Among the winners: Atlassian. The Australian company’s shares closed 3.2 per cent higher in New York on Friday, rising to a record $US111.76 before closing at $US110.95.
“Technology megacaps are the most risk-on of the most risk-on stocks, and they still have some of the biggest growth aspect characteristics, and it seems that that’s what investors want,” Eric Kuby, chief investment officer at North Star Investment Management in Chicago, also told Bloomberg. “For the last 10 years, valuations have been put on the backburner, valuations have been ignored, as investors have been searching for growth.”
Earnings growth in the sector will turn negative for the next three quarters, according to analyst estimates, but that is unlikely to turn growth-oriented investors away, according to Mr Kuby. As the yield on the 10-year Treasuries plunged to 2.7 per cent from 3.2 per cent in November, technology stocks became more attractive, he said.
‘High alert’ on RBA
A slew of weak data from China, Europe, the US and Canada at the end of last week heightens the focus on local data this week.
While a flood of economics reports are on the schedule, the key focus will be on the RBA’s policy meeting on Tuesday and the release of fourth quarter GDP stats on Wednesday.
“When the RBA meets on Tuesday, it will have seen the GDP partials and have a better idea of the risks to its Q4 GDP forecast of 0.6% q/q, 2.8% y/y,” NAB’s Kaixin Owyong wrote.
“So far, construction work indicates that the Bank’s forecast for residential investment is too optimistic. Instead of a modest decline of 0.9% q/q, residential investment is likely to decline sharply in Q4,” she also said. “As such, markets will scrutinise the post-meeting statement for signs that the building blocks for GDP have caused the RBA to shift its growth outlook.”
Ms Owyong said markets will be on “high alert” to RBA governor Philip Lowe’s Wednesday morning speech, titled The Housing Market and the Economy.
“We think Lowe’s speech will cover the key channels by which the current housing downturn can affect the macroeconomy, such as 1) reduced residential investment; 2) the wealth effect of lower prices on household spending; 3) reduced construction-related employment; 4) lower rents affecting underlying inflation; and 5) lower prices weighing on small business investment.”
“We think the governor will argue that the wealth effect is limited and that the economy has absorbed the decline in prices to date well. It will be interesting to see, though, whether he concedes that investment is falling at a faster rate than forecast by Bank staff and we think this issue will come up in the Q&A session even if he does not directly address it in his speech.”
“If the governor does end up suggesting that the Bank is reconsidering its outlook, particularly for residential investment and employment, we think that this could see markets price in a higher chance of a rate cut this year.”
In a note Bank of America Merrill Lynch said while the Australian economy slowed at the end of last year, activity in the first quarter “looks to be holding up. This should buy the RBA some time to get through a busy political schedule in coming months before a reassessment of the growth outlook by the middle of the year. The risk is for a shift to dovish guidance”.
Still, BofAML is tweaked its Australian dollar forecast.
“On FX, we revise down our end-2019 AUD/USD forecast to 0.78 (previously 0.81) and our end-2020 projection to 0.81 (previously 0.84), reflecting the RBA’s more neutral tone and two-flexibility on policy, as well as rising domestic risks.
“However, we continue to expect a medium-term drift higher – apart from domestic hard data holding up so far, we believe the external impulse will ultimately turn positive too.
“We expect broad USD depreciation, terms of trade will likely remain supported for some time (even if driven by supply side factors) and China easing will ultimately spill over to commodity intensive demand (albeit with some lag). While we expect AUD to be range bound near-term, the balance of risks favours appreciation v USD later this year.”
Today’s Agenda
Local data: MI inflation February, Business indicators fourth quarter, Building approvals January, ANZ job ads February
Overseas data: Euro zone PPI January; US construction spending December
Market Highlights
SPI futures up 18 points or 0.3% to 6210
AUD -0.2% to 70.79 US cents
On Wall St: Dow +0.4% S&P 500 +0.7% Nasdaq +0.8%
In New York, BHP -0.7% Rio +0.3% Atlassian +3.2%
FANG: Facebook +0.5%, Amazon +2%, Apple +1.1% Netflix -0.2% Alphabet +1.9%
In Europe: Stoxx 50 +0.4% FTSE +0.5% CAC +0.5% DAX +0.8%
Spot gold -1.5% to $US1293.44 an ounce
Brent crude -2.2% to $US64.86 a barrel
US oil -2.6% to $US55.75 a barrel
Iron ore +3.1% to $US87.92 a tonne
Dalian iron ore +4.4% to 643.50 yuan
LME aluminium +0.4% to $US1918 a tonne
LME copper -0.5% to $US6478 a tonne
2-year yield: US 2.55% Australia 1.72%
5-year yield: US 2.56% Australia 1.77%
10-year yield: US 2.75% Australia 2.15% Germany 0.18%
US-Australia 10-year yield gap: 60 basis points
From Today’s Financial Review
Industry super’s plan to ‘reshape’ business: Industry super fund tsar Greg Combet says businesses that use conflicted remuneration and vertical integration to squeeze consumers for short-term profits will be first in the firing line.
Boardrooms face a major shake-up: The director’s club is considering expanding director’s duties beyond shareholders, annual elections and caps on the number of board seats that a person can hold.
Governments failed to act on cladding warnings: Australia’s building regulators discussed the risks of combustible cladding but failed to warn about the dangers, documents show.
United States
US stock premium poised to fade: US stocks are near 70-year highs relative to other global developed markets though that gap is about to narrow.
Lyft IPO filing shows surging revenue: The filing with US securities regulators makes it all but certain that Lyft will hold its IPO ahead of larger rival Uber.
The S&P 500 and the Dow Jones Industrial Average snapped a three-day run of losses on Friday as optimism about the prospects for a US-China trade agreement countered downbeat US and China manufacturing data.
The Nasdaq meanwhile marked its longest streak of weekly gains since late 1999.
Following President Donald Trump’s announcement last weekend of a delay in higher tariffs on Chinese imports, Bloomberg reported late Thursday that a summit between Trump and his Chinese counterpart Xi Jinping to sign a final trade deal could happen as soon as mid-March.
“The optimism over trade resolution is outweighing the weakening economic data,” said Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina.
Friday marked the first close above 2800 for the S&P since November 8. Nate Thooft, global head of asset allocation for Manulife Asset Management in Boston said technical investors would see a close above that level “as a good omen”.
The index closed 4.2 per cent under its September record closing high. It has risen 11.8 per cent so far this year, bolstered by trade hopes and the Federal Reserve’s cautious stance on interest rates.
For the week, the S&P rose 0.4 per cent while the Dow fell 0.02 per cent and the Nasdaq rose 0.9 per cent.
Europe
European shares rose to five-month highs on Friday, starting the month on a strong footing.
The pan-regional STOXX 600 index closed up 0.4 per cent after hitting its highest since October 8 earlier in the session.
Gains spread across all regional bourses with Germany’s exporter-heavy DAX leading the charge thanks notably to rising car makers stocks.
“If corporate profits do grow, which I think they will, equities look reasonably good value,” said Edward Rumble, European equity portfolio manager at RWC Partners.
The Dublin bourse was up 1.3 per cent, outperforming its European peers as worries that Britain will crash out of the European Union without a deal at the end of this month eased. The market is often seen as a barometer for Brexit sentiment.
The optimism on markets came despite mixed news from economic indicators.
Data showed euro-zone manufacturing activity went into reverse for the first time in more than five years. In contrast, German retail sales jumped and the bloc’s powerhouse unemployment remained at record lows.
Among individual moves, Italian luxury group Moncler stole the spotlight, rising 11.1 per cent for its best day since January 2014 after its 2018 results, which broker Jefferies called “remarkable”. Moncler’s peers benefited from the rally with Gucci owner Kering up 3.2 per cent, LVMH up 1.5 per cent and Burberry rose 3.1 per cent.
Britain’s WPP, the world’s biggest advertising company, rose 4.9 per cent after its full-year results came as a relief amid fears the industry is facing structural headwinds.
Investors have been cautious about the company since French rival Publicis earlier this month results alarmed the market.
Among financials, Jupiter Fund Management was another big gainer, up 7.1 per cent after its dividend beat estimates. “The company paid out 90 per cent of underlying earnings, driving the beat,” write KBW analysts.
It was a different story for hedge fund manager Man Group which lost 2.6 per cent after reporting funds under management fell last year.
Asia
Capital Economics on Chinese equities: “The news that MSCI will increase the weighting of mainland Chinese equities in its benchmark indices sooner than previously anticipated seems to have given the Shanghai and Shenzhen markets a boost on Friday. But it doesn’t change our downbeat assessment of their prospects.
China stocks climbed on Friday to kick off a new month on a bullish note, with the benchmark Shanghai index posting its biggest weekly gain in nearly four years, as investors cheered the progress in A-share market’s internationalisation process, shrugging off soft factory activity data.
The blue-chip CSI300 index rose 2.2 per cent to 3749.71, while the Shanghai Composite Index closed up 1.8 per cent at 2994.01.
For the week, SSEC gained 6.8 per cent, its best week since June 2015, while the CSI300 was up 6.5 per cent, its best week since November 2015.
Global index provider MSCI is quadrupling the weighting of Chinese mainland shares in its global benchmarks later this year, a move it said might draw more than $US80 billion of fresh foreign inflows to the world’s second-biggest economy.
“We estimate these changes would lead to a $US67 billion fund inflow to the A-share market this year,” Gao Ting, Head of China Strategy at UBS Securities, noted in report.
In Japan, the Nikkei rose 1.0 per cent to 21,602.69, the highest close since December 13. For the week, the benchmark index gained 0.8 per cent and posted its third straight weekly gain.
Exporters took advantage of a weaker yen after the US dollar rose 0.4 per cent to 111.73 yen, the highest level since December 20.
“Short-term investors are seen buying back futures while they pick up cheap cyclical shares as the yen is weaker,” said Naoki Fujiwara, a fund manager at Shinkin Asset Management.
TDK Corp rallied 4.3 per cent, Advantest Corp jumped 4.1 per cent and Fanuc Corp gained 1.9 per cent.
Subaru underperformed and was only up 0.1 per cent after falling 1.4 per cent after the automaker announced a recall of 2.26 million vehicles around the world over a brake lamp defect.
The broader Topix rose 0.5 per cent to 1615.72.
Currencies
A day of reckoning for the ECB?: The European Central Bank is poised next step to prop up the euro zone economy with fresh stimulus to keep banks lending.
TD Securities’ expectations for Thursday’s ECB policy meeting: “We look for a relatively unchanged message from the ECB on Thursday: the policy statement is likely to remained unchanged, we don’t anticipate TLTROs, and risks around growth are likely to remain tilted to the downside.”
TD’s bet on the euro zone’s growth outlook: “We expect a sharp downward revision [by the ECB] to the growth forecast, with 2019 growth revised down from 1.7% to 1.3%, which would be the biggest single-meeting downgrade to growth since 2012.
“Much of this, however, is marking to-market on the back of weak 2018Q4 growth data, as well as an assumption of weak 19Q1 growth data (as hinted by Peter Praet), and assumes little change to the rest of 2019 quarterly dynamics. Growth of 1.3% in 2019 would put the ECB forecast in line with recent estimates from the European Commission, a figure that President Draghi has reportedly concurred with, as well as the latest economist consensus.”
TD on ECB rate outlook: “Money markets are currently pricing a 15bp deposit rate hike by the ECB only by Q3 2020. While that is later than our forecast for ECB hikes, we don’t think risk-reward is attractive to sell very front end Euribor contracts. There has been some talk about “technical” rate hikes by the ECB to ease the impact of negative rates on banks.
“We doubt the ECB is at the stage to trigger any moves in front-end rates. This would be extremely bearish for rates as it would trigger expectations of a rate hike cycle in the Euro area. In our view, any easing for the banking sector would be accomplished via the lending/liquidity channel.”
Pound enjoys biggest weekly rise in month: The currency surged to multi-month highs this week after Theresa May said lawmakers would get to vote on a delay to Brexit.
Commodities
Chinese steel mills are slowing iron ore purchases and seeking cheaper alternatives to Australian supplies after a steep run-up in prices in February, five mill executives and several traders told Reuters.
“We are holding off restocking and running with a low inventory since current prices are too high,” said a purchase manager at a large steel mill in China’s top steelmaking province Hebei.
Steel demand in China, the world’s largest consumer of the metal, has cooled recently amid an overall industrial slowdown which has pressured profit margins at mills.
Four other mill managers said their iron ore inventory had dropped to less than 15 days of use, lower than the normal level of 22 days. They declined to be identified because of company policy.
While ore stocks by mills have tightened, those held at Chinese ports have swelled so far in 2018, reaching 145.05 million tonnes by February 22, the highest since late September, SteelHome data showed.
US oil rigs at lowest since May 2018: The number of oil rigs operating in the US fell – as expected – to the lowest in almost nine months.
Zinc rose on Friday on concern about shortages after inventories slid, but some other industrial metals were softer after factory activity in China contracted.
“Most if not all Western smelters are probably working flat out, but in China, with the environmental scrutiny clampdown, capacity is being cut and new capacity has been delayed,” said Robin Bhar, head of metals research at Societe Generale in London.
“The deficit in the refined market is being met by the drawdown in stocks, so that’s lending a lot of support to the zinc price.”
On-warrant zinc inventories in warehouses registered with the London Metal Exchange, material that is not earmarked for delivery, fell to 46,000 tonnes last week, LME data showed. That was the lowest since at least 1998, having more than halved so far this year.
Benchmark LME zinc rose 0.2 per cent to $US2784.50 a tonne in closing open outcry activity after climbing 13 per cent so far this year.
Three-month LME copper shed 0.5 per cent to end at $US6478 a tonne. Earlier this week, available LME copper stocks fell to 21,600 tonnes, their lowest since 2005.
“The fact that spreads are not insanely backwardated at these levels of stocks tells you that there is some metal around but it isn’t necessarily on the LME,” said Guy Wolf, head of global market analytics at Marex Spectron.
The backwardation – the premium of cash copper over the three-month LME contract – was at $US44 a tonne on Friday, compared to a discount of $US23.25 a month ago, but far from a peak premium of $US149 seen in 2012.
Australian Sharemarket
Political risk now begins at home: The half-yearly reporting season has been better than expected. But there are unwelcome headwinds.
Wake-up call for investors facing lower returns: With cash refunds from fully-franked dividends under threat, investors are left wondering where to invest after a bumper earnings season.
Death of defensive stocks will reshape portfolios: Kraft-Heinz shows how once impregnable brands are being shaken by technology and easy money. Australian companies – and local investors – are not immune.
Cyclical stocks nab an edge in earnings season: Stocks which are not beholden to the economic cycle are struggling with higher costs and refining their strategies.
The Australian sharemarket recovered from a big dip on Tuesday to close the week at a five-month high, capping off a bumper earnings season.
On Friday the S&P/ASX 200 Index rose 23.7 points, or 0.4 per cent, to 6192.7 the benchmark’s highest level since September 2018.
Street Talk
Blackstone to pass Kiwi Burger King crown
Macquarie in clean-up mode; settles court actions over adviser pay
Bravura and GBST offer investors a sniff of M&A action
with Reuters, Bloomberg, AAP
Comments? Questions? Let us know what you think of Before the Bell: timothy.moore@fairfaxmedia.com.au
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