futures are pushing up nicely given Apple’s weighting here.

6. Australian shares: Unfortunately for those who bought into the Asian markets, including the ASX 200, we haven’t seen much of a move in S&P 500 futures and this is where we find the stronger correlation than Nasdaq futures. SPI futures were open for 30 minutes while the Apples’ results out and perhaps the best guide for the ASX 200 open is to look at the change in SPI futures from 4:10pm on Tuesday ( the official close of the ASX 200) to 7am AEST (when SPI futures closed). Here, we see this completely unchanged and this includes much of the good-will towards Apple, thus we see a flat open in Australia.

Rio Tinto will get good attention from clients, as they report first-half earnings in the afternoon, with the market expecting underlying net profit of $4.125 billion, on sales of $20.15 billion. Given iron ore is expected to account form close to 80 per cent of its earnings, they could find sellers on open too, but investors are not necessarily going to close out before earnings and good numbers could see the stocks gravitate towards $70 by the end of the week.

Keep an eye on June Aussie building approvals this morning, and while they may not be a huge mover of the Aussie the trend is quite concerning and the market expects the annualised pace of a fall of 11 per cent after a 19 per cent drop in May.

7. Oil: The API (American Petroleum Institute) crude inventory report showed a 1.8million increase in US crude stocks and a huge 4.8 million barrel draw in gasoline. We haven’t seen much of a move in US crude since they reported the numbers at 6:42am AEST, as there isn’t a really clear read through to tonight’s official Department of Energy inventory report, in which analyst expect a 3.4 million draw in crude stocks. We have also seen a 1.7 per cent drop in iron ore futures, so after a 19.4 per cent rally in Fortescue Metals Group in the prior six sessions we may see some selling on open here.

8. Market highlights

  • SPI futures down 6 points or 0.1% to 5708
  • AUD -0.5% to 79.67 US cents (Overnight range: 0.7961 – 0.8043)
  • On Wall St, Dow +0.3%, S&P 500 +0.2%. Nasdaq +0.2%
  • In New York, BHP -0.6%, Rio -0.6%
  • In Europe, Stoxx 50 +0.8%, FTSE +0.7%, CAC +0.7%, DAX +1.1%
  • Spot gold +0.3% to $US1272.96 an ounce
  • Brent crude -2.2% to $US51.55 a barrel
  • US oil -2.5% to $US48.94 a barrel
  • Iron ore -0.2% to $US73.56 a tonne
  • Dalian iron ore -1.3% to 542 yuan
  • LME aluminium -0.6% to $US1907 a tonne
  • LME copper -0.4% to $US6345 a tonne
  • 10-year bond yield: US 2.25%, Germany 0.49%, Australia 2.71%

with aap


  This column was produced in commercial partnership
   between Fairfax Media and IG

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