ASX to edge up, central banks in focus

Australian shares are poised to edge higher at the open after a mixed session in New York and as investors position for policy decisions from central banks in the US and the UK.

ASX futures were up 4 points or 0.1 per cent to 5852. The currency advanced 0.4 per cent.

On Wall Street, shares ended mixed on Friday local time with the Dow and S&P 500 ending higher and the Nasdaq lower.

The Dow added 130 points or 0.5 per cent with 22 of its 30 components rising, paced by a 2.8 per cent rise in Nike, a 2.7 per cent gain in Caterpillar and a 2.4 per cent bump in Dow Inc.

The S&P 500 edged up 0.1 per cent; industrials and materials led seven of the benchmark’s 11 industry groups higher.

While the Nasdaq is 10 per cent off the record high it reached on September 2, it’s still up 21 per cent year to date.

“When you see these short-term, sudden moves after a run-up like we’ve had, it doesn’t mean you avoid the sector, but you have to be prepared that it’s the price of admission of being there,” Charles Day, a managing director and private wealth adviser at UBS Global Wealth Management, told Bloomberg. “Investors should stay invested, we’re still positive on equities.”

The main risk events for this week are policy meetings at the US Federal Reserve and Bank of England. The RBA will release minutes from its latest meeting on Tuesday.

NAB economist Kaixin Owyong said she’s expecting some additional detail on the RBA’s decision to increase and extend the term funding facility, and perhaps some discussion of further monetary policy options.

“NAB’s view remains that the RBA will keep the cash rate and 3-year yield target unchanged for the foreseeable future,” Ms Owyong said. “However, we acknowledge the risk the RBA will ease further if the economy does not steadily recover as it forecasts. The key risks here are that unemployment remains elevated or that activity remains weak following further lockdowns.”

In its preview of the Fed meeting, TD Securities said it expects a “dovish” tone in the post-meeting statement and press conference with an emphasis on “net weakening in the economy, even with recent strength”.

Despite tipping a shift in focus last month, TD said it’s “not expecting specific inflation-outcome-based forward guidance yet”.

As for the outlook for US rates in the latest dot plot graph, TD said “We expect virtually all officials to show no increase in the funds rate through at least the end of 2023. Moreover, the economic projections will probably suggest no need for tightening until well after the end of 2023, even with stronger-than-expected growth since the projections were updated in June.”

Today’s agenda

Local: NZ net migration July

Overseas data: Japan industrial production July; Euro zone industrial production July

Market highlights

ASX futures up 4 points or 0.1 per cent to 5852

  • AUD +0.4% to 72.84 US cents
  • On Wall St: Dow +0.5% S&P 500 +0.1% Nasdaq -0.6%
  • In New York: BHP +2.9% Rio +5% Atlassian -1.2%
  • In Europe: Stoxx 50 +0.1% FTSE +0.5% CAC +0.2% DAX -0.1%
  • Spot gold -0.3% to $US1940.55/oz
  • Brent crude -0.5% to $US39.88 a barrel
  • US oil +0.2% to $US37.39 a barrel
  • Iron ore +1.8% to $US128.37 a tonne
  • 2-year yield: US 0.13% Australia 0.21%
  • 5-year yield: US 0.25% Australia 0.37%
  • 10-year yield: US 0.67% Australia 0.91% Germany -0.48%

From today’s Financial Review

China’s social media warfare database lists key Australians: A list of more than 35,000 Australians has been complied by a Chinese military contractor that boasts of ‘promoting conflict’ and waging ‘hybrid warfare’.

Why Mike Cannon-Brookes is on a Chinese military database: Mike Cannon-Brookes is rich, politically active and keen to share his views on Twitter. It makes the software billionaire an ideal target for those putting together a database of influential Australians.

Frydenberg tells Rio Tinto to hire Australian CEO: The Morrison government wants and expects an Australian chief executive and majority Australian board. Will the London headquarters listen?

United States

Fundstrat Global’s Vito Racanelli said he thinks the drivers of stock returns remain largely “constructive”. “Over the last two weeks, it has become evident that mega cap tech stocks are no longer invincible.

“And although the stock market and the tech sector (currently about 11 per cent below its all-time high) in particular, have seen a pullback over the last few days, I think it is important to keep a couple of things in mind: (i) stocks soared in August, so a bit of payback is not entirely surprising, (ii) the market was overbought based on many technical indicators.”

The coronavirus pandemic has pushed the US federal budget deficit above $US3 trillion for the first 11 months of fiscal 2020, more than doubling the previous full-year record, the US Treasury said.

The non-partisan Congressional Budget Office has projected the full-year 2020 US deficit to reach $US3.3 trillion, or 16 per cent of GDP, the highest share since the end of World War Two.

Europe

European shares ended a choppy trading session higher on Friday, as investors weighed signs of a pick up in M&A activity against the economic threat from growing prospects of a no-deal Brexit.

The pan-European STOXX 600 index rose 0.1 per cent and ended the week about 1.8 per cent higher. The index has been in a holding pattern since June.

Meanwhile, the EU is ramping up preparations for a tumultuous end to the four-year Brexit saga as top officials prepared to brief its 27 members on British Prime Minister Boris Johnson’s plan to break the divorce treaty.

“The Brexit talks could turn into another major headache for investors,” said Milan Cutkovic, market analyst at AxiCorp.

“UK Prime Minister Boris Johnson still intends to rewrite the UK’s Brexit treaty, even as the EU is threatening to take legal actions and the chances of securing a trade deal are decreasing.”

Oil and gas stocks were among the biggest decliners as crude prices fell, while defensive plays including healthcare , telecoms and real estate edged higher.

M&A activity took centre stage, with Altice Europe’s shares soaring 24.4 per cent to a three-month high and on top of the STOXX 600 after it agreed to be bought by its founder Patrick Drahi.

Swiss frozen baked goods maker Aryzta jumped 12.5 per cent after it said it was in advanced talks with private equity firm Elliott Advisors over a takeover deal.

Asia

Chinese shares recovered lost ground to end higher on Friday, though the benchmark Shanghai Composite Index posted its biggest weekly drop in eight as Beijing’s rift with Washington had investors sticking to safer assets.

At the close, the Shanghai Composite index was up 0.8 per cent at 3260.35 after earlier falling as much as 0.4 per cent. The index finished 2.8 per cent lower for the week, its biggest weekly drop since mid-July.

The blue-chip CSI300 index closed up 1 per cent, trimming its weekly losses to 3 per cent.

At the close of trade in Hong Kong on Friday, the Hang Seng index was up 189.77 points or 0.8 per cent at 24,503.31. The Hang Seng China Enterprises index rose 0.7 per cent to 9752.5.

Around the region, MSCI’s Asia ex-Japan stock index was firmer by 0.04 per cent, while Japan’s Nikkei index closed up 0.7 per cent.

Currencies

BCA Research on what to expect from global central bankers this week: “The Fed is not expected to adjust policy on Wednesday, but investors will carefully parse over the FOMC’s new forecast. Additionally, Fed chairman [Jerome] Powell is likely to be prodded with regards to the new policy objective unveiled at Jackson Hole.

“The Bank of Japan is expected to leave policy unchanged on Thursday. Around the world, Poland, who meets on Tuesday, Brazil, who meets on Wednesday, South Africa and Taiwan who both meet on Thursday are all expected to stand pat on the rate front. The Indonesian and Russian central banks are anticipated to cut rates by 25bps on Thursday and Friday, respectively.”

BCA’s view on the ECB and the euro: “President Christine Lagarde did not seem overly concerned by the recent strength of the euro. However, historically, the ECB tends to try to dampen the euro when it rises by 10 per cent on a year-on-year basis. This means that the euro is getting close to the threshold where its strength becomes concerning for the ECB. A breather in its rally is now necessary for the ECB to tolerate more significant strength over the following 12 months.”

Commodities

The price of iron ore will tumble to $US80 a tonne by the end of 2021, according to a new forecast from Capital Economics.

A combination of strong demand from China and a slow recovery in global production from its virus-related trough means that the price of iron ore is likely to remain elevated for the remainder of this year,” Samuel Burman wrote. “However, we expect prices to fall in 2021 as consumption stagnates and supply increases.”

Capital Economics has a year-end 2020 price target of $US110 a tonne.

Mr Burman said demand in China, which accounts for over 60 per cent of global iron ore consumption, “has been growing strongly and will continue to do so for some time. The recent fiscal stimulus package has been directed towards the steel-intensive infrastructure sector and, now that the rainy season has ended, construction activity should grow even faster”.

However, Mr Burman sees Chinese demand for both iron ore and steel fading through the second half of 2021 as global production returns to pre-pandemic levels, shifting the global iron ore market from a deficit this year to a surplus in 2021.

Australian sharemarket

ASX ends lower after a rollercoaster week: The Australian sharemarket ended a rollercoaster week slightly lower on Friday as wild swings in the price of US tech stocks wreaked havoc on local shares.

The S&P/ASX 200 Index closed the week 66.1 points, or 1.1 per cent, lower at 5859.4 following a 49.1 point, or 0.8 per cent, decline on Friday, its fourth weekly loss in a row.

Fund managers call for open borders: Fund managers are throwing their weight behind calls to ease or remove state border restrictions, warning that uncertainty is raising costs for businesses and stalling the economic recovery.

    Why your super is making the long march to China: UBS’ Hayden Briscoe has spent years predicting the rise of Chinese bonds as the next big thing for global markets. His vindication is now at hand as the interest from Australian funds in Chinese stocks and bonds heats up.

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