ASX poised to rise on trade, shutdown optimism


In a morning speech, Alexandra Heath, the Reserve Bank of Australia’s head of economic analysis, said the bank’s views on the domestic economy had shifted after retail sales and consumption proved weaker than expected, prompting a downgrade in growth forecasts.

Heath said the strength of the labour market stood in contrast with consumption and some other activity indicators and it was not clear how that would resolved.

Speaking at a forecasting conference, Heath also said the bank was confident that the corner had been turned on wages and that growth would pick up over time. Such growth would help offset any drag on wealth from falling home prices.

President Donald Trump told reporters at the White House that he could allow a looming tariff deadline to “slide for a little while” if he feels a deal with China is close.

Also bolstering optimism was a report that a fresh US federal government shutdown would be averted even though the bipartisan agreement apparently fails to provide much money for Mr Trump’s wall across the southern border.

“I’m not happy about it. It’s not doing the trick,” Trump also said during the cabinet meeting at the White House. But he added, “I don’t think you’re going to see a shutdown.” He said he’ll hold a meeting later in the day to consider the proposal.

The three main US benchmarks were each at least 1.3 per cent higher in mid afternoon trade, extending earlier gains.

The latest Bank of America Merrill Lynch survey of global fund managers found that bearish sentiment hasn’t been dented by the year to date rally in global equities.

Fund managers were just 6 per cent overweight global equities this month, 12 percentage points lower than in January.

And the view on US equities was particularly grim.

Allocation to US equities slid into negative territory and the lowest in nine months, down 4 percentage points to 3 per cent underweight; US equities have become the second least favoured region amongst global fund managers, BAML said.

Allianz chief economic adviser Mohamed El-Erian said there’s still an opportunity in US stocks, given the level of uncertainty about where Europe is headed in particular and China too.

Given the outlook, the “obvious relative trade” is to go long US stocks versus the rest of the world, El-Erian advised. He also called for the spread between 10-year US Treasuries and German bunds to widen out to as much as 270 to 280 basis points, from the current 255 points.

Poor political and fiscal management in Europe mean it’s “likely that growth prospects are going to dim further”, El-Erian said.

In the wake of political turmoil in Italy, violent street protests in France and sluggish growth in Germany, the European Commission recently slashed forecasts for the region’s economic expansion to 1.3 per cent this year, down from 1.9 per cent projected in November. While US activity is expected to slow from 2018’s pace, the Federal Reserve still projects a solid 2.3 per cent increase for gross domestic product.

Today’s Agenda

Local data: WBC-MI consumer confidence February, RBA’s Alexandra Heath speaks at the Australian Business Economists’ Forecasting Conference; RBNZ rate decision

In a Reuters poll, 16 economists unanimously expect the RBNZ to keep rates on hold at a record low of 1.75 per cent for the fifteenth time in a row, at its first monetary policy announcement of the year on Wednesday afternoon.

Six of the 15 economists who made predictions beyond this week’s decision expected at least one hike to the official cash rate (OCR) by the end of the year, though one expected a cut to 1.50 per cent.

Overseas data: Euro zone industrial production December; UK January CPI; US January CPI

Market Highlights

SPI futures up 29 points or 0.5% to 6045 at about 8.15am AEDT

AUD +0.5% to 70.95 US cents (Overnight peak 71.03)

On Wall St at 4pm: Dow +1.5% S&P 500 +1.3% Nasdaq +1.5%

In New York, BHP +0.7% Rio +0.3% Atlassian +1.5%

In Europe: Stoxx 50 +0.8% FTSE +0.1% CAC +0.8% DAX +1%

Spot gold +0.3% to $U1311.92 an ounce at 1.08pm New York time

Brent crude +2% to $US62.76 a barrel

US oil +2.2% to $US53.55 a barrel

Iron ore -3.2% to $US87.65 a tonne

Dalian iron ore -4.2% to 618 yuan

LME aluminium -1% to $US1862 a tonne

LME copper -0.7% to $US6106 a tonne

2-year yield: US 2.50% Australia 1.71%

5-year yield: US 2.49% Australia 1.74%

10-year yield: US 2.68% Australia 2.11% Germany 0.13%

US-Australia 10-year yield gap as of 8.37am AEDT: 57 basis points

From Today’s Financial Review

Macquarie picks ‘capital starved areas’: Macquarie chief executive Shemara Wikramanayake said the financial services group was focused on areas of global finance that are “starved of capital” such as renewables and infrastructure.

Chanticleer: Wikramanayake ready to invest $24b: Comments made by Shemara Wikramanayake during her first public outing as chief executive of Macquarie Group ought to make all the Macquarie non-believers sit up and take notice.

Why Antipodes picks Microsoft over Dropbox: Don’t be distracted by ‘disruptor’ tech stocks, says Antipodes Partners’ chief investment officer Jacob Mitchell.

United States

All three major US stock indexes posted their biggest one-day percentage gains for the month so far, each advancing more than 1 per cent. The S&P 500 ended the session above its 200-day moving average for the first time since early December.

The fourth-quarter earnings season is nearing the home stretch, and 71 per cent of S&P 500 companies that have reported have beaten consensus estimates.

The outlook for 2019, however, is less rosy. First-quarter earnings are now expected to post a year-on-year decline of 0.3 per cent, which would be the first loss since the earnings recession ended in the second quarter of 2016.

Of the 11 major sectors of the S&P 500, all but real estate closed in positive territory. Technology stocks provided the biggest boost to the S&P 500, and they also led the Nasdaq’s advance.

Tariff-sensitive industrials headed up the Dow’s gain, led by 3M, Caterpillar, United Technologies and Boeing.

Amazon provided the biggest lift to the S&P 500 and the Nasdaq, rising 3.0 per cent after Walmart ended its partnership with logistics firm Devi for a rival same-day grocery delivery service.

Trump open to China deadline extension: Donald Trump could allow a looming tariff deadline to “slide for a little while” if he feels a deal with China is close.

Shiller says recession risk elevated: Recession risk is real, according to Nobel laureate Robert Shiller, and one might come as soon as this year.

Citigroup CFO sees growth potential: Citigroup has moved past the distractions that have held it back in recent years, its retiring CFO says.

The National Federation of Independent Business said on Tuesday its Small Business Optimism Index dropped 3.2 points to 101.2 in January, the weakest reading since November 2016.

The index surged after Trump’s electoral victory, boosted by his administration’s $US1.5 trillion tax cut package and deregulation policy. It has declined for five straight months since hitting an all-time high last August, but remains high by historic standards.

The NFIB said its uncertainty index jumped 7 points to 86 last month, the fifth highest reading in the survey’s 45-year history. The rise in uncertainty coincided with the longest partial shutdown of the federal government in history.

Job openings, a measure of labour demand, increased by 169,000 to a seasonally adjusted 7.3 million, the Labor Department said in its monthly Job Openings and Labor Turnover Survey, or JOLTS, on Tuesday. That was the highest level since the series started in 2000.

Europe

Brexit Britain will play by EU rules: Theresa May tries to mollify parliament after accusations she is running down the clock to Brexit day in a bid to get her deal through.

European shares closed higher on Tuesday as investors cheered positivity around US-China trade talks and early signs of a compromise to avoid another US government shutdown, while Michelin’s results pumped up automotive stocks.

The pan-European STOXX 600 was up 0.5 per cent, with Germany’s trade-sensitive DAX advancing 1 per cent and Paris’ CAC 40 up 0.8 per cent.

Automakers and their suppliers were the biggest gainers, up 2.9 per cent after Michelin delivered better than expected results and pledged further gains in operating profit this year despite challenging conditions.

The French tire maker’s shares rallied 13 per cent for their best day in nearly a decade.

London indices underperformed their euro zone peers as the pound rose slightly after a parliamentary address by British Prime Minister Theresa May, in which she asked for more time to secure a Brexit deal.

Gucci owner Kering was another winner, with its shares turning positive in mid-morning trade as investors took comfort from upbeat comments on the first-quarter outlook.

Asia

Hong Kong stocks edged up on Tuesday as consumer shares outperformed amid expectations Beijing would roll out more measures to spur consumption to cushion growth.

The Hang Seng index rose 0.1 per cent to 28,171.33, while the China Enterprises Index gained 0.3 per cent to 11,044.65.

The Hang Seng consumer goods index climbed 1.9 per cent to a two-month high, having gained 12.4 per cent this year, as investors expected more efforts to boost the country’s consumption amid an economic slowdown.

The blue-chip CSI300 index closed 0.7 per cent higher at 3330.34, while the Shanghai Composite Index also gained 0.7 per cent to 2671.89 points. Both indexes posted their fourth session of gains in a row.

So far this year, the Shanghai stock index is up 7.1 per cent and the CSI300 has risen 10.6 per cent, while China’s H-share index listed in Hong Kong is up 9.1 per cent. Shanghai stocks have risen 3.4 per cent this month.

Japan’s Nikkei surged on Tuesday, rebounding from a one-month low, as shares of exporters such as automakers and machinery makers enjoyed strong demand thanks to a weaker yen.

Taiyo Yuden skyrocketed 20 per cent after it said its net profit for the April-December period jumped 58 percent and raised its dividend payout outlook. It also said it would buy back 2 million of its own shares, or 1.6 per cent shares outstanding, worth up to 3 billion yen.

The Nikkei share average rallied 2.6 per cent to 20,864.21, after closing at the lowest level since early January on Friday. Japanese markets were shut on Monday for a holiday.

Currencies

Pantheon Macroeconomics on the Brexit hit on the pound: “Brexiteers have downplayed the economic consequences of a no-deal exit by arguing that a further depreciation of sterling would cushion the blow.

“David Davis, the former Brexit Secretary argued in The Times on Monday that a 20% fall in sterling predicted by some analysts would not be a bad thing, because ‘our goods will become 20% more competitive on the global market’.

“Boris Johnson, the former Foreign Secretary, followed up on BBC Radio 4 and downplayed the potential side-effects for consumers by arguing that ‘sometimes you can have very significant falls in the value of the pound without that being passed on in the form of inflation’. Neither of these arguments stand up to scrutiny.”

Commodities

Miners damned if they don’t: After the latest Brazil dam disaster, Australian miners are set to come clean this reporting season on their own potential risks.

China’s iron ore and steel futures retreated on Tuesday from record highs hit in the previous session, as speculators sold positions amid trade concerns between Beijing and Washington.

The most-active iron ore futures on the Dalian Commodity Exchange ended 2.7 per cent lower at 634 yuan ($US93.60) per tonne. It reached a daily-trading limit of 8 per cent to a record high of 652 yuan in the previous session.

“It is not surprising that iron ore prices will pull back as some traders want to secure gains and wait to see the next move in the market,” said a Shanghai-based trader.

The volatile iron ore prices came as an estimated 70 million tonnes of iron ore output cut at the world’s largest miner of the mineral, Vale SA, after a dam collapse in Brazil last month that killed at least 165 people.

“The consensus view was that the net impact (of the accident) on iron ore supply would be limited and short-term. Conversely, our view has been that the impact would be significant and longer term,” Jefferies analyst Christopher LaFemina wrote in a note.

China is adding to its gold reserves again, boosting holdings for a second month and reinforcing an outlook from bulls including Goldman Sachs that central-bank buying will likely remain strong this year.

The People’s Bank of China raised holdings to 59.94 million ounces, or about 1864 tonnes, by the end of January from 59.56 million ounces a month earlier, according to data on the bank’s website. In tonnage terms, it added about 11.8 tonnes last month after taking in just under 10 tonnes in December, which was the first time the PBOC had boosted its hoard since October 2016.

Australian Sharemarket

Nikko says banks are cheap: Nikko Asset Management’s head of Australian equities is relaxed about the prospect of dividend cuts at the big four banks, taking the view that the sector is historically very cheap.

Australian shares closed higher on Tuesday as muted gains by the index heavyweights ended a two-day run of losses.

The S&P/ASX 200 Index rose 18.3 points, or 0.3 per cent, to 6079.1.

Street Talk

Ex-ANZ markets boss Steve Bellotti’s new fund drops 74.8pc

Ex-CQS, Och-Ziff bigwig Lincoln Li readies fund

Barry Lambert back with $300m float

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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