A softer tone

BY David Bassanese | 10 April 2017
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The Week in Review

  • Although the key global development last week was the US strike on Syria, markets seemed to take it in their stride. Indeed, equities and bond yields ended the weekly largely unchanged, though the military action did help support gold and oil prices.  Helping support equities were upbeat US manufacturing and non-manufacturing reports. Although Friday’s gain in US employment was weaker than expected (98k vs market estimate of 180k), particularly bad weather – which hurt construction – was partly to blame. The US unemployment rate did drop, however, to a 10-year low 4.5% and wage growth remained firm.
  • In other key news, Fed minutes and other Fed speakers over the week continued to discuss the possible start of balance sheet reduction later this year, i.e the Fed letting its huge stock of Treasuries start to decline by not re-investing the proceeds from maturities. Again, markets took this fairly well, with bond yields hardly moving.

  • Closer to home, the key development was a somewhat more cautious view on the economy from the RBA in last week’s post-meeting policy statement (in which, as widely expected, it left interest rates on hold).  This, in turn, reflected some weakening in business and consumer confidence of late, and the lurch higher in the unemployment rate to 5.9%.  Consistent with this softer theme, February retail sales were a disappointment, dropping 0.1%. And although building approvals bounced back an impressive 8%, the longer-term trend still appears down.  Iron ore prices also continued to correct.  The combination of falling commodity prices and softer local data contributed to a notable drop in local bond yields and a weaker $A.

Likely Highlights in the Week Ahead 

  • Only second tier data will be released this week, with interest likely to focus on the start of the US earnings reporting season and any further fallout from the US strike on Syria. So far at least, there’s been fewer than usual preseason profit warnings, which potentially bodes well for a relatively good set of results.
  • Locally, the key highlight will be Thursday’s labour market report, given the surprisingly weak result last month. After a 6k drop in February, the market is counting on a 20k bounce back in March, with the unemployment rate holding steady at 5.9%. Also of interest will be the degree of further weakness in iron ore prices. And given the recent concerns over bank exposure to high house prices, the RBA’s six-monthly Financial Stability Review report (also on Thursday) should attract greater than usual interest.

The Wrap 

  • The fact Wall Street held up relatively well last week in the face of Fed warnings, a weak headline payrolls result and new geopolitical concerns continues to demonstrate solid underlying investor support. That said, given the flat performance of Wall Street, it is not surprising the local market could not follow through after enjoying an upside break out in the previous week.  The 6000 market for the S&P/ASX 200 index appears elusive for now at least.  Indeed, investor optimism regarding the banks – given profit enhancing “out-of-cycle” rate hikes – appears to be giving way to some worry over an eventual housing sector downturn. And the correction in iron ore prices is hardly a positive for resources.
  • Geo-political risk is also starting to rear its head (the US is also sending ships to North Korea!), which could attract more interest in gold and, possibly, oil. Investors interested in gaining access to gold themes might consider QAU and/or MNRS and, similarly, OOO and FUEL in the case of oil.
  • The great market hope for now is the US earnings reporting season – not to mention any mention of those tax cuts by Donald Trump.  With the US economy ticking over nicely, the oil sector on the rebound, and wage growth and the $US still fairly well contained, chances are that the profit reporting season could provide some cheer. That would be just as well given the already elevated level of equity valuations and the upward pressure on bond yields.

Have a great week!

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