“The markets need a dose of confidence and predictability,” Horizons Investments Greg Valliere said in a note, ahead of the US jobs report and Powell’s dovish comments.
What also is needed is a thaw is the trade war between the US and China, Mr Valliere also said.
“Presidents Trump and Xi surely must realise that their game of chicken is having disastrous results in both countries,” Mr Valliere said.
“We agree with Trump’s trade hawks that China’s bad behaviour must be confronted, but a real cease-fire and a preliminary deal when high-level talks resume next month would make an enormous difference for the markets,” Mr Vallier said. “So would a decision to accelerate the timetable for those talks.”
A US delegation led by Deputy Trade Representative Jeffrey Gerrish will head to China for talks on January 7 and 8.
Locally, this week marks the return of economic data.
There’s trade tomorrow, building approvals on Wednesday and retail sales on Friday – for November.
Of these, retail sales is the highlight – with NAB expecting a below-market 0.2% m/m (albeit with upside risk, mkt: 0.4% m/m).
“Retail rales data around this time of year are particularly interesting as consumer spending patterns have been shifting,” NAB economist Kaixin Owyong said in a weekend note. “The rise of Black Friday, Cyber Monday and Click Frenzy sales have seen households bring forward their Christmas shopping and Boxing Day Sales shopping into November. Reports from retailers (ie Kathmandu’s recent profit warning) suggests sales in December were weaker than in November.
“As such, markets will likely interpret any strong November Retail Sales outcome with a degree of caution – a solid result could easily be offset by a weaker December result due to these shifting seasonal spending patterns.
“However, if Retail Sales are weak in the month, this will likely be taken as a sign of another weak print for Consumption in Q4. Note Retail Sales are only around a third of household consumption (which makes up around 60% of GDP), and the monthly data isn’t adjusted for prices.”
Today’s Agenda
Local data: AiG performance of manufacturing December
Overseas data: China trade balance December, CPI and PPI for December; Japan Nikkei services PMI December; Euro zone retail sales November; German factory orders November; US factory orders November final, Durable goods orders November final; ISM non-manufacturing December
Market Highlights
SPI futures up 69 points or 1.2% to 5631 as of 9am AEDT Saturday
AUD +1.5% to 71.13 US cents
On Wall St: Dow +3.3% S&P 500 +3.4% Nasdaq +4.3%
In New York, BHP +6.1% Rio +5.6% Atlassian +3.1%
In Europe: Stoxx 50 +3% FTSE +2.2% CAC +2.7% DAX +3.4%
Spot gold -0.6% to $US1286.05 an ounce at 5pm Friday New York time
Brent crude +2% to $US57.06 a barrel
US oil +1.9% to $US47.96 a barrel
Iron ore +0.7% to $US72.62 a tonne
Dalian iron ore +0.5% to 508 yuan
LME aluminium +1.6% to $US1865 a tonne
LME copper +3.2% to $US5918 a tonne
2-year yield: US 2.49% Australia 1.79%
5-year yield: US 2.50% Australia 1.93%
10-year yield: US 2.67% Australia 2.23% Germany 0.2%
US-Australia 10-year yield gap as of 9am AEDT Saturday: 44 basis points
From Today’s Financial Review
United States
Fundstrat Global’s Tom Lee sees reason for bulls to be renewed: “After committing one of the greatest policy errors (measured by equity market reaction), the Fed is now potentially becoming a positive catalyst. Is there a risk of a greater sell off? Yes, but the fact markets are near key support and P/E dispersion best since 2013, means a bearish view is excessive.”
According to Mr Lee stock market valuations have improved considerably recently—”there are now more stocks with P/E <<!-- -->15X (40 per cent) than P/E >25X (25 per cent), the first time since 2013. Think about it, the risk/reward for stocks now is better than at anytime in the past 5 years. This coincides, in our view, with a shift towards a Value regime”.
Since hitting a 20-month low on Christmas Eve just a rounding error from levels considered to be a bear market, the S&P 500 Index has now gained 7.7 per cent. Friday’s advance, measured by the number of stocks rising versus those falling, was the broadest in more than eight years.
All 11 major sectors of the S&P 500 ended the session in positive territory, with technology, communications services, materials and industrial stocks seeing the largest percentage gains.
Netflix jumped 9.7 per cent after Goldman Sachs added the streaming service to its “conviction list”.
Wall St leaps on Powell, jobs: US shares rallied on assurances from Fed chairman Jerome Powell and an unexpectedly bullish jobs report.
Powell says Fed can be ‘patient’: US Federal Reserve chairman Jerome Powell pledged to be patient with any future interest-rate hikes, allaying concerns that the central bank will snuff out the US economic expansion.
Jobs report underscores economic strength: US employers hired the most workers in 10 months in December while boosting wages, pointing to sustained strength in the economy.
Barry Ritholtz’s 2018 mea culpas: Betting that Donald Trump wouldn’t hurt the stock market in 2018 proved to be a mistake, acknowledges Barry Ritholtz.
Trump threatens years-long shutdown: President Donald Trump threatened a years-long shutdown of the federal government to get the money he wants for his US-Mexico border wall.
Europe
European shares posted their biggest daily gain since June 2016. Europe’s STOXX 600 rose 2.8 per cent, with strong gains across the region’s bourses.
Mining companies jumped 5.4 per cent, the top gainer as copper prices recovered on news of new trade talks between China and the United States.
Autos, which suffered in 2018 from the trade dispute, jumped 4.5 per cent.
Bayer shares climbed 6.7 per cent. A ruling by a US judge could restrict evidence favouring the plaintiffs in lawsuits alleging Bayer’s glyphosate-based weed killer causes cancer.
As the fourth-quarter results season approaches, analysts remain pessimistic about European earnings. They have cut earnings forecasts continuously since September 2018.
Edward Park, deputy chief investment officer at Brooks Macdonald, said he was slightly “overweight” on equities, expecting an economic slowdown but not a contraction.
“If we’re going to see moderate growth in 2019 but nothing too exciting, are market participants willing to be outside risk assets for that entire time?”
As for what’s happening with Brexit?
Irish Prime Minister Leo Varadkar said he shares with German chancellor Angela Merkel a “strong desire” to help their British counterpart Theresa May break an impasse over Brexit.
British politicians return to Parliament on Monday to grapple with navigating the UK’s path out of the European Union. Critics of May’s plan fear the UK could be trapped indefinitely in a backup arrangement for the Irish border, effectively keeping the whole country inside the EU’s customs union trade rules. The premier is hoping for a new legal definition to reassure her critics that the so called Irish backstop will be “temporary”.
Varadkar said he and Merkel had discussed how they might aid May in her battle to forge a way forward. The pair spoke for 40 minutes by phone on Thursday at the German leader’s request.
Asia
China slashes banks’ reserve requirements: China’s central bank said it was cutting the amount of cash that banks have to hold as reserves for the fifth time in a year, freeing up $163 billion for new lending.
While news of a fresh round of face-to-face meetings between the US and China starting next Monday and a stronger-than-expected China Caixin services PMI have given Hong Kong and Chinese shares the jolt they needed on Friday after a rough start to the year, Japan’s benchmark plunged as it played catch up after a four-day holiday.
The division was clear: the regional gauge encompassing all major markets slipped 0.3 per cent as of 4.31pm on Friday in Hong Kong, while the MSCI Asia Pacific Index excluding Japan climbed 0.8 per cent.
The Hang Seng Index rose 2.2 per cent and the Shanghai Composite gained 2.1 per cent. Japan’s Nikkei 225 Stock Average fell 2.3 per cent and the broader Topix dropped 1.5 per cent.
It looks like the good news has outweighed the bad, for now:
A US delegation led by Deputy Trade Representative Jeffrey Gerrish will head to China for talks on January 7 and 8, the Commerce Ministry said in a statement.
The talks will be the first since Presidents Donald Trump and Xi Jinping agreed to a 90-day truce in their trade war last month, and any progress would be a shot in the arm for markets and economies showing increasing strain as a result of the months-long conflict.
Currencies
Australian dollar tops US71¢: The Australian dollar surged on Saturday morning, extending its post-flash crash recovery to near 6 per cent.
TD Securities sees no move by the Bank of Canada on rates this week: “We expect the BoC to hold the overnight rate steady at 1.75% … They will have to acknowledge recent developments in the energy sector and financial markets, but will maintain some balance as the growth forecast is largely intact. We look for Poloz to reiterate that the policy rate will need to move back to the neutral range.”
The US dollar retreated against most major currencies in the wake of Powell’s pledge to be “patient”.
“Powell’s comments that the Fed is prepared to alter policy expectations quickly and flexibly are weighing on the US dollar and giving risk sentiment a boost,” said Eric Viloria, FX strategist at Credit Agricole in New York.
How to interpret the US yield curve?
“When the yield curve inverts then that usually is a sign that there’s a recession coming,” Kevin Hassett, chairman of the White House Council of Economic Advisers, told CNBC. “But right now, I think the yield curve is a really difficult signal to read because the back end of the curve is still being impacted by quantitative easing.”
Cleveland Federal Reserve president Loretta Mester said US interest rates are near neutral and there’s need to rush a policy decision. “”We are in a new world,” Mester said, where the obvious need to raise rates has given way to a situation where economic growth is expected to slow, wages are rising on the basis of low unemployment, interest rate sensitive sectors of the economy like housing have ebbed, and the unemployment rate has roughly “stabilised” at a low level.
Commodities
Chinese steel futures rose on Friday, with iron ore contracts hitting the highest in more than two months, buoyed by expectations that steel mills would replenish their stocks of the raw material.
The most-traded iron ore on the Dalian Commodity Exchange ended up 3.3 per cent at 511 yuan ($US74.43) a tonne, just below the day’s peak of 512 yuan, its highest since October 30 when it had hit 514 yuan.
“Our data analytics model shows low iron ore inventory at steel mills’ warehouses. So, they are looking to replenish,” said Darren Toh, a data scientist with Singapore-based steel and iron ore data analytics company Tivlon Technologies.
“We are seeing more relaxation in using iron ore in Q1 2019,” he said, with the government’s anti-pollution restrictions that prompted output curbs at steel mills in recent weeks to be eased after this month.
Prices of other steel-making raw materials also rose, with coking coal climbing 1.9 per cent to 1185.5 yuan a tonne and coke higher by 1.6 per cent at 1941 yuan.
As for base metals, benchmark copper on the London Metal Exchange (LME) closed up 3.2 per cent at $US5918 a tonne, its biggest one-day gain since September.
“China’s easing (of reserve requirements) has managed to turn round the downtrend,” said Societe Generale analyst Robin Bhar.
However, Bhar said he expected industrial metals prices to rise by 5-10 percent this year because any weakness in demand would 0be offset by tight supply.
Copper, zinc, aluminium and lead stocks in LME-registered warehouses remain near decade-lows. Tin inventories are close to the lowest on record and nickel stocks are the least in five years. Inventories of copper, aluminium and zinc in Shanghai Futures Exchange warehouses are also down sharply from highs last year.
LME aluminium ended up 1.6 per cent at $US1865 a tonne.
Australian Sharemarket
Australian shares closed a turbulent first week of trading for the year lower as the volatility across global markets in 2018 seeped into 2019.
The S&P/ASX 200 Index closed the week 31.3 points, or 0.6 per cent, lower at 5619.4 while the broader All Ordinaries slid 39 points, or 0.7 per cent, to 5677.
Street Talk
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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