ASX set to rise on Wall St’s endless pursuit of records and oil’s rally

by
Timothy Moore

A fresh record close for the Dow, rising overall global earnings optimism and further gains in oil have set the ASX up for a higher open.

ASX futures advanced 24 points or 0.4 per cent to 5658. The Australian dollar edged 0.2 per cent higher, remaining within striking distance of the US80¢ mark despite rising bearish calls — Goldman has even called for investors to place bets that the $A will drop.

The local reporting season begins in earnest this week on high expectations — have profits reached a peak as many brokers expect? UBS sees headline earnings growth of about 18 per cent for fiscal 2017; Deutsche Bank targets a little below 15 per cent. Both reflect a rebound after two tough fiscal years for the resources sector.

Excluding resources, UBS sees more modest profit growth of 5.7 per cent, and that’s forecast to slow to as little as 2 per cent in fiscal 2018 as resources become a drag. 

“The market has had a decent bounce off its early July lows as banks and resources return to favour though constrained earnings growth (and expensive valuations where there is growth) still suggests to us that the Australian market will be something of a laggard,” UBS strategists David Cassidy and Dean Dusanic said in a July 26 note.

Rio Tinto reports on Wednesday and Tabcorp on Friday, among others. The two most hectic weeks will be August 14-18 and August 21-25. 

The start of the week however will see a continuing focus on American corporates for sentiment. On the schedule this week: Apple, Archer-Daniels-Midland, Pfizer, Under Armour, Carlyle Group, FitBit, Molson Coors, Modelez International, Tesla, Time Warner, Cheniere Energy, GoPro, Kellogg, Kraft Heinz, Viacom and Berkshire Hathaway, among others.

More than halfway through reporting season, S&P 500 companies are on track to increase earnings by 10.8 per cent, according to Thomson Reuters I/B/E/S.

Investors have been counting on earnings to support the relatively high valuations for equities. The S&P 500 is trading at about 18 times earnings estimates for the next 12 months above its long-term average of 15 times.

“I would call the market at the high end of fairly valued,” Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, told Reuters.

Even amid the blast of earnings reports, economic data will continue to push for time in the mix this week, as last. Over the weekend, the advance estimate for US second-quarter growth helped renew generally bullish views on the world’s largest economy. 

Locally the focus this week, for a second consecutive week, is on the Reserve Bank. Tuesday brings a policy meeting, a no-change rate decision is expected. Words will be parsed as usual for any bias tweak. 

“In the space of a few months, markets have moved from pricing in a small chance of a rate cut to a chance of a hike over the next 12 months,” said Janu Chan, senior economist at St George Bank. “It partly reflects an improvement in domestic economic conditions. 

“Given that the rhetoric by global central banks has moved towards tightening, markets will likely continue to price in some chance of an RBA hike despite some downside risks to the domestic outlook remaining,” Ms Chan wrote.

Investors also will be keying on the Statement of Monetary Policy and renewed economic forecasts on Friday.

Short term the currency is likely to get some momentum, up and down, from commodities markets. Over the weekend, oil surged for its best week this year. US oil rose near 9 per cent last week.

In contrast, iron ore and base metals were mostly lower. The spot price of iron ore slid 2.1 per cent on Friday. The retreat was in part attributed to profit-taking and pre-weekend positioning after metals’ recent run higher.

The week ahead brings some fresh data on China’s manufacturing sector. Solid Chinese data has bolstered expectations that demand for raw materials will at least be steady for the next several months.​

Today’s Agenda

Local data: HIA new home sales June, MI inflation July, Private sector credit June; NZ building permits June, ANZ business confidence July

On Tuesday, the RBA’s board meets and the AiG performance of manufacturing July will be released as well as CoreLogic house prices July. On Wednesday, its June’s building approvals. On Thursday, AiG services July and Trade balance June. And on Friday, June’s retail sales and the RBA’s Statement on Monetary Policy. 

Capital Economics on RBA policy: “The Reserve Bank of Australia is unlikely to change interest rates at its meeting on Tuesday or to alter its optimistic forecasts for the economy in Friday’s Statement on Monetary Policy. But we wouldn’t be surprised if, in response to the recent surge in the Australian dollar to US$0.80, the RBA ratchets up its rhetoric on the currency.”

Overseas data: China July manufacturing PMI, nonmanufacturing PMI July; Japan industrial production June, Housing starts June; Euro zone unemployment rate June; US Chicago PMI July, Pending home sales July, Dallas Fed manufacturing July

The key US report this week will be July’s nonfarm payrolls data on Friday evening AEST.

Market Highlights

SPI futures up 24 points or 0.4% to 5658

AUD +0.2% to 79.88 US cents (Session range: 0.7937 – 0.8007)

On Wall St, Dow +0.2%, S&P 500 -0.1%, Nasdaq -0.1%

In New York, BHP +0.8%, Rio +1.6%

In Europe, Stoxx 50 -0.7%, FTSE -1%, CAC -1.1%, DAX -0.4%

Spot gold +0.8% to $US1269.74 an ounce

Brent crude +2.2% to $US52.61 a barrel

US oil +1.5% to $US49.76 a barrel

Iron ore -2.1% to $US68.73 a tonne

Dalian iron ore +3% to 545 yuan

LME aluminium -1.6% to $US1907 a tonne

LME copper -0.1% to $US6325 a tonne

10-year bond yield: US 2.29%, Germany 0.54%, Australia 2.68%

From Today’s Financial Review

Small business fear over Labor’s tax hit

CommBank not to blame, says Hartnell

The fundies shunning outsized gains

United States

Capital Economics on this week’s nonfarm payrolls report: “July’s employment report is due on Friday. We anticipate another healthy gain of around 200,000 in non-farm payrolls, with the unemployment rate falling to 4.3 per cent.”

The S&P 500 slipped over the weekend on negative reactions to earnings reports from high-profile names such as Amazon, Exxon and Starbucks and a drop in shares of tobacco companies.

The Dow industrials, however, set a record high, buoyed by Chevron after the energy company’s results.

Despite Friday’s share reactions, results overall have come in better than expected for the second quarter and stocks are trading near record highs.

More than halfway through reporting season, S&P 500 companies are on track to increase earnings by 10.8 per cent, according to Thomson Reuters I/B/E/S.

Investors were also digesting data showing the US economy accelerated in the second quarter as consumers ramped up spending and businesses invested more on equipment.

“We have had a good earnings season. We have had pretty good economic results,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

“But I think that there’s a tendency after you have had too long a string of wins, to start looking for the problems in even the good data. And I get the sense that that is kind of what is going on in the market at this point.”

Europe

Declines in auto-related shares and commodity producers dragged European stocks lower as a busy earnings week drew to a close.

The Stoxx Europe 600 Index fell 1 per cent at the close. The gauge fell 0.5 per cent in the past five days, capping its second straight weekly decline. Renault fell 5.1 per cent Friday, pulling down car makers, after its profit missed estimates and the company said price pressures are rising in some markets. Miners snapped a three-day advance.

Among shares moving on corporate results:

L’Oreal fell 2.8 per cent after reporting second-quarter sales that missed estimates.

Credit Suisse Group gained 3.1 per cent after the lender posted second-quarter profit that beat estimates.

Adidas jumped 4.1 per cent after the company raised its revenue and profit forecasts, helped by strong sportswear sales and the disposal of its CCM hockey business.

Fund managers poured $US3.3 billion in European equity funds in the week ended July 26, the largest inflow in 11 weeks, according to a Bank of America Merrill Lynch note citing EPFR Global data.

Imperial Brands and British American Tobacco  fell at least 3.8 per cent on the news that the US Food and Drug Administration plans to explore regulating the level of nicotine in conventional cigarettes.

Asia

Hong Kong shares ended lower on Friday as investors took profit after strong gains earlier in the week. The Hang Seng index fell 0.6 per cent, or 151.78 points, to 26,979.39 points, with losses centred in energy, technology and financial stocks. The benchmark posted gains for a third straight week, up a little over 1 per cent.

Technology sector giant Tencent Holdings, which has gained more than 60 per cent this year and was up 2.5 per cent in the previous session, took a breather. The stock finished the session 1.2 per cent lower.

China stocks ended higher on Friday, with the Shanghai benchmark index recording the sixth consecutive week of gains, bolstered by recent solid economic data and the country’s pledge to persist with supply-side reforms.

The blue-chip CSI300 index rose 0.3 per cent, to 3721.89 points, while the Shanghai Composite Index added 0.1 per cent to 3253.24 points. For the week, CSI300 was down 0.2 per cent, while SSEC gained 0.5 per cent.

Japan’s Nikkei share average fell on Friday after tech shares dropped sharply following weakness on the Nasdaq market, while investors stayed cautious as the dollar slipped against the yen.

Semiconductor equipment makers tumbled, with Tokyo Electron diving 7.2 per cent and Advantest declining 5.0 per cent, together contributing a hefty 53 negative points to the Nikkei benchmark.

The Nikkei dropped 0.6 per cent to 19,959.84. For the week, it declined 0.7 per cent, falling for a second week.

The broader Topix shed 0.4 per cent to 1621.22, with turnover hitting a six-week high of ¥2.77 trillion.

Currencies

Trimming the Federal Reserve’s $US4.5 trillion balance sheet  is the right thing to do, Minneapolis Fed President Neel Kashkari said over the weekend. “I think the big, big balance sheet isn’t doing a lot to boost the economy right now, but I do think there are costs in terms of public confidence in the Federal Reserve,” Kashkari told a business group in Woodbury, Minnesota. Kashkari has dissented on both of the US central bank’s rate hikes this year.

“I have been in favour of us slowly bringing that balance sheet back down to a more normal size even though I’m still concerned about inflation,” Kashkari said. “We can focus on inflation with our short-term interest rate.”

Gross domestic product rose 0.6 per cent from the previous month, Statistics Canada reported over the weekend. Growth in the oil, gas and mining industry accounted for about two-thirds of the increase. On an annual basis, the 4.6 per cent expansion was the fastest in almost 17 years.

The monthly expansion for May was the seventh in a row, the longest such streak since 2010, and 14 of 20 industries expanded on the month. The economy grew 4.6 percent from a year earlier, the fastest pace since October 2000 during a technology boom. The Bank of Canada cited a broader and more durable recovery when it raised its benchmark rate a quarter point to 0.75 percent on July 12. Trading in overnight index swaps shows another quarter-point increase is fully priced in at the October 25 meeting.

Canada’s dollar extended gains after the report, climbing 1 per cent to $C1.2433 per US dollar over the weekend.

Capital Economics on the $C: “The two-month rally in the Canadian dollar, from US73¢ to US80¢, doesn’t pose any direct threat to the economy, particularly given the significant decline in the real trade-weighted exchange rate over the past few years. While the higher nominal exchange rate might lead to some further temporary softness in inflation, the Bank of Canada would continue to look through that. Accordingly, we think the BoC will remain hawkish on the interest rate outlook in the very near term.”

Commodities

Nickel prices hit a 3-1/2 month peak over the weekend as investors shifted from zinc after a build-up in zinc inventories indicated that shortages had eased.

“Traders are seeing a weakening scenario for zinc because the market is not as tight as people expected, while it’s looking a bit more positive for nickel with Shanghai premiums rising,” said Gianclaudio Torlizzi, partner at consultancy T-Commodity in Milan.

“After the very good run that zinc had in June, there’s probably some profit taking and nickel is benefiting from a combination of short covering and some new long exposure.”

Benchmark London Metal Exchange nickel closed 0.7 per cent higher at $US10,200 a tonne after touching $US10,290, the highest since April 6. Nickel gained 7.1 per cent on the week.

Three-month LME zinc finished down 0.9 per cent at $US2776 a tonne after climbing 18 per cent from June 7 until Wednesday, when it touched $US2857. It gained around 1 per cent this week.

Three-month LME copper ended down 0.1 per cent at $US6325 a tonne, but gained 5.4 per cent on the week, the biggest weekly rise since February, while Comex September copper fell 0.1 per cent to $US2.88 a lb.

“Copper prices are in pursuit of breaking trend line resistance and moving to the 38.2 per cent Fibonacci retracement area of about $US3.00,” Paul Ciana, technical analyst at Bank of America Merrill Lynch said in a note. “A weekly close above the trend line at $US2.86 confirms the uptrend is alive and well for another 5 per cent trend higher.”

LME tin dipped 0.3 per cent to close at $US20,600 a tonne after hitting a six-month high for the second straight day after reports of smelter shutdowns in Yunnan province in China, the world’s largest tin producer.

Aluminium finished down 1.6 per cent at $US1907 a tonne and lead rose 0.5 per cent to end at $US2320.

Exxon Mobil posted a rare earnings miss over the week, the only international oil producer to do so last quarter, as production slipped in its African and Canadian operations. Exxon’s results were overshadowed by rival Chevron Corp , which easily exceeded Wall Street’s expectations with a double-digit percentage increase in production.

“Exxon continues to really struggle on getting its output up,” said Edward Jones analyst Brian Youngberg. “Chevron is going from a cash spender to a cash generator, even without commodity prices improving,” he said.

Royal Dutch Shell, Total and Statoil last week delivered profits that topped expectations also.

Australian Sharemarket

USB says strong headline growth in fiscal 2017 belies a constrained outlook for earnings: “The overall Australian equity market looks set to post impressive headline earnings growth for FY17 of around 18 per cent. However, below the strong headline growth rate is a much more modest picture: excluding the resources sector sees FY17 growth drop to 5.7 per cent.

“In general we believe this constrained earnings growth outlook is in part behind the underperformance of Australian equities this year as investors look forward into FY18. The market has had a decent bounce off its early July lows as banks and resources return to favour though constrained earnings growth (and expensive valuations where there is growth) still suggests the Australian market will be something of a laggard in our view.

“Potential upside surprise candidates include AGL Energy, Flight Centre, Harvey Norman, JB Hi-Fi, Janus Henderson Group, Mirvac Group, Qantas Airways, Resmed and Woolworths. Potential downside surprise candidates include Coca Cola Amatil, Crown Limited, CSL, Seek and Wesfarmers. See main body for potential small-caps surprises.”

Credit Suisse has added ALQ, FXJ and SXL to its Top Picks list, while removing SDA and WPP.

Morgan Stanley has taken a “negative” stance on Australian banks. “We believe structural and cyclical headwinds in 2018-19 will weigh on the outlook for returns and trading multiples. We prefer WBC (OW) and ANZ (OW) over NAB (UW) and CBA (UW).”

Deutsche Bank analysts see “potential upside from Boral, Harvey Norman, Isentia, Star, Suncorp and Worley Parsons. Potential downside from ASX, Crown, Greencross and Wesfarmers”.

DB: “FY17 earnings growth is likely to be quite robust – a little under 15 per cent. FY18 is less encouraging, with growth forecast at 8 per cent, and earnings revision ratios have rolled over. Commodity prices pose some upside risk to earnings, but outside that we’d expect the usual mild downgrades as the year progresses. We expect a soft tone around consumer-exposed companies. Retail sales have been weak, and the underperformance of small industrials earnings revisions is telling (small companies being more exposed to the domestic cycle). The construction side is likely to be firmer – housing conditions are still solid and the infrastructure pipeline is picking up. Offshore earners are benefiting from a robust macro backdrop.”

Street Talk

Buyers to look under the bonnet of EGR

CBS bigwig flies into town for Ten meet

TPG Capital director jumps ship

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

Leave a Reply

Your email address will not be published. Required fields are marked *

*

nineteen − thirteen =