ASX poised to open lower, US tech losses widen

Australian shares appear poised to open lower as the US tech sector continues, seemingly, to fall back to earth, relatively speaking. $A retops US74¢. ASX futures down 26 points.

It’s been a tumultuous time for shareholders, regardless of where investments are being made and yet the oft-cited Chicago Board of Trade’s volatility index remains in a narrow, low range even in the wake of massive sell-offs first by Facebook and then Twitter.

Last week the Nasdaq broke out to new highs — before Facebook. However the recent advance in the index is flashing some warning signs as the US equity bull market hits hurdles despite a surge in US corporate profits.

Tematica Research said “more and more stocks within the [Nasdaq] index have been falling below their 150-day moving averages, which shows this rise has been on poor breadth – meaning few stocks are pushing the index up”.

It’s not just the Nasdaq that is starting to fatigue. The S&P 500 has yet to make a new high since its 2018 lows.

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“There have been only three times during the current bull market where the S&P 500 did not make a new high in a 6+ month period,” Tematica said. “If it does not make a new high by August 10th, this will be the third-longest streak without a new high.”

And Tematica said there’s little reason to be optimistic at this point given the fact that the FAANG stocks – Facebook, Apple, Amazon, Netflix and Google parent Alphabet – have been responsible for nearly half of the S&P 500’s gains in 2018, rising from 11.6 per cent of market cap to 13.6 per cent by Thursday’s close.

“We’re pretty sure that deadline will sail right on by given the market’s reaction to earnings from these folks” the past two weeks and while Apple reports in the days ahead, the June quarter is usually one of the slowest for the company, Tematica said.

Earnings will continue to wash over markets this week ahead as well as a lot of economic data and meetings by three central banks: Bank of Japan, Federal Reserve and Bank of England.

Locally the focus will be on June building approvals and RBA credit tomorrow, trade balance on Thursday and retail sales on Friday.

“All are important (and timely) pulse checks for the Australian economy, but markets will be paying particular attention to retail sales, which includes a quarterly volumes measure this month – a key indicator for Q2 household consumption component of GDP (Q2 data due early Sep),” noted NAB economist Kaixin Owyong. NAB expects retail sales to rise slightly in June, by +0.1% m/m, pointing to a Q2 print of 0.7% q/q, once retail inflation is taken into account. The market is a touch stronger at +0.3% m/m and +0.8% q/q.

Today’s Agenda

No local data

Overseas data: Japan retail sales June; Euro zone confidence indices for economic, business, industrial, services and consumer July; US pending home sales June, Dallas Fed manufacturing activity July

Market Highlights

SPI futures down 26 points or 0.4% to 6225

AUD +0.3% to 74.00 US cents

On Wall St: Dow -0.3% S&P 500 -0.7% Nasdaq -1.5%

In New York, BHP +1.4% Rio -0.1% Atlassian +10.5%

Techs: Facebook -0.8% Twitter -20.5% Alphabet -2.4% Netflix -2.2%

In Europe: Stoxx 50 +0.5% FTSE +0.5% CAC +0.6% DAX +0.4%

Spot gold +0.1% to $US1224.22 an ounce

Brent crude -0.3% to $US74.29 a barrel

US oil -1.3% to $US68.69 a barrel

Iron ore +1.8% to $US67.49 a tonne

LME aluminium +0.2% to $US2071 a tonne

LME copper +0.1% to $US6297 a tonne

2-year yield: US 2.67% Australia 2.04%

5-year yield: US 2.84% Australia 2.24%

10-year yield: US 2.95% Australia 2.64% Germany +0.4%

From Today’s Financial Review

PM under pressure to dump tax cuts

Bill Ferris calls for more direct corporate R&D support

Why free-to-air TV is still king in advertising

United States

Wall Street’s major indexes fell on Friday as weak earnings reports from major technology companies led to a big drop for the sector.

Intel shares sank 8.6 per cent after the chipmaker’s data center business missed estimates amid stiff rivalry from Advanced Micro Devices. AMD shares rose 3.2 per cent.

Twitter shares plunged 20.5 per cent after the social media network reported a decline in monthly active users, versus the increase analysts had expected, and warned of further drops as it deletes phony accounts.

The S&P 500 technology index fell 2.0 per cent, the most among the major S&P sectors. Shares of Apple, which is set to report quarterly results on Tuesday (Wedneday AEST), fell 1.7 per cent. Shares of Microsoft and Alphabet, which had soared after both companies recently reported strong quarterly results, dropped 1.8 per cent and 2.5 per cent, respectively. Alphabet shares touched an all-time high earlier in the session but reversed course..

“There’s a bit of concern perhaps growing that the bloom’s off the rose for these tech stocks, that they are not invincible,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.

For the week, the Nasdaq shed 1.1 per cent. However, it wasn’t all bad news: the Dow advanced 1.6 per cent and the S&P 500 rose 0.6 per cent.

US economic growth reaches 4.1pc: The US economy grew at its fastest pace in nearly four years in the second quarter as consumers boosted spending and farmers rushed shipments of soybeans to China.

“Pop the champagne today, but don’t get used to it, growth going forward has a lot of headwinds,” said Chris Rupkey, chief economist at MUFG in New York. “Unless you cut taxes again, there won’t be additional tax cut monies to line company and consumer pocket books.”

Europe

In Europe, more than 70 companies on the pan-European STOXX 600 will report this week. It is a particularly big week for the region’s banks, which have underperformed the broader index with a 10 per cent fall so far this year.

The big guns on the list include BNP Paribas, Intesa Sanpaolo, Lloyds, ING, Barclays, SocGen, RBS, Credit Agricole and Unicredit. With issues like stuttering euro zone growth, a long-running struggle to keep up with U.S. rivals as well as bad loans and trouble in Turkey, there will be plenty to drill into.

European stocks rose to fresh six-week highs on Friday, helped by an easing of fears over US tariffs and some solid company results.

Shares in consumer goods company Reckitt Benckiser, supermarket retailer Carrefour, construction group Vinci, BT and bank BBVA rose following well-received results, lifting the pan-European STOXX 600 benchmark, closing 0.6 per cent higher. The index ended the week up 1.7 per cent.

“On average earnings updates are quite good,” said Jerome Schupp, fund manager at Geneva-based investment firm Prime Partners. “The message about the second half is also reassuring given the uncertainties regarding trade wars.”

According to Deutsche Bank, European second-quarter EPS growth has accelerated to 6 per cent from 0 per cent in the first, a result they said was good given the deterioration in euro area growth momentum.

Mining company BHP Billiton rose 3 per cent in London after BP agreed to buy BHP’s US shale oil and gas assets for $US10.5 billion. BP shares reversed earlier losses to end 0.5 per cent higher.

“The shale deal presents a promising opportunity for BP to reverse many years of underinvestment,” said Accendo Markets Artjom analyst Artjom Hatsaturjants.

“Still, it comes at a price of a short-term hit to shareholder value and would divide those investors looking for a quick profit from rising oil prices and those who see a long-term opportunity in holding energy stocks,” he added.

Asia

China’s cabinet investigation group has found that vaccine maker Changsheng Bio-technology broke the law in manufacturing rabies vaccines, the state news agency Xinhua reported on Friday.

The investigation group said the company had systematically falsified production and testing records to avoid regulatory scrutiny, according to Xinhua.

“The company used expired materials to produce some rabies vaccine and falsified the production date,” the investigation group found. “To cover up violations, the company systematically fabricated production and testing records.”

In China, the blue-chip CSI300 index ended 0.4 per cent down at 3521.23, while the Shanghai Composite Index closed 0.3 per cent lower at 2873.59 points. For the week, SSEC was up 1.6 per cent, while CSI300 gained 0.8 per cent.

Hong Hong stocks ended flat on Friday, as expectations of more stimulus from Beijing offset worries over a China economic slowdown as trade frictions with the United States intensify.

The Hang Seng index rose 0.1 per cent, to 28,804.28, while the China Enterprises Index gained 0.2 per cent, to 11,047.42 points.

China plans to put more money into infrastructure projects and ease borrowing curbs on local governments to help soften the blow to the economy from the Sino-US trade war, policy sources told Reuters. Profit growth for China’s industrial firms eased in June from the previous month, as factory production slowed.

Chinese investors signed agreements to build a $US10 billion metallurgical complex in South Africa during President Xi Jinping’s state visit last week and hope to start construction next year, an executive involved in the project and a provincial official told Reuters.

South Africa’s President Cyril Ramaphosa said at a joint news conference with Xi on Tuesday that China had committed to invest $US14.7 billion in the South African economy, but neither leader mentioned the $US10 billion complex.

Ramaphosa is on a mission to kick-start economic growth after a decade of stagnation and is targeting $US100 billion in new investment over five years.

Currencies

Capital Economics said in a note that its sees further divergence in monetary policy among the world’s most important central banks. Meeting this week are the Bank of Japan, US Federal Reserve and the Bank of England.

Cap Eco on BoJ: “… we doubt that the BoJ will tighten policy to any significant degree for a long time yet. If anything, recent developments have strengthened the case for Japan to stick to its ultraaccommodative policies. In particular, the last few months of inflation data have been even weaker than expected.”

Cap Eco sees the Bank of England lifting rates this week, again in November and twice more in 2019.

As for the RBA, Cap Eco sees Australia’s cash rate, now at 1.5 per cent, on hold for some time yet; it forecasts the next move will be a 25 basis point lift in the third quarter of 2019 with the cash rate reaching 2 per cent by the end of 2019 and 2.5 per cent by the end of 2020.

The Bank of Japan meets on Tuesday and might be doing some ‘jinarashi’ i.e. preparing markets for some changes to its unique, ultra-loose monetary policy.

Sources have told Reuters that having failed to raise Japan’s inflation to anywhere near its 2 per cent target despite some intense effort, it is now considering changing its targets or its bond-buying program.

Five years of the qualitative and quantitative easing policy, which was last tweaked in 2016 to keep rates negative and cap the 10-year bond yield at zero, have had mixed results at best. Unemployment has dropped and the economy is no longer mired in deep deflation, but the yen hasn’t weakened enough to create noticeable inflation or ramp up economic growth.

And with a global trade war now threatening trouble for its big exporters and zero interest rates hurting its banks, the BOJ seems to have recognised that something needs to give.

TD’s take on what this week’s Federal Reserve statement will note: “The FOMC significantly consolidated and updated its statement language in June, which likely means no material changes for August. The opening paragraph should cite strong recent GDP and job growth, with inflation returning to target. This near-term optimism is already fully priced into market expectations for a September rate hike.”

Capital Economics on the yuan: ” The renminbi declined against the dollar again on Friday to the weakest in more than a year. But the move was probably not a deliberate effort to devalue the currency. Indeed, there were widespread rumours that officials were leaning on state banks to limit the currency’s fall over the past two days. The [central] bank’s intervention in FX market has not been aggressive so far though, and will probably remain small unless capital outflows start to surge.”

Commodities

Benchmark copper on the London Metal Exchange closed up 0.1 per cent at $US6297 a tonne and was 2.4 per cent higher this week.

The most traded contract on the Shanghai Futures Exchange also saw its first weekly gain in seven weeks, up 3.5 per cent.

Most other industrial metals also rose this week from last week’s multi-month lows, but Trump’s unpredictability meant any recovery was fragile, Capital Economics analyst Caroline Bain said.

“There’s so much uncertainty that it (prices) could go either way,” she said. “We’re going to see more softness in the Chinese economy over the next few months which will prevent any significant rebound in metals prices for now.”

LME aluminium finished up 0.2 per cent at $US2071 a tonne and was 2 per cent higher this week, its first weekly gain in eight weeks.

Data on Friday showed 37,375 tonnes of warrant cancellations, taking on-warrant stocks available to the market in LME-registered warehouses to 852,900 tonnes, the lowest since May 15 and pointing to tighter supplies.

Underlining concerns of restricted supply, one entity held 50-79 per cent of aluminium warrants on the LME, one entity controlled 50-79 per cent of copper warrants and one entity controlled 50-79 percent of zinc warrants.

China’s construction steel rebar prices rose more than 3 per cent on Friday to their highest since February 2013, buoyed by strong demand, dwindling stocks and signs of more production curbs in the country’s top steelmaking centre.

The most-active rebar contract on the Shanghai Futures Exchange ended up 3.1 per cent at 4126 yuan ($US606.54) a tonne, its highest close since February 18 2013.

The market has been betting on tighter supplies due to stringent production curbs in Tangshan, the country’s top steelmaking city in Hebei province, which has imposed a series of temporary restrictions this month.

Industry website SMM reported on Friday that all sintering machines and shaft furnaces in Tangshan would have to shut down from noon on July 27 until midnight on July 31 due to pollution, sending prices higher.

Falling inventories were also fuelling the rally. Chinese steel product inventories fell by 104,700 tonnes to 9.89 million tonnes as of Friday from a week earlier, data from Mysteel consultancy showed.

Stocks of construction steel rebar fell by 1.8 per cent to 4.48 million tonnes and hot-rolled coil stocks slipped by 0.7 per cent to 2.11 million tonnes.

Iron ore on the Dalian Commodity Exchange rose as much as 3.7 per cent on Friday to its highest since May 15 before closing up 3.5 per cent at 491.5 yuan a tonne.

Australian Sharemarket

Who will shine and sink this earnings season?: How much worse can it get for Telstra and CBA, and how much better for the miners? This earnings season promises some answers to big questions.

The Australian sharemarket closed the week higher, hitting a fresh 10-year high on the back of improved market sentiment and commodity prices.

The S&P/ASX 200 index rose 14.3 points, or 0.2 per cent, this week to 6300.2, beating the previous 10-year high by 14 points.

Improving trade relations supported base metal prices this week as they recovered from almost two months worth of losses.

The Bloomberg Commodity Index rose 2 per cent this week, its best weekly performance since October 2017. BHP Billiton lifted 4.5 per cent to $34.40 this week. The company announced the sale of its US shale assets for $US10.5 billion. Rio Tinto shares also rose 1.6 per cent to $81.38, while South32 shares closed the week 2.5 per cent higher at $3.63.

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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