ASX poised to rise, $A slips

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Pantheon Macroeconomics’ Samuel Tombs sounded a more optimistic note in his comment.

“All told, Brexit uncertainty clearly is slowing the economy, but we do not see a strong case for expecting GDP to fall in Q1,” Mr Tombs said. “We have revised down our forecast for quarter-on-quarter GDP growth in Q1 to 0.2%, from 0.3%, due to the lower-than-expected starting point in December.

“We also have nudged own our forecast for year-over-year GDP growth in 2019 as a whole to 1.5%, from 1.6%. But we’re not prepared to bet against consumers at this stage, given their track record of resilience and myopia.”

As expected, the spot price of iron ore leapt higher on Monday as it reset with the return of Chinese traders. The surge in iron ore prices has led Citigroup to significantly lift its earnings forecasts for BHP, Rio and Fortescue. It has buy ratings on both BHP and Rio; and a hold on FMG.

Today’s Agenda

Local data: Housing finance December, NAB business conditions January, NAB business confidence January.

Overseas data: US NFIB small business optimism

RBC on the pending US data: “The full NFIB small business sentiment survey for January is due out tomorrow, but we already got a pretty good preview of what’s to come with the release of the employment sub-components. Not surprisingly, the effects of the government shutdown (which ran nearly the entire month of January) are palpable. Hiring plans slid hard on the month to a net 18% from 23% prior in what goes down as the sharpest sequential decline this cycle. This highlights that while the static impact of a government shutdown is relatively modest, the feedback to sentiment based on the uncertainty created can add up.

“Interestingly, while the effect on hiring plans was acute, employee compensation remained in an uptrend. The share of small firms raising worker comp ticked up to 36% from 35% last month and a nearby low of 32% back in August. This is also the second best read of the cycle. This income trend is confirmed by what we’ve seen in the monthly employment reports of late—with January, in particular, showing production worker aggregate wage growth running at a heady near-6% y/y clip. So setting the self-inflicted fiscal wounds aside, the fundamentals of the economy look quite sound.”

Market Highlights

SPI futures up 18 points or 0.3% to 6015 about 4.30am AEDT

AUD -0.3% to 70.66 US cents

On Wall St at 12.33pm: Dow flat S&P 500 +0.1% Nasdaq +0.3%

In New York, BHP flat Rio -0.7% Atlassian +0.8%

In Europe: Stoxx 50 +1% FTSE +0.8% CAC +1.1% DAX +1%

Spot gold -0.6% to $US1309.11 an ounce at 12.32pm New York time

Brent crude -0.8% to $US61.58 a barrel

US oil -1.4% to $US51.96 a barrel

Iron ore +5.9% to $US90.58 a tonne

Dalian iron ore -0.8% to 646.50 yuan

LME aluminium flat at $US1880 a tonne

LME copper -1% to $US6150 a tonne

2-year yield: US 2.49% Australia 1.67%

5-year yield: US 2.47% Australia 1.70%

10-year yield: US 2.65% Australia 2.06% Germany 0.12%

US-Australia 10-year yield gap as of 3.53am AEDT: 59 basis points

From Today’s Financial Review

Time for regionals to stop whinging: Bendigo is one of a number of regional banks that have delivered poor financial performance and then tried to blame someone else.

How the Future Fund avoided the rout: A 30 per cent allocation to so-called “iliquid assets” such as infrastructure and property boosted the portfolio’s overall return while hedge fund investments offset a sharp decline in equities.

Atlassian leads encryption revolt: Atlassian’s Scott Farquhar says business is already being lost due to new encryption laws, but Peter Dutton says they are already producing results.

United States

Bianco Research: “Companied over guidance for the S&P 500 is two-year low and continuing lower. Companies are warning that the earnings recession is real.”

The US Federal Reserve could hike interest rates once more by June despite a growing, near 50-50 chance of a 2020 recession, Vanguard Group chief investment officer Greg Davis said on Monday.

Davis sees steady inflation and an environment that can be supportive of corporate bonds and other relatively risky assets. Wage growth and other economic data could help the Fed raise rates once more before a “permanent” pause given heightened uncertainty on trade, geopolitics and other issues.

Yardeni Research: “Fears that the US economy may be falling into a recession have been recurring since the last one, triggering 62 panic-attack selloffs in the stock market since March 2009, when the current bull market started. They were all followed by relief rallies, as was the latest panic attack.

“Of course, it’s too soon to declare that the latest one is definitely over. Stock prices swooned last Thursday and Friday morning on fears of a renewed government partial shutdown, slowing global growth, an impasse in the US-China trade talks, and weakness in some US economic indicators.”

Europe

Britain’s economy slowed sharply in late 2018, pushing annual growth to a six-year low as worries about Brexit hammered business investment and a weakening global economy weighed on trade, data showed on Monday.

Quarterly growth fell to 0.2 per cent between October and December from 0.6 per cent in the previous quarter, in line with forecasts in a Reuters poll, while output in December alone dropped by the most since 2016.

“Brexit uncertainty, a slowing global economy and the persistent financial squeeze on consumers and businesses (are) increasingly having a suffocating effect on economic activity,” British Chambers of Commerce economist Suren Thiru said.

European shares bounced back on Monday. The pan-regional STOXX 600 index ended the session up 0.9 per cent after falling on Friday amid worries over an economic slowdown.

Banks and financials had a strong session with Italian lenders leading the way after Banco BPM, UBI Banca and UniCredit said their capital ratios met European Central Bank standards. Their shares were up 7 per cent, 3 per cent and 1.9 per cent respectively.

Deutsche Post rose 2.5 per cent on a report saying that Germany was set to grant the postal services firm a higher-than-expected increase in postage for letters to account for fewer letters sent and higher costs.

Airbus shares closed up 2 per cent after Goldman Sachs added the stock to its ‘European Conviction’ list and reiterated its “buy” rating.

Asia

The Hong Kong stock market closed firmer on Monday, led by a rally in mainland Chinese shares, as Beijing and Washington launched another round of bilateral trade talks. At the close of trade, the Hang Seng index was up 0.7 per cent at 28,143.84 points, while the Hang Seng China Enterprises index gained 0.6 per cent

The Shanghai Composite index rose 1.4 per cent to 2653.90 points, its highest close since December 5, 2018. The index has risen 6.4 per cent so far this year. The blue-chip CSI300 index gained 1.8 per cent, with its financial sector sub-index advancing 0.8 per cent and healthcare sub-index rising 2.4 per cent.

The smaller Shenzhen index jumped 2.9 per cent and the start-up board ChiNext Composite index rallied 3.5 per cent.

The A-share market was closed last week for the Lunar New Year holiday.

Japanese markets were closed for a holiday.

Currencies

TD on the Swedish knona: “The SEK has depreciated more than any major currency in 2019. This weakness now looks overdone, however, and no longer appears to be supported by underlying fundamental or technical factors. The Swedish economy has softened but the move looks overdone – particularly as other risky assets have recovered sharply YTD.

“With a lot of the bad news now in the price, we think the SEK looks vulnerable to a correction. This week’s Riksbank meeting should pass quietly, but our base case for a broadly unchanged policy stance is unlikely to provide further fuel to SEK bears.

“Against this backdrop, we think EURSEK looks ripe for a reversal lower. The October 11 high (10.5370) should provide a notable degree of resistance heading into this week’s policy meeting. As an alternative, we think CADSEK has potential for a significant retracement lower as we are generally inclined to fade CAD strength in this environment.”

Commodities

China iron ore futures rose to a record on Monday, the first session after a week-long national holiday, on concerns that supply from Brazil, the country’s second-largest ore supplier, may decline after a fatal dam accident at a Vale mine.

The most-active iron ore futures for May delivery on the Dalian Commodity Exchange rose to their daily trading limit when the market opened at 0100 GMT, hitting a record of 652 yuan ($US96.26) a tonne.

Contracts for March, July, September and November delivery also climbed to their daily limit during early trade on Monday.

“Price hiking today is driven by both real supply gap and speculative sentiment among investors,” said a Shanghai-based iron ore trader.

Benchmark construction steel rebar prices on the Shanghai Futures Exchange (ShFE) also surged on Monday, gaining more than 4 per cent to a daily high of 3908 yuan a tonne, the highest in five months, as traders expect short supply in the coming months. It settled up 2.4 per cent at 3825 yuan a tonne.

Citi’s new mining analyst Paul McTaggart has lifted earnings significantly for RIO/BHP/FMG following big upgrades to iron prices for CY19. “The tragedy at Vale’s Brumadinho dam in Brazil has led to the suspension of 51mtpa of iron ore production (~3.3% of seaborne supply), and as a result Citi has raised its base case CY19 forecast to $88/t from US$63/t, CY20 from US$60/t to US$70/t. LT remains unchanged at US$55/t.

“RIO CY19E EBITDA estimate is raised 44% with BHP & FMG FY20 EBITDA estimates raised 19% and 71%. We retain our Buy ratings on BHP and RIO with target prices raised to $39 & $102. Staying Neutral on FMG with new $6.20 target. RIO the pick given valuation, stock trading on 9.8xFY20 PE vs BHP on 10.7x.”

Australian Sharemarket

Costello sees Future Fund role in super: Future Fund chairman Peter Costello is pressing the Morrison government to create a public fund to manage people’s superannuation, as part of its response to the banking royal commission.

Australian shares fell on Monday dragged lower by financials stocks as Bendigo and Adelaide Bank’s weaker-than-anticipated first-half numbers took the wind out of the high-flying banking sector.

The regional lender declined 6.8 per cent to $10.39 and led the big four banks down with it. Bank of Queensland shares also fell by 4 per cent to $10.23.

The S&P/ASX 200 Index declined 10.7 points, or 0.2 per cent, to close at 6060.80. Local shares are up 7.3 per cent so far this year after a 3.9 per cent rise in January and 3.6 per cent rally last week alone, following the release of the final report into the Hayne royal commission. The report did not challenge vertically integrated businesses or the way banks assess the suitability of borrowers, causing banks to surge in value.

Morgan Stanley has recalibrated its model portfolio: “Recent valuation call-outs by our Resources analysts lead to a removal of Gold and a switch to more China-linked exposures. We also concentrate our defensive positioning further now that the ASX 200 has pushed through our 6000 target.

“Both our Metals and Mining and Energy teams have made recent call-outs on sector and stock conviction following a strong start for both in CY19. Energy stocks are up 11% YTD and Metals and Miningup 9%,versus the ASX up 7.5%. Across the Resources space our analysts have seen upside opportunities close and in some cases shift due to moves in spot commodity prices. We take this on board and recalibrate positioning.”

Street Talk

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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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