Buckle-Up For A Busy Week

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The FOMC is pretty much certain to raise the Fed Funds target rate to 1% on Wednesday.

The US employment report released last night was mixed, with the headline number of 235,000 new jobs above expectations, the hourly earnings growth below expectations at .2% and the Unemployment rate unchanged at 4.7%.

These data were solid enough to hold the US indexes within recent ranges and even move the odds of a June rate hike slightly above 50%.

However, there are several other events next week which could also move the market.

On Tuesday, UK PM Theresa May will be addressing the House of Commons. There is a good chance that she may announce Article 50, which will formally start the Brexit process.

On Wednesday, Dutch citizens go to the polls to elect a new PM. The anti-EU candidate, Geert Wilders has a very good chance of winning.

Also on Wednesday, the US Debt ceiling agreement from 2015 will expire, further clouding an already murky legislative agenda in the USA.

On Thursday, the Australian employment report will be released, which will have an acute bearing on future domestic interest rate policy measures.

 

Tabcorp And Tatts

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Shares of Tabcorp have had a good week and are pushing up against the $4.50 level in early trade.

Before the open yesterday, the ACCC, Australia’s competition watchdog committee, gave an upbeat report that some of the “red-light” issues facing Tabcorp and Tatts‘ proposed $11 billion merger can be easily resolved.

However, the ACCC did say that the merger details would require more time to get the rubber stamp.

One of these hurdles could be overcome by Tabcorp selling its Queensland electronic gaming monitoring business, Odyssey Gaming.

As a defensive name, we have been buying Tabcorp for client accounts in the $4.20 to $4.50 range since early February.

Chart – TAH

US Payroll Preview

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The  US Non-Farm Payroll (NFP) report, scheduled for 12:30 am Sydney time tonight, could have a significant impact on global financial markets.

In a speech last Friday, FED Chief Janet Yellen was very clear that steady employment growth and rising inflation were the key indicators guiding US interest rate policy.

Tonight’s report will reflect both the number of new jobs created in the month of February and the pace of wages growth.

Wednesday’s release of the ADP private sector job’s report printed much higher at 298,000 on expectations of 184,000. And while the ADP data is far from a foolproof indicator of the NFP report, it would be a big surprise if the headline jobs number printed much below the 200,000 consensus forecast.

Against this backdrop of an imminent FED rate hike, US 10-yr bond yields have reached a three year high of 2.64%, Gold has dropped below $1200.00, Crude Oil has fallen more than 8.5% this week and Copper has lost more than 6% over the last 10 trading sessions.

It’s likely that a NFP print of  230,000, or more, will be bullish for the US Dollar and negative for Global equity markets.

Crude Dump Pushes Oil Search Lower

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The price of West Texas Crude Oil fell over 5% last night as the US Energy Information Administration (EIA) reported an 8.2 million barrel increase in domestic crude supplies. This lifted the total crude inventories to a new record of 528.4 million barrels in storage.

The front-month April contract broke the recent consolidation pattern to trade down to a 3-month low of $50.05, just above the important $50.00 support level.

A corrective bounce higher after such a large 1-day move is likely. However, with storage at all-time highs, more supply coming online and consumption numbers falling, a $48.00 price handle looks more probable than a $52.00 handle over the medium-term.

Shares of Oil Search have held above the recent low of $6.80, but look vulnerable to further downside.

The Investor Signals Algo Engine triggered a short signal at $7.72 on October 10th.

Technical studies suggest a break of the $6.75 level will see the stock revisit the November lows near $6.20.

Chart – OSH

 

 

Gold Weakness Pressures Newcrest lower

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After reaching a high of $1263.00 on February 27th, the price of Gold has dropped over $45.00 to close today at $1216. 00.

Technically, this price represents the first daily close below the 30-day moving average since January 2nd, and points to the next key support level at $1200.00.

On February 8th, the Investor Signals Algo engine generated a short signal on Newcrest Mining at $23.95. Investors who were holding long positions were given the signal and had the opportunity to sell covered calls, or sell the shares outright.

Shares of Newcrest are now trading near initial support at $21.00.

However, with momentum indicators pointing lower, a realistic near-term target could be found near the former “double-top” high at $20.40.

Chart – NCM

RBA Preview

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The RBA is widely expected to keep interest rates unchanged today.

Foreign Exchange investors will be listening for comments about the Aussie Dollar.

The AUD/USD has risen by 4.5% this year on a trade weighted basis, and RBA Governor Philip Lowe has signalled that the central bank would like a weaker currency.

The sharp improvements in domestic terms of trade (rising coal and iron ore prices) appear to have largely run their course. The AUD/USD was sold through .7600 last week for the first time since late January. Initial support is now seen in the .7530 area.

In the last RBA statement, Governor Lowe made it clear that he was looking at three factors in determining the path for monetary policy: Inflation, the labor market and household balance sheets. 

Of these factors, weakness in the labor market looks to be supportive of another rate cut.

Looking at the expansion of household balance sheets suggests the RBA should look to raise rates. However, the benign outlook on  price inflation signals that the central bank can leave rates unchanged.

We will see the result at 2:30 Sydney time.

Ramsay Health Care

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Since posting a high of $84.00 last September, shares of Ramsay Heath Care have dropped almost  20% to below 67.50 today.

This decline has adjusted the share price to 26 X estimated 2017 earnings. While this multiple is not cheap, it looks like fair value considering Ramsay’s strong long-term growth prospects and dividend history.

Since the private hospital operator started paying dividends in 2007, it has increased its payout to shareholders every singe year. This is a streak that includes 21 consecutive dividend increases.

Based on the last 12 months of dividends, Ramsay’s shares are currently offering a fully-franked 4.8% yield, which tips up to almost 7% when the franking credits are included.

Further, the company has given guidance that 2017 profits could increase by 20%.

China Lowers Their GDP Growth Target

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While addressing the 3,000 members of the National People’s Congress (NPC) in Beijing, Premier Li Keqiang announced that China’s economic growth target has been cut to around 6.5% from last year’s estimate of 7%.

China’s GDP grew at the slowest rate in 26 years last year, and Mr Li pledged he would address the state sponsored “zombie enterprises” which produce more coal and steel than the market needed.

Similar pledges have proved hard to fulfill in the past.

However,  it appears that NPC leaders are more committed to slower growth to deal with the painful reforms triggered by the rapid build-up in debt from both the official and shadow banking sectors.

Against the backdrop of last week’s disappointing Australian trade balance numbers, it will be worth watching to see if the RBA makes reference to this development during their monthly statement tomorrow.

A contracting Chinese economy would increase the likelihood of another RBA rate cut and a lower Australian Dollar.

 

 

ETF Watch: Gains In BBOZ and YANK

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As the AUD/USD broke down through the .7600 support level, and the XJO dropped over 1% on the day, the two biggest gainers in the local ETF market were BBOZ and YANK.

The BBOZ is an ASX listed inverse Exchange Traded Fund tied to the local share market, which means the price of the shares rose over 2% to $18.05 as the shares on the  XJO index traded lower.

Similarly, the YANK is an inverse fund based on the price of the AUD/USD. It has a weighting of 2.5%.

As such, shares of the YANK ETF rose 3.15% to $14.60 as the price of the AUD/USD fell close to 1.5% to .7550.

Chart – BBOZ
Chart – YANK

 

 

Yellen Signals A Rate Hike

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In remarks earlier today, Fed President Janet Yellen indicated a readiness to raise the US funds rate at the FOMC’s March 14-15 meeting.

In fairly explicit language, she said that as long as “employment and inflation are continuing to evolve in line with expectations”, “a further adjustment of the federal funds rate would likely be appropriate”.

As a result, we now see a hike at the March meeting as close to a done deal, and see the market probability raised to 95%.

Considering the fact that the Fed Funds futures contract was reflecting a probability of around 30% just over a week ago, this has been a very sharp turn in policy sentiment.

As a result, US 10-year yields touched 2.52%; close to a 3-month high.

In typical market conditions, a US rate hike is Bullish for the US Dollar and Bearish for Stocks, Commodities and Crude Oil

Chart -Dow Jones
Chart – OOO (Oil ETF)