ASX poised for muted end to disappointing year


Today primarily is the bookend of a reality check year. The S&P/ASX 200 has tumbled 6.8 per cent this year through Friday, and even a late arriving Santa Claus won’t be able to put much more than a mere dent into that.

Friday’s close of 5654.32 is 719 points or 11.2 per cent below the index’s 2018 peak of 6373.50 reached in late August. The brunt of the losses, or near 9 per cent, have been during the final three months of 2018.

In late June, Citi strategist Tony Brennan reckoned the benchmark measure would get to 6500 by the end of this year and to 6650 by the middle of 2019. The August peak, which marked a more than 10-year high, then put the promise of ever higher valuations in a positive light. Alas, clouds rolled in, hail too.

To be fair to Mr Brennan and other optimistic forecasters, the S&P/ASX 200’s tough times were far from entirely of its own making.

The fourth quarter has been tough for local investors. Bloomberg

Australian stocks haven’t been able to dodge the impact of the ever widening and lingering trade war that the Trump administration initiated with China.

In addition, local stocks haven’t been able to dodge the recent collapse of US equities prices amid concerns about the impact of the past three years of Federal Reserve interest rate hikes as well as positioning for a potential monetary policy mistake by chairman Jerome Powell; some market watchers argue that’s already happened.

On Friday on Wall Street, US shares once again traded in a wide range. The Dow’s day range was 400 points; it ended down 76 points. During the session the index switched from positive to negative five times.

“Lots of movement for what ended up being a slight down day,” Allianz chief economic adviser Mohamed El Erian said in a tweet. “Interestingly, the high for the day came at 3 pm NY time…and the low 54 minutes later. Talk about #traders and #investors lacking conviction. And what a week for #markets overall — one for the #volatility history books.”

Mr El Erian was of course referencing the 650-point drop on Christmas Eve, the 1000-point surge on December 26 and a wild more than 800-point afternoon rally on December 27 to lift the Dow by 260 points when all was said and done.

Separately Mr El Erian said the good news to take from the fluctuations is what he sees as a “transition to less distorted #markets that, otherwise, would have posed an even greater risk to future financial and economic stability”.

As for the bad news, Mr El Erian said “this volatile journey risks undermining a slowing global #economy and fuelling doubts about the functioning of markets”.

The VIX slid 5.4 per cent to 28.34; on Christmas Eve it closed at 36.04. While Friday’s retreat was positive for sentiment, the index has risen 157 per cent so far this calendar year.

The S&P500’s 10-day volatility soared last week to its highest level since 2015, according to Think Markets UK’s Naeem Aslam.

Mr Aslam said he expects more volatility ahead in the New Year for equities because there continues to be a “disconnect” between what the Fed is forecasting it will do with rates and what markets have priced in.

According to the CME FedWatch Tool, investors are betting overwhelmingly that the Fed won’t lift at all in 2019. Fed policymakers earlier this month signalled they were expecting rates to rise twice in the year ahead.

NatWest Markets’ John Briggs told Bloomberg that it feels “premature” to completely price out the Fed.

In a week in review note, LPL Financial continued to hew to its enduring glass half-full view of the US bull market.

“Valuations have fallen significantly to levels we would consider attractive at less than 15 times the next 12 months’ S&P 500 earnings, based on FactSet consensus. This level has been associated with above-average long-term returns, while large drops in the S&P 500 Index price-to-earnings ratio have historically been followed by above-average one-year returns.”

LPL’s final thought: “Our best advice is for everyone to focus on fundamentals supporting growth in the economy and corporate profits, and stick with your long-term strategy.”

The ASX will close early today, at 2.10pm.

Today’s Agenda

Local data: Private sector credit November

Overseas data: China manufacturing and non-manufacturing PMIs December; US Dallas Fed index December

Market Highlights

Note: Most global markets will be closed on Tuesday for the New Year holiday

Japanese markets are closed through Thursday

SPI futures up 22 points or 0.4% to 5629 as of 9am Saturday AEDT

AUD +0.2% to 70.47 US cents

On Wall St: Dow -0.3% S&P 500 -0.1% Nasdaq +0.1%

In New York, BHP -0.1% Rio -0.2% Atlassian flat

In Europe: Stoxx 50 +1.7% FTSE +2.3% CAC +1.7% DAX +1.7%

Spot gold +0.2% to $US1278.27 an ounce

Brent crude +0.1% to $US52.20 a barrel

US oil +1.1% to $US45.12 a barrel

Iron ore +1.7% to $US72.73 a tonne

Dalian iron ore +0.6% to 495 yuan

LME aluminium -0.4% $US1845 a tonne

LME copper +0.2% to $US5997 a tonne

2-year yield: US 2.52% Australia 1.93%

5-year yield: US 2.55% Australia 1.94%

10-year yield: US 2.72% Australia 2.36% Germany 0.24%

US-Australia 10-year yield gap as of 9am Saturday AEDT: 36 basis points

From afr.com

The great holiday home reshuffle: Labor’s proposed change to investment-housing tax breaks will shift the sands under the nation’s stock of beach houses.

Vitamin king’s plan to rule from beyond the grave: Marcus Blackmore is using the late Paul Ramsay as a role model in his plan to deter takeovers by offshore predators of the $2 billion-plus vitamins giant.

Is this the best school in Australia?: How to choose where to send your kids? It’s a question parents never tire of debating but experts have their own rules for deciding which schools deliver the best value.

United States

Stocks going crazy is nothing new: The wild swings in US equities feels unprecedented, Armageddon, or maybe the robot apocalypse. It isn’t.

Defensive stocks top 2019 playbooks: Perceived safe havens like utilities and consumer staples are emerging as top picks on Wall Street as US stocks limp towards 2019.

The S&P 500 ended marginally lower in a choppy session on Friday, but major indexes posted weekly gains for the first time in December following a wild few days of trading that saw equities rebound from a prolonged slide.

Citi cuts iPhone production estimates: Citi Research reduced its first-quarter production estimates for Apple’s iPhones and nearly halved expectations on the costliest iPhone XS Max.

Major indexes moved in and out of positive territory during the day, action that was emblematic of recent volatility though lacking the huge swings of the past week. The Dow finished modestly lower, while the Nasdaq eked out a slight gain.

With the year coming to an end, investors will be watching key US economic reports next week, including on manufacturing and employment.

“It’s just maybe nervousness … with another short week coming up,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama. “There’s a lot of potential for moves one way or the other. We have got a lot of data coming in next week.”

The Dow Jones Industrial Average fell 76.4 points, or 0.3 per cent, to 23,062.40, the S&P 500 lost 3.1 points, or 0.1 per cent, to 2485.74 and the Nasdaq Composite added 5 points, or 0.1 per cent, to 6584.52.

For the week, the S&P 500 rose 2.9 per cent, the Dow added 2.8 per cent, and the Nasdaq gained 4 per cent.

Even so, the S&P 500 was on track to drop more than 9 per cent in December, its biggest monthly percentage decline since February 2009, during the throes of the financial crisis.

US fund investors added $US5.2 billion to equity funds in the first net positive flows for such funds this month, according to Lipper data for the latest week.

Tesla shares jumped 5.6 per cent after the electric carmaker named Oracle co-founder Larry Ellison to its board, in response to a demand by US regulators for independent oversight of company management.

Dell Technologies returned to public markets, nearly six years after the company’s founder and chief executive, Michael Dell, took it private.

Europe

European shares clawed back losses on Friday, buoyed by a bounce on Wall Street as a turbulent week drew to a close and investors licked their wounds after the region’s benchmark STOXX 600 sank to its lowest level since US President Donald Trump’s election.

The STOXX 600 ended the day up 1.9 per cent, its biggest daily performance since last April.

The pan-European benchmark had touched a low of 327.34 points on Thursday, its worst since November 9, 2016.

Overall, analysts expect earnings from companies in Europe’s STOXX 600 to rise 8.4 per cent in 2019, the latest Refinitiv IBES estimates show. That’s more than the 7.6 per cent earnings growth expected for the S&P 500.

“My feeling is corporate earnings in Europe will surprise a few people in 2019,” said Chris Bailey, strategist at Raymond James. “Earnings growth of 8.5 per cent is more credible for Europe than for the S&P 500, which is a regime shift.”

Asia

Japan’s Nikkei fell on its final trading day of the year on Friday as energy-related shares sagged, leading the index to its first annual loss in seven years.

The Nikkei share average ended the session 0.3 per cent down at 20,014.77.

The benchmark index booked a 12.1 per cent decline in 2018, its first annual loss since 2011 and breaking the longest winning streak since the late 1980s.

The broader Topix lost 0.50 per cent to 1494.09, and recorded a 17.8 per cent decline over the year, its biggest annual loss since 2011.

Japanese markets will be closed Monday through Thursday, reopening on Friday this week for New Year holidays.

Chanticleer: China leads green finance revolution: When Ma Jun, a member of the monetary policy committee of China’s central bank, put forward a radical idea to halve the amount of capital held on bank balance sheets against green loans there was barely a ripple of international interest.

Hong Kong stocks inched higher in slightly thin trade on Friday as investors stayed cautious in the last full trading session of 2018; it’s open a half day today. The Hang Seng index was up 0.1 per cent at 25,504.20 on Friday, but was down nearly 1 per cent for the week. The Hang Seng China Enterprises index was pretty much flat.

At close, the Shanghai Composite index was up 0.4 per cent at 2493.90 points on Friday. The index was down 0.9 per cent last week, down 3.5 per cent in December, and lower by 0.9 per cent in the fourth quarter.

The blue-chip CSI300 index was up 0.7 per cent on Friday. It was down 0.6 per cent for the week, down 5.1 per cent in December, and lower by 12.5 per cent this quarter.

The Shanghai index has lost 24.6 per cent since the start of the year, while the CSI 300 index has weakened by 25.3 per cent in the same period. The two indices have been in negative territory every month since September, and now sit below their respective 50-day and 100-day moving averages.

Currencies

The euro at 20 – still a work in progress: The euro is about to celebrate its 20th birthday but the countries that use the currency are still wrestling over how it should work and how to fix the flaws exposed by the European debt crisis.

The year-end stampede into safe-haven Treasuries has pushed the $US15.5 trillion sector toward its biggest monthly rally in 2-1/2 years, on track to bring it into positive territory for 2018, according to an index compiled by Bloomberg and Barclays.

“It’s been a move in risk reduction. Treasuries have always served that role. There’s a lot of chaos out there,” said Jerry Paul, senior vice president of fixed income at ICON Advisers in Denver.

Investors added $US4.2 billion in to Treasury funds in the week ended December 26, the most since February 2015, Lipper data showed.

Signs of softening business activity and a flat Treasury yield curve have raised concerns the US economy might enter a recession in late 2019. Those worries have stoked bets the Federal Reserve might stop raising interest rates, analysts said. Domestic pending home sales unexpectedly fell by 0.7 per cent in November, while the Chicago Purchasing Management Index slipped in December.

Commodities

Copper inched up on Friday for its first weekly rise in five weeks as gains on global equity markets rekindled interest in riskier assets and a weaker dollar made metal cheaper for buyers with other currencies.

Benchmark copper on the London Metal Exchange (LME) closed up 0.2 per cent at $US5997 a tonne and around 0.2 per cent higher for the week.

Still, concerns over slowing economic growth in China, the biggest metals consumer, have left copper down 17 per cent over the year as a whole.

“We have a weaker dollar and equities rebounding, and that’s likely lifting metals,” said Julius Baer analyst Carsten Menke.

But weaker Chinese demand for copper meant prices would likely remain around current levels through next year, he added.

A rebalancing of asset allocations by benchmark indexes in early January will see significant buying of aluminium, zinc and Comex copper, analysts at Citi said in a note.

LME aluminium ended down 0.4 per cent at $US1845 a tonne and down more than 3 per cent this week – the biggest weekly loss since October – after Russian producer Rusal agreed a deal to remove it from a US sanctions list and appointed a new chairman.

Zinc closed down 2.2 per cent at $US2440 a tonne, nickel finished 0.4 per cent lower at $US10,730, lead gained 1.5 per cent to $US2060 and tin rose 1 per cent to $US19,495.

Australian sharemarket

Australian shares closed a shortened week of trading higher, as the market closed in positive territory in all three sessions.

The benchmark S&P/ASX 200 Index closed the week 186.7 points, or 3.4 per cent, higher at 5654.3 points while the broader All Ordinaries Index rose 182.7 points, or 3.3 per cent, to 5716.

On Friday the S&P/ASX 200 advanced 57.1 points or 1 per cent.

Havilah shares back on ASX after social media claims: Shares in Adelaide mining company Havilah Resources have resumed trading on the ASX following a voluntary suspension so the company could retract statements on social media about an iron ore find.

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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