We start the new week with the ASX 200 eyeing a move into 5971, with SPI futures closing 16 points higher on Friday night and traders asking how much supply will come into the market if and when we test 6000.
Recall, 6000 is of course just a round number, so breaching and closing above here is psychological. However, if we go back to the period between March and April of 2015, we can see that on four occasions we tested and rejected this level, before we saw a 20% sell-off into the February 2016 lows. The ASX 200 trades on a 12-month price-to-earnings multiple of 16.3x, which as punchy, but has the juice to push above 16.5x and the leads we have been provided and certainly, the macro backdrop continues to favour upside here.
One headwind for the open could be Westpac Banking Corporation (AX:WBC), who have just reported FY cash earnings of $8.06 billion that are on the light side of expectations. FY Net interest margins of 2.06% and cash ROE of 13.6% also won’t be taken well by the market, while the 94c dividend is inline. On headline numbers alone there seems little to inspire and that will disappoint the index bulls, given the ASX financial sector is failing to contribute to the ASX rally, falling 0.3% last week. All the buying is in energy, industrials, and materials at present.
I have been an advocate that we need new news to fuel the fire, given markets are fantastic aggregators of all known news and much is in the price now. European and US and earnings are largely discounted and shouldn’t get too much focus in the week ahead, although it will be interesting to see if there is a further tailwind to the market leader, Apple (NASDAQ:AAPL), after strong earnings and we see this name now having to add just 13% to its market cap until they command a market cap of $1 trillion! The wash-up though (in the US specifically) has been that once again it’s been an inspiring reporting quarter. With 81% of S&P 500 companies having now reported, we see 76.9% have beaten on earnings, by an average of 4.7%, while on the sales line we can see 67% have beaten the street's forecast. In terms of growth, we see aggregate EPS of +7.1% and sales growth of +5.6%, so both metrics are higher than what was originally forecast.
Global growth is a mature them, and notably, we have seen real improvement in Europe, while in the US the data is humming along nicely and it wouldn’t be a surprise to see Q4 GDP of 3%, although there is a lot of data to pass until we get this release. The economic data flow on Friday came in thick and fast, with the payrolls report detailing that 261,000 jobs were created in October, although this was lighter than the 313,000 eyed. On a more positive note, we did see an upward revision to the September print (from -33,000 to +18,000), while the unemployment rate fell to 4.1%, courtesy of a 765,000 drop in the labour force. Perhaps the bigger issue was that the U6 unemployment rate (the broader measure of unemployment that the Fed regularly focuses on as a sign of genuine slack in labour market) fell a sizeable 40 basis points to 7.9%, matching the December 2006 lows. Also, importantly average hourly earnings came in below expectations, which in turn brought down the year-over-year rate to 2.4%.
We also saw the October ISM services index printing a very robust 60.1% and this has certainly supported risk sentiment, given we also solid factory orders and durable goods data. The wash-up after all the data flow was a further belief that the Fed can lift the fed funds rate in December, with this implied probability now sitting at 92%. Looking at the US Treasury complex and despite the scale of the data flow, we saw limited ranges (the US 10-year traded in a four basis point range) and on the session only very modest net buying. That said, traders preference is still to be long duration and we can see the 2’s vs 10’s Treasury curve now the flattest since November 2007 and looking ominously like it will head even lower.
Implied financial market volatility also took a bath on Friday, with the “VIX” momentarily trading below 9%. The Bloomberg US financial conditions index (which aggregate a number of key market indicators) is now at the highest levels since 2007 and the Fed would absolutely have noticed this.
US tax reform is the key talking point at present and this, along with communication from the Reserve Bank and China data flow will be the main focal points this week. The idea of tax cuts, estimated to be $1.5 trillion over the coming ten years (according to the House Ways and Means Committee plan) is having a positive effect on sentiment and while many are optimistic, there is still a healthy skepticism about what the final package actually looks like. The House plan should be a talking point tonight, with insights around the package itself and any potential amendments, which once agreed upon needs to make its way for a vote on the House floor and then onto the Senate in the weeks ahead. The market expects a sturdy test in the Senate and we could see an increase in noise around this package.
Despite limited moves in US fixed income we can see the USD finding buyers on Friday and currency comes into the new week with a solid platform to build, with the daily chart of the USD index looking quite constructive. AUD/USD hit a high of $0.7716 on Friday but was offered through European and US trade and price action has all the hallmarks that traders are looking to sell rallies in this pair here. The pair is clearly a ‘must watch’ pair in G10 this week given tomorrows RBA statement and Friday Statement on Monetary Policy.
Commodity markets are finding good traction here too and we should see this resonate in the ASX 200 energy and materials space, although the S&P 500 materials sector closed 0.1%. US and Brent crude both closed up over 2% and should be supported this morning with the Baker-Hughes rig count falling by a sizeable eight rigs on Saturday, taking the total reduction to 40 rigs from the August high. One suspects the news flow that the Saudi crown prince is cracking down on corruption may influence Brent prices to an extent too. Elsewhere, spot iron ore closed up 0.2%, while iron ore, steel and coking coal futures closed +2.2%, +0.9% and +1.6% respectively. BHP’s ADR actually closed lower by 0.5%.