It’s shaping up for another big week for market participants, with corporate earnings likely occupying Australian traders’ minds this week. On the docket today we get NCM, ANN, BEN, COH and JBH and these companies have the tailwind of reporting numbers on a day when the broader market is to open higher and positive sentiment seems to be on the increase.
Certainly, if we look at JB Hi-Fi Ltd (AX:JBH) on Friday we can see someone was pretty happy to hit the bid and there seems little in the price action to suggest concern that they will miss the 23% increase expected in 1H sales (at $2.507b), or $110M in 1H NPAT. Newcrest Mining (AX:NCM) has been a favourite of late, with the price having rallied from $16.35 to $23.95 through December into February, so the earnings numbers will need to justify the move.
The broader ASX 200 is looking upbeat, both from the technical set-up and the recent revisions higher in consensus EPS growth (see Bloomberg chart below). Our call for the open sits at 5730 and this would be the highest level since 17 January and would see price breach the January and February double bottom neckline at 5720. Therefore probability states higher levels should be on the cards in the short-term and 5800 is the clear target.
The market internals backs up this case for higher levels in the index, where we can see 64% of stocks above their 20-day moving average, 15% at 4-week highs and 10% above the top Bollinger® band. These percentages have been moving up of late, as you would expect when the index is going up, but they are at no way at levels which suggest euphoric conditions and contrarian positions.
(Various market internals – the white dashed line on each pane represents a level that the market has sold off after testing)
By way of leads, the S&P 500 made a new high on Friday, pushing up a touch to close at 2316, so again the view that a market at all-time highs is bullish holds true. We have seen stability in US fixed income, with the 10-year treasury up 1 basis point at 2.40%, although did lose 6bp on the week. US crude is supportive, although we have seen the Baker Hughes rig count increase by a further 12 rigs to 741, so watch the crude futures open at 10:00 AEDT. A move above $54.34 this week (the 2 February high) would be positive and open up a further extension into $56.00. Obviously great for leveraged names such as Santos (AX:STO), who report earnings on Friday.
Bulk commodity futures have pushed higher too on the Friday night session, with iron ore futures gaining 4.2%, steel +2% and coking coal +1.9%. Copper has broken out to the upside, thanks to the ongoing strike at BHP's (NYSE:BHP) Chile mine, Escondida. Stay long copper here, but watch news flow as this is where first mover advantage plays a pivotal role, as news of a restart will likely cause a wave of profit taking.
Event risk for the week
It’s hard to really pinpoint the exact event risk this week as really there is so much going on at a macro level, it’s hard to keep track. We can see relations between Japan and the US moving along nicely, with the deputies Mike Pence and Taro Aso getting along well during their meeting. Trump’s recognition of the ‘One China’ policy on Friday has been well received by markets and lifted some tensions that had been hanging over the markets for a couple of weeks. There is renewed focus on Europe, with prosecutors stepping up their investigation into Francois Fillon’s alleged incorrect use of public funds and this won’t do any good to his approval rating and it is becoming more and more likely we see Marine Le Pen take on Emmanuel Macro in the run-off’s on 7 May.
It also has to be acknowledged that Greece is back on the radar, but is not a source of angst in the markets just yet, although should play into my short EUR/AUD trade nicely. The Greek creditors want Greece to commit to EUR1.8 billion of new reforms (1% of GDP) by 2018, but the Greek’s, inspired by Brexit, have told the Troika to “stop playing with fire”. How can they put new measures through without sizeable political ramifications?
With key elections in France and Germany this year the last thing anyone wants is a destabilizing event, so who bulks first here is key. Will it be the IMF, the Germans or the Greeks? Either way, one suspects this issue will be pushed out to 2018 and the can will be kicked down the road.
One for the radar, but it does support the view that Greece simply cannot go on under the current regime. Importantly, even when they appear to be hitting their fiscal targets, one of their key creditors (i.e. the IMF) believe this is purely down to one-off factors! What we are seeing here is a big story for 2018, and one I suspect that will find a temporary resolution, so the elections can go on without Greece being at the epicentre.
Janet Yellen takes the stage at Thursday (at 02:00 AEDT), although she speaks on behalf of the Fed collective and it’s hard to see anything that shakes markets too greatly here. There has been some focus on Fed Vice Chair Stanley Fischer weekend comments talking about “significant uncertainty about fiscal policy under the Trump administration” while suggesting Dodd-Frank would not be repealed as a whole. This comes at a time when Daniel Tarullo has announced his retirement from the Fed and his role that was effectively created after Dodd-Frank. So Trump now has three spots on the Fed he has to fill.