After a relatively quiet session on Wall Street, investors are expected to focus on this week’s consumer price data set for release on Wednesday. ASX futures were down 24 points. Oil and iron ore were lower. Wall Street ended flat.
Inflation is the top priority of global central bankers and the recent shift to lifting rates in the US and Canada and the prospect of an easing off the ultra easy monetary accelerator at the European Central Bank and perhaps at the Reserve Bank of Australia.
Slower than expected inflation in the US has knocked the wind out of bets of a third rise by the Federal Reserve later this year, and the prospect of a second lift later this year in Canada has meant the greenback has retreated and the loonie has surged.
Also surging of course is the Australian dollar. This week’s second quarter price check may help fuel the potential for a hike by the RBA or kick it further into the future.
“We will know more about the near-term outlook for interest rates in Australia after Wednesday’s release of the CPI inflation figures for the second quarter and RBA governor Lowe’s speech on economic developments the same day,” wrote Capital Economics Katie Hickie in a weekend note.
“We estimate that headline inflation stayed at 2.2 per cent, but that underlying inflation edged down to 1.7 per cent,” Ms Hickie said. “If so, then the governor’s speech is unlikely to be very hawkish.”
As for the $A, it edged 0.5 per cent lower to US79.16¢ over the weekend, hovering near a 10 per cent return so far this year. Capital Economics sees a “glide back down towards US70¢” sooner than later amid a reassessment of RBA policy and a retreat in the price of iron ore.
On Friday, iron ore fell 1.3 per cent to $US67.14 a tonne amid generally positive sentiment for the steelmaking raw material. Chinese steel mills were willing to buy seaborne cargoes at $US60-65 per tonne cfr, but prices of above $US70 per tonne cfr made them hesitate, a trader in south China told Metal Bulletin.
Commodities overall were mixed over the weekend with gold and copper rising, and oil and aluminium falling. The New York traded shares of both BHP Billiton and Rio Tinto ended down, 1.1 per cent and 0.9 per cent respectively.
That said, brokers are optimistic. RBC Capital Markets said it continues to rate Rio Tinto as its top mining pick, adding it sees “a potential special dividend helping to drive a near-term rerating”. As for BHP, it has held onto a buy recommendation from UBS on the expectation that it will lift shareholder returns and generate strong free cash flow in fiscal 2018.
Across the Pacific, the week ahead includes a policy meeting at the Federal Reserve and a raft of high-profile results: Alphabet, Facebook, Amazon, Caterpillar, Ford, Boeing, McDonald’s and Coca-Cola. Fed policymakers aren’t expected to do anything, at least not lift rates. There’s an outsize chance that the Fed could signal when it plans to start to pare its balance sheet, though consensus still seems to point to September for that announcement.
No local data on Monday. The key data point will be the second quarter CPI release on Wednesday, RBA governor Phil Lowe is scheduled to speak that day too. Australia second quarter trade prices will be released on Thursday with second quarter PPI on Friday.
Overseas data: Japan Nikkei manufacturing PMI July; Euro zone Markit manufacturing PMI July, Markit services PMI July: US Markit manufacturing PMI July, Markit services PMI July, Existing home sales June
SPI futures down 24 points or 0.4% to 5640
AUD -0.5% to 79.16 US cents
On Wall St, Dow -0.2%, S&P 500 flat, Nasdaq flat
In New York, BHP -1.1%, Rio -0.9%
In Europe, Stoxx 50 -1.4%, FTSE -0.5%, CAC -1.6%, DAX -1.7%
Spot gold +0.8% to $US1254.98 an ounce
Brent crude -2.8% to $US47.90 a barrel
Iron ore -1.3% to $US67.14 a tonne
Dalian iron ore -2.3% to 505 yuan
LME aluminium -0.1% to $US1915
LME copper +0.8% to $US6004 a tonne
10-year bond yield: US 2.24%, Germany 0.50%, Australia 2.69%
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Capital Economics on this week’s Fed meeting and economic data: “The Fed is unlikely to make any policy changes … but the statement will probably concede that the recent decline in inflation has been more broad-based than previously argued. Second quarter GDP figures are due out on Friday. We suspect that growth rebounded from 1.4 per cent to 2.8 per cent (q/q annualised) last quarter, driven by stronger consumption growth. Meanwhile, investment growth probably slowed in the second quarter, but durable goods data for June, due out on Thursday, are likely to show a healthy rebound in core orders.”
The stock market continues to reach new highs, thanks in large part to strong earnings results from U.S. companies. And next week, key reports from tech titans such as Google parent Alphabet, social media powerhouse Facebook and online retail leader Amazon could determine if the rally can continue on Wall Street.
So far, the second-quarter earnings season is off to a good start. The companies in the S&P 500 stock index are collectively on track to post earnings growth of 8.6 per cent, above the 8 per cent analysts expected July 1. And while it’s a slower pace than the 15.3 per cent growth in the first three months of the year, there’s a strong chance enough companies will deliver better-than-expected results to propel earnings growth above 10 per cent for the second consecutive quarter.
“The earnings backdrop is improving,” says Ryan Detrick, senior market strategist at LPL Financial. “And two straight quarters of double-digit profit growth is a nice backdrop for stocks.”
Nearly 200 companies in the S&P 500 are slated to report earnings next week, providing a fresh look at the financial health of Corporate America and the domestic and global economy. Other companies reporting results include big machinery maker Caterpillar, home builder Pulte Group, defense contractor Boeing, automaker Ford and consumer-focused stocks, including fast-food giant McDonald’s and soft drink maker Coca-Cola.
Even as the S&P 500 Index clawed its way to a fresh record and squeezed out a third consecutive weekly gain, signs of fading enthusiasm in US stocks have become increasingly difficult to ignore.
The latest can be seen in the SPDR S&P 500 Trust, the biggest exchange-traded fund tracking the US equity benchmark. As of Thursday, investors had pulled $US3.8 billion out of it in July. That puts the fund on pace for a fourth consecutive monthly outflow, which would be the longest streak since the start of the bull rally in 2009.
European stocks declined to the lowest level in 10 days as concern about potential antitrust collusion sent car makers toward the worst decline in more than a year.
The Stoxx Europe 600 Index slid 1 per cent at the close, as a strong euro also weighed on exporters. Car makers fell the most in six months in the biggest retreat among industry sectors. Volkswagen and Daimler informed regulators about decades of talks among German auto makers on vehicle technology that may have breached competition rules, Spiegel magazine reported.
More than half the companies in the Euro Stoxx 50 Index report results next week, including Daimler, Deutsche Bank and Banco Santander.
The latest European reporting season is off to a mixed start, according to JPMorgan Chase & Co. Earnings in the industrial sector have been particularly disappointing, equity strategists including Emmanuel Cau and Mislav Matejka wrote in a note.
The Stoxx 600 fell 1.7 per cent in the past five days, after posting two consecutive weekly gains.
“While earnings seasons over the past year have typically started strong before turning worse, the current season is off to a decidedly weak start”, Deutsche Bank’s equity strategist Wolf von Rotberg, said. “FX strength is set to weigh on euro earners’ results, which will likely contribute to subdued beat ratios for the remainder of the season,” he said.
France’s blue-chip CAC 40 fell to its lowest since April 21, just before Emmanuel Macron’s first-round victory sent French and European equities surging.
Germany’s DAX fell 1.7 per cent, its worst daily performance in a month and its lowest since April as well.
Deutsche Bank strategists have an underweight on the French and German markets because of their heavy cyclicals weighting, which they think could hurt them as momentum in PMI indicators fades. They are favourable on the more defensive Swiss and UK indexes.
Hong Kong stocks snapped a nine-day winning streak on Friday as investors took a breather after the benchmark index scaled a fresh two-year peak in the previous session.
The Hang Seng index shed 0.1 per cent, or 34.12 points to 26,706.09, ending its longest streak of gains since April 2015. However, it rose 1.3 per cent last week, its second week in the black. Gains in telcos and industrial stocks were offset by losses in energy and financial shares.
China’s stocks fell on Friday but ended the week higher, with demand for blue chips gaining momentum amid a slump in small-cap stocks, as investors sought firms with solid growth prospects and lower valuations.
The blue-chip CSI300 index fell 0.5 per cent, to 3728.60 points, while the Shanghai Composite Index lost 0.2 per cent to 3237.98 points. For the week, the two indexes gained 0.7 per cent and 0.5 per cent, respectively, erasing losses earlier this week when investors dumped start-ups stocks.
“Blue chips found favour with investors as they attach great importance to performance and valuations at listed firms due to curbed risk appetite amid tighter financial regulations and liquidity conditions,” said Xu Wei, analyst with Hongxin Securities.
Japan’s Nikkei share average edged down on Friday as investors took profits on steelmakers, offsetting gains in Yaskawa Electric and other machinery makers.
The Nikkei ended down 0.2 per cent at 20,099.75 points. For the week, the benchmark index dipped 0.1 per cent.
A firmer yen also soured the mood as the US dollar continued to lose tractiion, though analysts said small gains would not undermine support for the Nikkei around the psychologically important mark of 20,000.
The Nikkei has managed to stay above 20,000 for most of the time since July 10, in which time the dollar dropped to below 112 yen from mid-114 yen.
In the broader market, the Topix dropped 0.2 per cent to 1629.99.
“On a daily basis, the market gets emotional about currency levels, but we don’t have to worry too much about the dollar-yen level so often because it has been proven that the Japanese stock market downplayed it in the past few weeks,” said Chisato Haganuma, chief equity strategist at Mitsubishi UFJ Morgan Stanley Securities.
RBA won’t be second guessed on rates: The prospect of rate hikes at some point in the future might actually be taken as good news.
The RBA is only half the story: The RBA’s public statement on Friday putting the brakes on rate hike talk has worked. For now.
The euro gathered momentum following Thursday’s comments by European Central Bank president Mario Draghi that policy makers in the fall will discuss unwinding quantitative easing. Rising hawkishness from the ECB has helped the euro rally from lows last seen near the start of the millennium, with investors expecting tapering to start in the new year and pricing in a 10 basis point rate hike by September 2018.
“Draghi tried to talk the euro down, even going so far as to suggest that ECB’s quantitative easing could be increased and prolonged,” said Yann Quelenn, a market strategist at Swissquote Bank. “But the currency markets were not buying Draghi’s line, and neither are we. Available bonds are too scarce, and turn to a taper is too clear to disguise.”
The euro climbed 0.3 per cent to $US1.167. The common currency has gained 1.7 per cent on the week, its second straight five-day advance.
The Bloomberg Dollar Index slid 0.3 per cent to its lowest level since May 2016. The yen gained 0.7 per cent to 111.11 per dollar.
Seaborne iron ore prices fell further on Friday, though market participants told Metal Bulletin that they are seeing limited downside amid stable demand. Mills were willing to buy seaborne cargoes at $US60-65 per tonne cfr, but prices of above $US70 per tonne cfr made them hesitate, a trader in south China said.
August-delivery Capesize cargoes of Pilbara Blend fines, of which only a small number are available, are said to be tradable at premiums of $US1.30-1.50 per tonne against indices, a trading source in north China said.
China’s steel rebar futures fell for a second day on Friday on mounting concern that rising output from mills seeking to cash in on higher prices has glutted the market. The most-active rebar futures contract on the Shanghai Futures Exchange fell as much as 3.2 per cent to 3467 yuan a tonne on Friday. It closed at 3525 yuan, down 1.6 per cent.
Open interest in the most-active rebar futures contract fell to 3.78 million lots, equivalent to 37.8 million tonnes, on Friday, down from 4.83 million lots the week before.
Copper hit a 4-1/2 month peak, fuelled by strong growth in top copper consumer China, a weak US dollar and worries about supply disruptions.
Three-month LME copper closed up 0.8 per cent at $US6004 a tonne, having hit its highest since March 1 at $US6051. Copper inventories in Shanghai Futures Exchange-monitored warehouses fell 4.9 per cent from last Friday to their lowest since January.
Aluminium closed down 0.1 per cent at $US1915.
Indonesia exported 403,201 tonnes of nickel ore in the first six months of 2017, when a complete ban on exports was lifted.
Philippine President Rodrigo Duterte said the government will draft a new law for the country’s mining industry. Worries over supply from the Philippines have faded since the country’s firebrand environment secretary was replaced in May.
LME nickel ended up 0.3 per cent at $US9520 a tonne.
Zinc closed up 1 per cent at $US2753, lead closed up 1.2 per cent at $US2239 while tin ended up 0.8 per cent at $US20,225.
Bank stocks lost steam on Friday as investors booked profits after two days of strong gains, weighing on the overall market.
The S&P/ASX 200 index ended the session down 0.7 per cent at 5722.8, for a weekly loss of 0.7 per cent.
The sharemarket was mainly driven by domestic factors this week such as the new capital requirements for banks as well as numerous quarterly updates and a few late confessions before the start of the August earnings season.
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with Reuters, Bloomberg, AAP
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