ASX poised to fall, base metals retreat, global growth concerns persist

In the US overnight, Caterpillar reported earnings that missed expectations, the first time it has done so in ten quarters, exacerbating fears of a global slowdown. Nvidia flagged that it will miss when it reports next month, principally because of weakness in China.

As for how US companies’ results overall, LPL Financial said in a morning post that with 112 S&P 500 Index companies having reported results, fourth quarter earnings growth for the S&P 500 is tracking to a 14.3% year-over-year increase, 1.5% below expectations as of January 1, 2019 on beat rates slightly below recent trends.

S&P 500 earnings estimates for the next 12 months have been reduced by 2.1% year to date and may fall further amid slower economic growth, trade tensions, and the government shutdown, LPL also said. “Although the lack of upside is a bit disappointing, barely 20% of results are in (mostly financials), the drop in estimates is in line with long-term averages, and growth expectations for 2019 in the 6% range are achievable in our view.”

Today’s Agenda

Local data: NAB business confidence; NZ trade balance December

Westpac on the pending confidence report: “The confidence index has fallen steadily over the past year, from above 10 to 3 in Dec, a low since 2016 and below the 25 year average of 6. But the RBA is more likely to focus on the conditions index, given its closer correlation with business activity. This was still quite encouraging in Dec, at 11, also lower than in early 2018 but well above the long term average, also 6.”

Overseas data: US S&P CoreLogic CS house prices November, US consumer confidence January

The US Census Bureau said it is updating its 2019 economic indicator release calendar in coordination with other agencies and the Office of Management and Budget to address the impacts of the recent lapse in federal funding.

Market Highlights

SPI futures down 20 points or 0.3% to 5831 as of 8.15am AEDT

AUD -0.2% to 71.67 US cents

On Wall St near 4pm: Dow -0.8% S&P 500 -0.8% Nasdaq -1.1%

In New York, BHP flat Rio +0.8% Atlassian -1.2%

In Europe: Stoxx 50 -0.8% FTSE -0.9% CAC -0.8% DAX -0.6%

Spot gold -0.1% to $US1303.51 an ounce at 1pm New York time

Brent crude -3.2% to $US59.65 a barrel

US oil -4% to $US51.54 a barrel

Iron ore +4.7% to $US78.18 a tonne

Dalian iron ore -0.1% to 553.50 yuan

LME aluminium -2.7% to $US1867 a tonne

LME copper -0.9% to $US6002 a tonne

2-year yield: US 2.59% Australia 1.74%

5-year yield: US 2.58% Australia 1.84%

10-year yield: US 2.74% Australia 2.21% Germany 0.20%

US-Australia 10-year yield gap as of 7.45am AEDT: 53 basis points

From Today’s Financial Review

PM pledges more jobs, no debt: Scott Morrison will pledge the creation of 1.25 million new jobs over the next five years and the eradication of net debt within a decade.

Chanaticleer: Logic catching up with retail property: Investors have pushed up retail REIT share prices, but signals from the sector aren’t good. Someone is going to be wrong.

Ausbil says to brace for more volatility: Ausbil fund manager Paul Xiradis describes the savage rotation between sectors during the final months of 2018 as one of the most violent he has ever seen.

United States

The Q4 2018 earnings season is poised to accelerate this week with an estimated 325+ companies set to report, according to Bespoke Investment Group.

Caterpillar reported quarterly profit that widely missed Wall Street estimates, hurt by softening demand in China and higher manufacturing and freight costs, sending its shares tumbling. An increase in the provision for credit losses and write-offs in its financial products segment also cut into fourth-quarter earnings for the world’s largest heavy-duty equipment maker.

The US economy is expected to lose $US3 billion from the 35-day partial federal government shutdown over President Donald Trump’s demand for border wall funding, the nonpartisan Congressional Budget Office said. The CBO said the cost of the shutdown will make the US economy 0.02 per cent smaller than expected in 2019. But researchers said more significant effects will be felt by individual businesses and workers, particularly those who went without pay.

Wall Street analysts expect Tesla to forecast a loss for the first quarter when it reports results on Thursday AEDT, having changed their expectations for a profit after CEO Elon Musk warned of a “very difficult” road ahead.

Europe

European shares slid on Monday as optimism about the end of a US government shutdown faded and growth worries reared their head again.

The pan-European STOXX 600 lost 0.97 per cent, its biggest fall since January 3, as a profit warning from Caterpillar cemented investors’ pessimistic mood after data showed the second consecutive drop in Chinese industrial profits in December.

“Medium-term threats to European unity, the European economy’s still-anaemic growth and its dependence on trade do make us cautious toward European risk assets,” said Blackrock global chief investment strategist Richard Turnill in a note.

Financials were the biggest drag on the STOXX 600, with HSBC, Santander, Allianz, and BNP Paribas down 0.8 to 1.8 per cent.

Tesco could ax 9000 jobs in its UK stores and head office with its latest move to simplify operations and achieve targeted cost savings. Britain’s biggest private sector employer, with a staff of over 300,000, said the main change in its stores would be to its fresh meat, fish and delicatessen counters. It expects to close counters in about 90 stores, with the remaining 700 trading with either what it called “a full or flexible counter”.

Capital Economics on the outlook for the FTSE 100: “We think that this will be another tough year for the FTSE 100, even if the outcome of negotiations over Brexit is favourable for the UK economy. Our forecast is that the index will finish 2019 at 6,400, which is about 5% below its level now.

Asia

Investors may be ignoring the risks on China: The hope of a trade deal between the United States and China has lifted global stock markets in 2019. But not everyone is convinced it will end well.

Hong Kong shares were little changed on Monday as China reported weak industrial profit, but the forthcoming trade talks between Beijing and Washington and a leadership change at China’s stock market regulator gave some hopes.

The Hang Seng index ended nearly flat at 27,576.96, while the Hang Seng China Enterprises index inched up 0.1 per cent.

Earnings at China’s industrial firms shrank for a second straight month in December, data showed on Monday, putting pressure on policymakers to support industries hurt by slowing prices and weak factory activity amid a protracted trade war with the United States.

Over the weekend, China appointed banking veteran Yi Huiman to head the China Securities Regulatory Commission.

All eyes are now set on Chinese Vice Premier Liu He’s visit to the United States on Jan. 30-31 for the next round of trade negotiations with Washington.

China needs to live up to great power status: The Australian Financial Review: Christopher Pyne’s call for China to act in its own best interests is a very different diplomacy from two years ago.

Xi Jinping is the most dangerous enemy: The Chinese government’s new brand of techno-authoritarianism is a threat to the world, not just the citizens of China, writes George Soros.

Japan’s Nikkei index closed down 0.6 per cent.

Currencies

Economists ready for slowing inflation: None of the big four economists sees CPI growth higher than 1.6 per cent in advance of Wednesday’s quarterly inflation report.

Commodities

Iron ore surges on Brazil disaster: The price for iron ore surged to its highest in more than 10 months after another tailings dam disaster in Brazil.

Capital Economics revises iron ore price forecast: “Overall, we expect iron ore prices to drop from $US78 per tonne at present to $US60 at end-2019 (up from $US55 previously) and to $US55 by end 2020 (revised from $US50) hindered by paltry global demand growth.”

BMO Capital Markets analyst Colin Hamilton said there was potential for aluminium stocks that were previously held off-exchange now becoming visible to the market, which could cause some near-term pressure on prices.

“However, we remain of the view that, with the market in heavy deficit and demand set to improve, the skew of price risk into mid-year is to the upside,” he said in a note.

Inventories of aluminium stand at 1.3 million tonnes in warehouses approved by the LME, near their lowest since May 2018.

There is likely to be little price support from top aluminium consumer China in the near term, with the country shutting down for the week-long Lunar New Year break next month.

Anticipated restarts to alumina production, including at Norsk Hydro’s Alunorte plant in Brazil, could keep pressure on prices, analysts have said.

The Rusal sanctions helped to boost Chinese exports of aluminium in 2018 by 20.9 percent as producers plugged the supply gap left by Rusal.

Bullion is likely to break to $US1311 as it has cleared resistance at $US1299, Reuters analyst Wang Tao said.

In other metals, palladium fell 2.2 per cent to $US1330.95 per ounce. Prices hit a record high of $US1434.50 on January 17.

Australian Sharemarket

Claims broker overhaul will enrich CBA: The shift to a flat-fee model for mortgage broking has the industry worrying that competition will be reduced.

Street Talk

Doug Farrell’s Quintet Partners restocks warchest

Quadrant’s gyms bulk up in Asia ahead of sale

Affinity prepares to fly on Virgin’s Velocity

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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