S&P/ASX 200 Fundamental Analysis – September 15, 2016 Forecast

Australian stocks rebounded from four-straight losing sessions on Wednesday, supported by a strong performance in the financial sector which reacted positively to strong demand for the country’s 30-year bond auction. The S&P/ASX 200 closed higher, finishing up 19.92, or 0.4 percent, at 5227.70.

The index did not get much guidance from U.S. stock indices so it was up to the domestic shares to provide the support. The major support came from the financial sector which was influenced by a strong performance by the so-called “Big Four” banks, which gained between 0.6 percent and 1.5 percent.

Telstra Ltd., a telecoms giant, reversed early losses to finish 2.6 percent higher, posting its biggest daily percentage gain since early May.

The upside was limited by losses to mining giants BHP Billiton Ltd and Rio Tinto Ltd, which slipped 1 percent and 1.3 percent respectively. These stocks were reacting to this week’s weakness in the energy sector.

FORECAST

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Daily S&P/ASX 200 Index

Despite the higher close, the S&P/ASX 200 is expected to open about 15 points lower due to mixed results in the U.S., led by another steep decline in the energy sector.

Domestically, investors will be monitoring the release of Australia’s employment report. It is expected to show the economy added 15,000 jobs in August, with the unemployment rate remaining at 5.7%.

We could see some volatility today since this is options and futures expiration day. However, accompanying the increased volatility is expected to be sizable volume which may mean we won’t see the wild swings we’ve grown accustomed to seeing.

Although the index is called lower, BHP Billiton and Commonwealth Bank’s American Depository Receipts (ADR) are called higher. In addition, Goldman Sachs upgraded CBA. This is causing come confusion for investors ahead of the opening so we may see some interesting price action.

At this time, investors would like to see some stabilization in the market. Uncertainty over the timing of the next Fed rate hike, next week’s Fed interest rate decision and a possible return of the bear market in crude have been wreaking havoc on investor confidence.

The S&P/ASX 200 trend is down and volatility is relatively higher. This likely means we’ll still see some weakness over the next week, or at least a sideways trade because I don’t believe anyone wants to step in front of the Fed at this time.

S&P/ASX 200 Fundamental Analysis – September 14, 2016 Forecast

Australian shares fell for a fourth-straight session on Tuesday, with the S&P/ASX 200 closing at 5207.80, down 11.81 points or -0.20 percent. It was the lowest finish since the index closed at 5197.50 on July 6. Traders blamed a decline in financial and energy stocks for the weakness.

Although the U.S. markets posted a strong gain on Monday due to dovish comments from a key Fed official, the move was attributed to short-covering and didn’t carry over to the ASX 200. The price action also suggests that investors remain jittery about the direction of U.S. interest rates ahead of next week’s Federal Reserve Monetary Policy Committee meeting on September 21.

By shedding risky assets, Aussie share traders appear to be nervous about the outcome of the Fed meeting, however, U.S. Fed Funds traders are showing a 15% chance of a September rate hike and a 50% chance of a rate hike in December.

Locally, financial stocks were responsible for more than half of the losses on the ASX 200, with the “Big Four” banks weakening between 1 percent and 1.3 percent. The catalysts behind the selling pressure were concerns over earnings growth and competition.

A steep drop in crude oil prices weighed on energy stocks. Share prices tumbled to their lowest level in two months, led by Oil Search which fell 2 percent.

S&P/ASX 200 DAILY FORECAST

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Australian stock market investors are bracing for a lower opening on Wednesday, due to the sharp sell-off in U.S. equity indices. U.S. markets plunged sharply lower as the positive reaction to dovish comments from a noted Fed official on Monday faded and as investors faced the reality of a lower crude oil prices due to a forecast for lower demand.

U.S. listed shares of BHP Billiton fell more than 5 percent in New York, with Rio Tinto’s U.S. –listed stock falling more than 4 percent.

In addition to the drop in crude oil prices, iron ore fell 2.9 percent. This put pressure on the energy and commodity sectors of the broad index.

Investors should note that volatility is back after a two-month absence following the Brexit vote. The benchmark S&P 500 Index traded 43 sessions without a 1 percent move. However, the last three trading sessions has seen the VIX (Volatility Index) jump 17.7 percent. Over the short-run, this should be a concern, but it is actually right on pace with its one-year average.

The early call for Wednesday is for a 0.50 percent lower opening. This would put the S&P/ASX 200 at about 5182.00. BHP and CBA are two stocks expected to lead the broader-based index lower. They are called 1.6 percent and 0.5 percent lower, respectively.

S&P/ASX 200 Fundamental Analysis – September 13, 2016 Forecast

The S&P/ASX 200 closed sharply lower on Monday as investors played catch up with the U.S. stock indices following Friday’s plunge. Traders, however, are looking for a firmer opening on Tuesday as investors respond to yesterday’s strong close by U.S. equities.

On Monday, the benchmark ASX 200 closed down 119.58 points, or 2.2 percent, at 5219.6. Today’s slide was the biggest sell-off since late June, when the index fell 3.2 percent in one day after the U.K. had voted to leave the European Union.

The Australian market followed the direction of the U.S. markets which lost more than 2 percent on September 9 after Boston Fed President Eric Rosengren, a historically dovish policymaker, said the U.S. Federal Reserve faced increasing risks if it waited too much longer to raise interest rates. Rosengren also added that gradual increases in rates were likely appropriate although he softened his tone a bit when he said the central bank was unlikely to act too rapidly.

The markets were further spooked on Friday when the Fed announced a well-noted dovish Federal Reserve board member Lael Brainard would make a previously unannounced speech on Monday at 1700 GMT. Some investors felt the timing of the announcement likely means Brainard is going to signal plans to raise rates in September.

FORECAST

Australian Stock Market
Daily S&P/ASX 200 Index

After worried investors drove the ASX 200 lower on Monday, the index is expected to snap back from those sharp declines on Tuesday after a much anticipated speech from U.S. Federal Reserve member Lael Brainard helped calm fears of an imminent rate hike.

Australian stocks are expected to open higher in reaction to strong closes by the Dow Jones Industrial Average, the NASDAQ Composite and the S&P 500 Index. The latter closed 1.5% higher on impressive volume. The price action suggests that investors have set aside their worries for a September rate hike although a December rate hike is still a coin-toss.

Fed governor Lael Brainard triggered a late session rally in the U.S. stock markets when she said in a speech that, while economic progress continues, it would be wise for the Fed to keep monetary policy loose. Based on what she said, it would be hard for Fed Chair Janet Yellen to come out next week on September 21 and announce a rate hike.

With a September rate hike off the table and the ASX 200 at technically oversold levels, we could be looking at the possibility of a 2 to 3 day rally before the index becomes rangebound as investors adjust their portfolios ahead of the Fed’s two-day meeting on September 20-21.

S&P/ASX 200 Fundamental Analysis – September 12, 2016 Forecast

Australian shares are expected to open lower on Monday based on the sharp sell-off in U.S. stocks on Friday. The S&P/ASX 200 finished at 5,339.20, down 46.60 or -0.87%.

The Australian index was driven lower on Friday on disappointment over the European Central Bank’s decision to keep monetary policy unchanged. News that North Korea had conducted a nuclear test also weighed on investor sentiment.

On Thursday, the ECB decided to leave interest rates unchanged as well as its current stimulus program. The decision by the central bank to not extend the duration of its stimulus program surprised a minority of traders who were looking for some kind of tweaking due to a weakening Euro Zone economy.

The selling pressure began after ECB President Mario Draghi in his press conference seemed less inclined to expand on the existing stimulus measures anytime soon. This spooked investors because it may be an indication that the central bank has run out of ammunition.

The news that North Korea had conducted a “higher level” nuclear test explosion on Friday also weighed on sentiment. The results of the test likely mean that North Korea has the capability to build “at will” an array of stronger, smaller and lighter nuclear weapons. This could cause instability to the region.

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U.S. stocks finished sharply lower on Friday as investors reacted to the possibility the Federal Reserve might raise interest rates this month following hawkish commentary from key Fed officials.

The Dow Jones Industrial Average closed nearly 400 points lower, posting its biggest single day loss since June 24 and its worst week since January.

The commentary from Boston Federal Reserve President Eric Rosengren, a voting member of the Federal Open Market Committee, that the central bank may be forced to raise rates is important because it sends a message to the markets that a rate hike is coming whether it be in September or December.

Rosengren, historically a dove, said in a speech, low interest rates are increasing the chance of overheating the U.S. economy. He also called for a gradual tightening monetary policy, saying it is appropriate to maintaining full employment.

With the Dow down nearly 400 points, the S&P 500 off by 2.45 percent and the NASDAQ composite lower by 135 points, or 2.54 percent, S&P/ASX investors should brace for a lower opening as investors are likely to continue with their “risk off” sentiment until they get a better read on the timing of the next Fed rate hike. The Fed is scheduled to make its interest rate decision on September 21.

Traders are calling for the benchmark ASX 200 to open about 79 points lower, or 1.50 percent.

S&P/ASX 200 Fundamental Analysis – September 8, 2016 Forecast

The S&P/ASX 200 Index closed higher on Wednesday, led by strong gains in the gold, consumer discretionary and consumer staples sectors. Uncertainty over the direction of U.S. interest rates helped drive up demand for higher-yielding assets.

The index initially posted a strong gain in response to higher markets in the U.S., but these gains quickly evaporated after the release of Australian second-quarter Gross Domestic Product results. The GDP report showed the economy grew at an annualized 3.3 percent pace, its fastest pace since 2012. However, the quarterly increase of 0.5%, fell short of the 0.6% forecast. This encouraged investors to take profits on the news.

In the end, the index managed to close higher at 5424.20, up 10.60 or +0.20%. The index was supported by strength in the big banks and gold mining companies.

This week’s price action indicates the S&P/ASX 200 has been highly sensitive to the movements in the commodities sector – namely crude oil and gold. Crude oil has been driven lately by speculation that OPEC and Non-OPEC producers are close to agreeing on a production freeze. This has created a volatile, headline driven trade.

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Gold found support late last week on increased expectations the Fed will pass on an interest rate hike in September. This news has helped drive down the U.S. Dollar, helping to boost demand for the dollar-denominated gold market.

Since both gold and crude oil are in focus right now and subject to news headlines, we expect to see volatility from these two sectors. This is likely to spill over into the Australian markets, putting the index in a position to post a choppy, two-sided trade. Until a trend develops in gold and oil, these two sectors have the potential to contribute to wide swings in the S&P/ASX 200 index.

U.S. stock indices continue to trend water as investors await guidance from the Fed regarding the direction of interest rates. The Fed meets on September 21. Until then we could see a range bound trade that is subject to wicked, two-sided swings. This too, is likely to contribute to increased volatility in the Australian market.

Today’s session begins with the S&P/ASX 200 in a short-term downtrend. Although the index posted a gain on Wednesday, the move was likely short-covering since a solid support pace has not been established yet. This likely means that the bearish traders will continue to sell rallies until proven otherwise.

Crude Oil Prices Marginally Lower on Worries Over Production Freeze

Crude oil prices traded slightly lower on Wednesday as investors remained skeptical about producers’ ability to reach an agreement to freeze output to regain control of global support growth.

However, oil prices climbed back up, Internationally-favored Brent crude oil for November was trading at $47.80, up $0.54. October WTI crude oil futures are up about $0.50 at $45.33.

With the market predominately controlled by the news this week, crude oil traders have been forced to deal with a considerable amount of volatility. On Monday, while the U.S. was on holiday, prices surged to a one-week high after Russia and Saudi Arabia agreed to cooperate on stabilizing the supply side of the crude oil market. Since then, however, support for the production freeze has fallen as investors reduced the chances of such an agreement.

30-Minute Brent Crude Oil

Support for the deal eroded on Tuesday when Saudi Arabia’s Foreign Minister Adel al-Jubeir said the country would go along with an agreement to freeze output if other producers agreed too. Crude oil sellers, however, cast doubt on the ability of OPEC and Non-OPEC producers to reach an agreement at the informal meeting in Algeria on September 26 – 28, because of their past history of failing to workout similar plans.

Because of Monday’s U.S. holiday, this week’s key American Petroleum Institute and U.S. Energy Information Administration’s weekly inventory reports have been delayed.

According to Reuters, traders are saying that U.S. commercial crude inventories likely declined by 100,000 the week-ending September 2 after rising the previous two weeks. Traders also said that they expect to see a 500,000 barrel decrease in gasoline stocks. Distillate stocks are forecast to have increased by 1 million barrels.

30-Minute WTI Crude Oil

 

In other news, Asian stocks were mixed on Wednesday in response to the weaker-than-expected U.S. ISM services data. The news lowered the chances the Federal Reserve will hike interest rates in September.

Japan’s Nikkei 225 finished down 0.41 percent, or 69.54 points at 17012.44. It was largely influenced by a stronger Japanese Yen. Japanese traders tend to sell stocks when the Yen increases because of its negative effect on Japanese exports. A drop in exports usually leads to reduced earnings.

In Australia, the S&P/ASX 200 closed slightly higher at 5425.20, up 10.567 or 0.2 percent. The market sold-off after the release of Second Quarter GDP data fell short of expectations. Supporting the index was a firm material sector. Gains were capped, however, by a weaker energy sector.

S&P/ASX 200 Fundamental Analysis – September 7, 2016 Forecast

The S&P/ASX 200 Index looked promising early in the session on Tuesday, but at the end of the session, it ended lower. The index finished at 5413.60, down 16 points or 0.29 percent. The inability to sustain the early rally suggests that buyers are scarce.

Sellers eventually took control after the Reserve Bank of Australia left the cash rate at 1.5 percent and maintained a neutral bias. Additionally, it added language to its monetary policy statement that said Australian Dollar strength could hinder domestic strength.

“Having eased monetary policy at its May and August meetings, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” outgoing Governor Glenn Stevens said in a statement.

The GDP was expected to arrive at 0.6% but the actual was only 0.5%. The actual for the previous month was also revised down to 1%.

Westpac raised its forecast from 0.4 to 0.5 percent quarterly growth. This is below the consensus estimate of 0.6 percent. It is also predicting 3.3 percent annual growth. They cite a 2.7 percent jump in public sector fiscal spending as the reason for being slightly more optimistic. However, this increase is only likely to offset slack domestic demand, which is growing at just 0.9 percent.

The price action suggests that investors were disappointed with the RBA’s decision to keep the cash rate on hold at a record low 1.5 percent. They were hoping for clarity on the bank’s rate plans. There was essentially no new information from the August meeting’s commentary. Overall, the RBA’s September statement indicates there won’t be a cut in October, but that it still believes an appreciation in the Australian Dollar could cause problems for the economy if it hurts exports.

FORECAST

ASX 200 Index Analysis
Daily S&P/ASX 200 Index

Today’s price action and direction will be determined by the quarterly GDP report. This report has been known to produce volatile results so investors should prepare for a possible two-sided reaction. Traders need to remember that in Q2, markets were preparing for the Brexit vote, which may have involved some portfolio position-squaring by money managers looking to reduce risk. Additionally, the RBA had cut rates in May, delivering capital gains for investors.

Try not to look too much into this report for long-term indications because of the aforementioned variables. Treat this report with caution since it is only one quarter of data. Therefore, we’re not going to read into the data too much at this time. Basically, we expect stocks to firm if the GDP number reaches or exceeds the 0.6 percent consensus estimate. The S&P/ASX 200 Index is likely to break sharply if the report comes in under 0.4 percent.

S&P/ASX 200 Fundamental Analysis – September 6, 2016 Forecast

Despite this trading conditions due to the bank holiday in the U.S., the S&P/ASX 200 closed higher on Monday at 5429.60, up 56.80 or 1.06%. Buyers came in early in response to Friday’s strong close in the U.S., which was fueled by greater demand for higher-yielding assets after the release of a disappointing U.S. Non-Farm Payrolls report. Investors continued to come in on the long side throughout the session, leading to the strong finish.

The higher close helped the Aussie index break a three-day losing streak, and may have signaled the start of another “risk-on” rally. Investors jumped on equities early in the session on increased bets the Fed is less likely to raise rates at its September meeting.

Helping to generate the upside momentum were strong performances in the financials and materials sectors. All four major banks posted solid gains. Mining giants BHP and Rio Tinto also finished the session with strong performances.

Traders also had the opportunity to react to fresh domestic economic data on Monday. The TD Securities-Melbourne Institute said that inflation in Australia rose in August. Their proprietary gauge rose 0.2 percent from July and is up 1.2 percent on the year. This is, however, below the Reserve Bank of Australia’s target.

The Australian Bureau of Statistics said that job advertisements rose in August. Their report showed a 1.8 percent increase, up from minus 0.8% the previous month. This put it at a 4-year high.

The index derived most of its gain from a 2.27 percent increase in the Materials sector. However, gains were capped by a 0.22 percent loss by the Discretionaries sector.

S&P/ASX 200 Fundamental Analysis
Daily S&P/ASX 200 Index

Individually, Alumina rose 8.36 percent and Regis Healthcare lost 16.67 percent.

With U.S. investors returning on Tuesday, the S&P/ASX 200 is likely to take its direction from the movement in the U.S. indices. These investors are going to have to decide whether the disappointing jobs data means a September rate hike is off the table, or still a possibility. Taking it off the table will be supportive for stocks because it will lead to increased demand for higher risk assets. Leaving in the possibility of an early rate hike will likely be bearish for stocks.

Additionally, last week’s stock market gains may have been fueled by thin trading conditions. The bigger investors may not want to chase prices higher so we could see a break triggered by profit-taking and position-squaring. This could influence S&P/ASX 200 investors, leading to a similar move.

I’d continue to monitor the price action in the U.S. indices for clues as to the short-term direction of the Australian Index. Today will be all about “risk-on” or “risk-off”.

S&P/ASX 200 Fundamental Analysis – September 5, 2016 Forecast

The S&P/ASX 200 finished lower on Friday and for the week as the lack of demand for higher yielding assets continued to weigh on the index due to the uncertainty over the direction of U.S. interest rates. The index closed at 5372.80, down 42.80 or -0.79% for the session and down 142.70 or -2.59% for the week.

Despite the lower close, Australian shares are poised to open higher on Monday as the easing of U.S. interest rate hike worries eased on Friday after the release of a weaker-than-expected U.S. Non-Farm Payrolls report. Wall Street will be closed on Monday due to the U.S. Labor Day holiday.

The U.S. jobs report for August showed that U.S. companies and the government hired fewer new workers than expected – 151,000 actual versus 180,000 estimate. Additionally, employees worked slightly less per week and wages grew at a slightly weaker pace. Unemployment also rose slightly to 4.9%.

While the overall report may have been positive for the U.S. labor market, it likely means a September rate hike is off the table, but there is still the opportunity for a December rate hike.

Australian Stocks Fundamental Analysis
Daily S&P/ASX 200 Index

The reaction to the report was mixed. Richmond Fed President Jeffrey Lacker said on Friday that economic analysis shows that the Fed’s key rate “should be significantly higher than it is now”. He also said that the Fed may have missed an opportunity in August to raise rates stating, “The way the data is playing out I think the longer we wait there is a material increase in risks that we run.”

Some of the largest Wall Street banks, however, stuck with their forecasts for just one rate hike in 2016. This is the news that helped boost U.S. stocks on Friday, and the news that is likely to support the S&P/ASX 200 on Monday. If there had been a 200,000 print in the jobs report then the market would’ve likely priced in two rate hikes.

Locally, Australian investors will get the opportunity to react to data from several sources on Monday. These include the AIG Services Index, MI Inflation Gauge, Company Operating Profits and ANZ Job Advertisements.

Quarterly Company Operating Profits are expected to come in at 2.1 %, up considerably from the previous minus 4.4%. This report measures the change in the total value of profits earned by corporations. The monthly ANZ Job Advertisements report is expected to come in positive versus last month’s minus 0.8% read.

Later this week, the Reserve Bank of Australia is expected to leave interest rates unchanged at 1.50% and Quarterly GDP is expected to come in lower at 0.4%, compared with the previous 1.1%.

What Traders Need To Know On Friday Sept 2nd

Asian markets were very quiet this morning (Friday, September 2, 2016) as traders prepare for the US jobs report which hopefully will give some direction and hints into the Federal Reserve members thinking before the September FOMC meeting. Asian currencies responded to the lower US dollar after disappointment on the data released by the ISM. US manufacturing slipped a bit but this can also be a simple mathematical anomaly with summer vacations sometime data is reported late or inaccurately. Data showed U.S. factory activity contracted for the first time in six months in August, as new orders and production tumbled. The ISM index was 49.4.

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Reuters said that Australian stocks lost 0.7 percent. South Korea’s Kospi and Japan’s Nikkei were flat, and the yen was marginally stronger.

“Some market participants had bet the Fed may raise a U.S. rate as early as this month, but because of the weak ISM data and poor U.S. auto sales, such expectations seemed to have changed,” said Hikaru Sato, a senior technical analyst at Daiwa Securities.

“The U.S. is moving towards tightening, and that direction is the same, but the dollar-yen moves also show that people stepped back from expectations for an imminent hike.”

Asian equity markets took few cues from overnight moves on Wall Street, where stocks were flat with gains in the tech sector offsetting sluggish U.S. factory activity data and lower oil prices.

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The Australian dollar gained 3 points as the greenback slid a bit and is trading at 0.7555 and the kiwi is up 4 points at 0.7289 keeping pace with its neighbors.

Many traders in the US are already on holiday leading into Labor Day and US markets are closed on Monday, so the response might be muted to the jobs report. Most major currencies weakened against the greenback, as traders awaited the US non-farm payrolls data for August due to come out at 8:30pm Hong Kong time. Recent data showed the US private payrolls grew at a steady pace in August and rose by 177,000, after increasing 194,000 jobs in July.

The British pound fell for three days in a row, down 0.13 per cent to trade at 1.3285 on Friday morning. The euro dipped 0.02 per cent to 1.199. The Japanese yen also weakened versus the US dollar, trading 0.11 per cent lower at 103.33. Bank of Japan Kuroda stated that there remains “ample space for additional easing” under the existing policy framework. Data last week showed consumer prices in Japan fell for a fifth straight month, underscoring the central bank’s struggle to spur inflation to its 2 percent target.

The greenback rallied last month, with the dollar index trimming its 2016 loss to 4 percent, as Fed officials signaled that employment and inflation gains have bolstered the case to hike rates. That contrasts with major peers in Europe and Japan, who are boosting stimulus.

Traders Return From Holidays Seeking Profits

September is known as profit month, as traders come back from summer holidays and have just a few months to book profits ahead of the holiday season. Traders are fully energized and this year is not expected to be any different. Janet Yellen and Stanley Fischer have set up the back drop and the Nonfarm payroll report will start the month off with fireworks.  The US dollar is trading near a several months high at 96.18 while the Japanese yen has given up some of its strength giving the Bank of Japan and government a bit of a breather. The yen is now trading at 103.45 well above the 99 level touched just a week ago.

Slightly better government figures out of China this morning helped ease tensions, although the manufacturing PMI report was not great it did move above the 50 line and printed better than expected helping market fears ease a bit. While economists hailed the fact that all three figures were above 50, they warned China-watchers to contain their excitement. July’s number was unusually weak so that helped to explain the pick-up in August, Zhu Haibin, chief China economist and head of Greater China economic research at J.P. Morgan.

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Both the kiwi and the Aussie gained even though Australia retail sales fell well below forecast. Although the ABS noted online retail sales were up 4.1 per cent from last year.

The Aussie is trading at 0.7529 and the kiwi is up at 0.7256 with gains limited by the strength of the US dollar. Asian currencies however, were treading water ahead of Friday’s US jobs data which could materially alter the chance of a rate increase from the Federal Reserve in September. Australian data showed business investment continued to fall, contracting 5.4 per cent quarter-on-quarter in the three months through June.

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Asian stock markets were mixed on the first day of a new month as investors reviewed Chinese, Japanese, Australian and US data that painted an uneven picture of economies across the region. Japan’s Capital expenditure data indicated business spending grew by 3.1 per cent in the June quarter from a year earlier, slower than the 4.3 per cent growth in the previous three-month period and undershooting expectations for 5.5 per cent. The pace of decline in Japanese profits quickened to minus 10 per cent from a 9.3 per cent contraction in the first three months of the year.

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Nikkei 225

Japan’s Ministry of Finance also released the findings from its June-quarter corporate survey, a key input in the upcoming second preliminary gross domestic product estimate.

Japan’s index rose 0.5 per cent as the Nikkei 225 edged up 0.1 per cent, despite the yen gaining 0.2 per cent to ¥‎103.24 per US dollar. Australia’s S&P/ASX 200 slipped 0.3 per cent while Hong Kong’s Hang Seng gained 0.3 per cent. On the mainland, the Shanghai Composite and the technology-focused Shenzhen Composite were each down 0.2 per cent.

S&P/ASX 200 Fundamental Analysis – August 31, 2016 – Forecast

The S&P/ASX 200 closed higher on Tuesday after the previous day’s sharp break. While Monday’s weakness was fueled by a reaction to external factors such as the hawkish comments from Fed officials last Friday, today, the index was supported by higher traditional, domestic sectors such as Gold, Metal & Mining and Healthcare.

Strong gains by Austral Ltd (AX: ASB), Ramsay Health Care Ltd (AX: RHC) and Select Harvests Ltd (AX: SHV) helped underpin the S&P/ASX 200. At the close, it was up 0.31%.

Helping to put a lid on the rally were Gateway Lifestyle Group (AX: GTY), Estia Health Ltd (AX: EHE) and Mesoblast Ltd (AX: MSB).

According to Sydney Stock Exchange Data, advancing stocks outnumbered falling ones by 592 to 470. 330 stocks ended up unchanged.

Australian Stocks
S&P/ASX 200 Index

There wasn’t much movement in the U.S. equity indices on Tuesday with the major players on the sidelines ahead of Friday’s U.S. Non-Farm Payrolls report and Monday’s U.S. Labor Day holiday. Some traders feel there won’t be any reaction to the U.S. jobs report until next week when investors return from the long holiday week-end.

Even before the U.S. jobs report, S&P/ASX 200 traders will get the opportunity to react to the latest manufacturing PMI data from China, early Thursday. At nearly the same time, Australia will release its latest retail sales report.

The direction of the S&P/ASX 200 on Wednesday will likely be determined by how investors feel about the chances for a Fed rate hike. Prices could continue to drift higher if they feel the Fed will leave rates unchanged in September, but they could be capped if the odds of a December rate hike remain steady or increase.

The most volatile stocks over the near-term are likely to be bank and mining related. Banks and mining stocks could benefit if Friday’s jobs report comes out weaker-than-expected and the Fed keeps rates unchanged. Those stocks should weaken if the odds of a Fed rate hike increase as well as the U.S. Dollar.

S&P/ASX 200 Fundamental Analysis – August 30, 2016 – Forecast

The S&P/ASX 200 posted a negative close on Monday as traders reacted to Friday’s hawkish Fed comments and a disappointing Australian earnings season. The index broke below the psychological 5500.00 level on Monday, closing at 5469.2, down 46.3 or -0.84 percent.

A stronger dollar led to lower commodity prices which also encouraged investors to sell mining and natural resource stocks, driving down those sectors.

Early in the session, the ASX 200 felt pressure from comments made by Fed Chair Janet Yellen and Fed Vice Chair Stanley Fischer on Friday. Yellen thought the case for an interest rate had strengthened, however, her tone did not indicate that a rate hike was imminent. Fischer, however, was hawkish, saying that two rate hikes in 2016 were possible.

Australian Stocks
Daily S&P/ASX 200 Index

Traders were disappointed with domestic stocks because of weak revenue growth, slower cost cuts and lower pre-tax margins.

On Tuesday, ASX 200 traders are likely to react to the movement in U.S. interest rates, U.S. stock indices and the direction of the U.S. Dollar since there isn’t much domestic data this week. The key report this week from the U.S. is Friday’s Non-Farm Payrolls report.

Higher U.S. interest rates will be supportive for the U.S. Dollar. This will also serve as an indication that a Fed rate hike in September is still in the cards. As recently as Friday, Fed Fund futures indicated there was an 18 percent chance of a Fed hike next month. That percentage rose to 30 percent early Monday.

Early losses by the ASX 200 can be expected, but they will be limited because of the higher close by the benchmark S&P 500 Index.

Today’s price action is likely to be the most volatile as many investors will start to pack it in ahead of Friday’s U.S. jobs report.

US Dollar Holds Fed Inspired Gains

Asian markets are responding to Federal Reserve speeches and US data released on Friday. Asian markets were closed when Janet Yellen addressed the Jackson Hole symposium as well as Stanley Fischer 2nd hawkish speech. Japan’s Nikkei climbed 2.3 percent, the biggest one-day gain in three weeks, as the yen weakened against the resurgent dollar. The surge in the US dollar helped the safe haven yen climb to 102.37 easing the burden on Japanese exporters. China’s  and Shanghai Composite both saw losses. Hong Kong’s Hang Seng eased 0.3 percent.

equities monday morning

Wall Street closed slightly down after a volatile session on Friday, having moved between gains and losses as traders debated the likely timing of a U.S. interest rate hike following comments from top Federal Reserve officials.

The S&P 500 climbed after Yellen made the case for raising rates had strengthened but did not indicate when the Fed would act but gave traders an idea that rate increases would be later than soon. Yellen told bankers in Jackson Hole, the U.S. economy was nearing the central bank’s goals of maximum employment and price stability but that future hikes should be “gradual”.

Equities later traded lower after hawkish comments from Fed Vice Chair Stanley Fischer raised the possibility of a rate hike as soon as next month.  Fischer indicated that rate increases in September and December remained in play.

Reuters reported comments by the Fed’s No. 2 policymaker, Vice Chair Stanley Fischer, following Yellen’s speech also bolstered the case for a hike this year. Asked on CNBC whether a rate hike in September and more than one policy tightening before year-end should be expected, Fischer said Yellen’s comments were “consistent with answering yes” to both questions, albeit still data-dependent.

This increased the importance of the August nonfarm payroll report due on Friday. The NFP is expected to show that the economy created 180,000 jobs this month after rising by 255,000 in July, according to a Reuters poll. The forecast is for the unemployment rate to fall to 4.8%

labor market

Other data this week includes personal consumption on Monday, consumer confidence on Tuesday, and car sales and factory activity on Thursday. For more economic data this week.

The reaction to Yellen and Fischer were positive for the greenback. The dollar index which tracks the greenback against six global peers, jumping 0.8 percent on Friday. It held steady at 95.56 on Monday.

The dollar surged 1.3 percent against the yen to a two-week high, its biggest one-day advance in almost seven weeks. It extended those gains by 0.3 percent to 102.37 yen this morning.

Japanese traders will closely monitor household spending and retail sales data for July due on Tuesday. Investors are looking for some indication that Prime Minister Shinzo Abe’s massive Three Arrow plans are having an effect, after figures on Friday showed a decline in consumer prices by the most in three years in July.

The euro is trading flat at $1.1193 after tumbling 0.8 percent it regained most of its losses. The kiwi and the Aussie both dipped this morning on the strength of the US dollar. The AUD is trading at 0.7551 with the NZD at 0.7237

S&P/ASX 200 Fundamental Analysis – August 29, 2016 – Forecast

A weaker close on Wall Street on Thursday drove the S&P/ASX 200 lower on Friday with few investors willing to step in front of the market ahead of Friday’s key speech by Fed Chair Janet Yellen. The index closed at 5515.50, down 25.50 points or 0.48 percent. For the week, the index lost 11 points.

Besides the reaction to the lower U.S. indices, weakness in the major banks tied to a decline in the REITS sector also weighed on prices. The best performing group for the session was the telecoms.

U.S. stock indices were mixed on Friday as investors evaluated the comments from Fed chair Janet Yellen and Vice Chairman Stanley Fischer. The indices posted a volatile two-sided trade as investors tried to figure out if the tone of her comments was hawkish or dovish.

Yellen essentially said the economy had strengthened and suggested a rate hike was still data dependent. Most traders concluded that she offered nothing new and that a rate hike was not imminent.

The biggest reaction by the markets and the one that triggered the sell-off in the equity markets were made by Fischer. He said two rate hikes were possible. The U.S. Dow Jones Industrial Average contract close about 50 points lower. The benchmark S&P 500 about 0.15 percent lower and the NASDAQ composite finished at 0.13 percent higher.

S&P/ASX 200 Index
Daily S&P ASX 200 Index

 

Given the negative zone at the close, investors have to expect a lower opening by the S&P/ASX 200 on Monday. The week is filled with several key reports from Australia and the U.S. with the major report the U.S. Non-Farm Payrolls.

Traders are looking for the report to show the economy added 186K jobs in August. Unemployment is expected to decline slightly to 4.8%. Average hourly earnings are expected to show a drop from 0.3% to 0.2%. A blockbuster number may give the Fed the fire power to raise rates twice before the end of the year. Meeting the estimate or coming in below the estimate will likely take a September rate hike off the board.

In Australia, investors will get the opportunity to react to the latest data on Building Approvals on Tuesday, and a speech from RBA Assistant Governor Debelle on Wednesday. The week comes to an end with an Australian Private Capital Expenditure report and Retail Sales on Thursday.

Look for a lower trade today as Australian investors are expected to react negatively to the comments from Yellen and Fischer.

S&P/ASX 200 Fundamental Analysis – August 26, 2016 – Forecast

The Australian Stock market ended lower on Thursday despite strong performances from a couple of major companies. Traders seemed to ignore the solid rallies by Woolworth and Amcor, instead, choosing to focus on the weaker U.S. equity indices. The S&P/ASX 200 spent most of the session treading water, closing at 5541.90, down 20 points or 0.4 percent lower.

A steep drop in gold prices weighed on commodity and resource stocks. Gold mining stocks were also under pressure. The weakness was triggered by a rally by the U.S. Dollar. The Greenback rose on speculation that Fed Chair Janet Yellen would deliver a hawkish speech before a group of central bankers at Jackson Hole, Wyoming on Friday.

S&P 500/ASX 200 Fundamental Analysis
Daily S&P ASX 200 Index

A drop in crude oil prices also dragged Australian energy stocks lower on Thursday. However, Woodside Petroleum bucked the trend by posting a solid gain despite a 3 percent slide in crude prices triggered by a surprising rise in U.S. stockpiles earlier in the week.

We’re not expecting too much movement in the S&P/ASX 200 on Friday as investors express caution ahead of Yellen’s speech. Traders will be watching Yellen’s comments for clues as to the timing of the next Fed rate hike. Investors expect her to acknowledge the strengthening economy, reiterating the message from the last Fed meeting in late July.

Look for stocks to break sharply if Yellen’s comments lean toward a possible rate hike in September. Stocks may also feel pressure if she leaves a possible rate hike on the table for 2016. However, the reaction will not be as strong as if a rate hike was imminent.

Look for a sideway, rangebound trade today with a slight bias to the downside. Investors aren’t likely to move the S&P/ASX 200 too much since there aren’t any economic reports from Australia or Asia and with the possibility of a volatile reaction to Yellen’s comments. I expect most major investors to sit on the sidelines and use the week-end to digest the Yellen speech and save their reaction until Monday.

S&P/ASX 200 Fundamental Analysis – August 25, 2016 – Forecast

The S&P 500/ASX 200 Index closed at 5561.70 on Wednesday, up 7.90 or 0.14%. Gain were moderate amid mixed profit results. Trading results were mixed with stocks posting earnings struggling and stocks without earnings attracting buyers.

Gains were spread among the big mining stocks, energy companies and banks. The biggest gain for the day was posted by Quantas. It was up 1.5% to $3.45. The move was supported by a billion-dollar net profit and the announcement of a 7-cent a share dividend, its first payout to shareholders since 2009.

Losers included Wesfarmers, with an 83 percent profit slump amid a slew of asset write-downs. Its shares were down 2.2 percent at $42.63. Boral’s shares also tumbled more than 4 percent to $6.92. Blackmores’ shares dropped 19.5 percent after issuing a sales warning. Its stock fell to $129.50 despite a 115 percent rise in net profit.

Daily S&P ASX 200 Index

In the real estate sector, McGrath was up about 6 percent on strong profits, and the news that its founder and biggest shareholder John McGrath is stepping down as chief executive.

Thursday’s session is expected to see similar price action. The lack of fresh economic news from Australia is helping to keep the volatility down. Investors have also been a little tentative due to earnings season.

Additionally, investors are keeping an eye on the U.S. with Federal Reserve Chair Janet Yellen on schedule to give a speech before the central bankers’ symposium in Jackson Hole, Wyoming on Friday.

Traders will be watching for clues as to the timing of the next Fed rate hike. Generally speaking, global stock indices have been supported since early July by the injection of new stimulus. However, recently the indices have drifted sideways-to-lower due to lower demand for higher-risk assets. Hawkish comments from Yellen could put further on the S&P 500/ASX 200 Index as well as the other major global indices.

We’re expecting to see more sideways price action today as we finish earnings season in Australia. If there is going to be volatility, it is likely to come from the energy or natural resource sector. Prices could be particularly sensitive to the price action in gold and crude oil in particular.

Gold has been feeling pressure from the stronger U.S. Dollar and crude oil has seen a choppy, two-sided trade recently. The bearish price action has been fueled by low demand and growing supply. The bullish price action by expectations that OPEC and Non-OPEC are close to agreeing to production cuts or a production freeze.

S&P/ASX 200 Fundamental Analysis – August 23, 2016 – Forecast

The S&P/ASX 200 Index drifted lower on Monday, finishing at 5515.10, down 11.60 or -0.21%. Most of the weakness was attributed to a general lack of demand for higher risk assets ahead of this week’s central bankers’ symposium in Jackson Hole, Wyoming. The keynote speech will be delivered by Fed Chair Janet Yellen on Friday.

As we near the end of summer, many major investors have become content with the direction of the global equity markets so we expect to see a drop off in volume and volatility unless there is a sudden news event.

Also contributing to the weakness in the S&P/ASX 200 index were losses in the gold, metals & mining and resources sectors. These sectors lost ground because of a stronger U.S. Dollar. The dollar was boosted by hawkish comments from a high ranking Fed official over the week-end.

ASX 200 Index
Daily S&P ASX 200 Index

On Sunday, U.S. Federal Reserve Vice Chairman Stanley Fischer said he saw reasons for a near-term interest rate hike. Mr. Fischer, the Fed’s second-highest ranking official, told a crowd in Aspen, Colorado, the central bank is close to hitting its targets for U.S. employment and inflation.

“Looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes,” he added.

Additionally, Fischer said that core inflation is “within hailing distance” of the Fed’s 2 percent target and that employment had increased “impressively” since its bottom in 2010.

His comments encouraged investors to sell dollar-denominated commodities including gold, which in turn put pressure on gold stocks. A 3 percent decline in crude oil futures also contributed to the weakness in the ASX 200.

As far as individual stocks are concerned, Fortescue Metals dropped 2.4 percent to $4.81 despite the iron ore miner more than tripling its annual profit and pumping up its dividend. The minor said cost and spending cuts have more than offset the drop in iron ore prices, helping profits soar to $US985 million after tax.

On Tuesday, traders will hear from Oil Search, Scentre Group and Healthscope on Tuesday and Westfarmers, Boral and Westfield on Wednesday.

Economic news is scarce this week so investors are likely to remain sensitive to any outside news especially if it effects metals and other natural resources. Early Tuesday, investors will get the opportunity to react to Conference Board’s Leading Index.

Low volume and thin trading conditions could lead to further pressure on the S&P/ASX 200 since it appears investors aren’t willing to step in on the long side ahead of Yellen’s speech on Friday. Even good news from a few stocks on Monday couldn’t turn the trend to up. With momentum pointing lower, it isn’t going to take much negative news to pressure the index lower. On the other hand, it will take a major surprise to turn the momentum to up.

S&P/ASX 200 Fundamental Analysis – August 22, 2016 – Forecast

If S&P/ASX 200 traders take their cue from Friday’s lower close in U.S. equity markets then we could see a weaker opening on Monday. With little fresh economic data this week, investors are likely to take direction from a slew of earnings reports from heavyweight companies such as Woolworths, Westfarmers, South32 and Westfield. The coming week is the biggest of the August profit season, with 87 major companies due to report.

As of Friday, close to half of listed Australian companies have already reported earnings. Unfortunately, the news wasn’t all that positive. Overall profits are down about 8 percent in financial year 2015-16. Traders blame the weakness on poor earnings from resource stocks which were dragged down by falling commodities markets.

As far as earnings are concerned this week, the important ones include Fortesque on Monday, Oil Search, Scentre Group and Healthscope on Tuesday and Westfarmers, Boral and Westfield on Wednesday.

The week ends with earnings reports from Woolworths, Amcor, Perpetual and South 32 on Thursday and Harvey Norman and Coca-Cola Amatil on Friday.

Australian Stock Market
Daily S&P ASX 200

Economic news is scarce this week with the Conference Board’s Leading Index and Construction Work Done on-tap. The latter will help economists get an idea of how the domestic economy has performed over the three months to June.

The rest of the week will be dedicated to the gathering of central bankers in Jackson Hole, Wyoming with all eyes focused on U.S. Federal Reserve Chair Janet Yellen, who is scheduled to deliver a speech on Friday evening. Traders don’t expect Yellen to offer any inside into the timing of the next Fed rate hike.

The theme of the symposium is “Designing Resilient Monetary Policy Frameworks for the Future”. The topics of discussion are likely to be about the effectiveness of extreme monetary policies, including negative interest rates and quantitative easing. Some will argue that they forms of stimulus have done nothing to spark economic growth and inflation. Instead, they are overinflated financial assets.

While earnings will be the main market driver this week, traders will also be paying close attention to the direction of the Australian Dollar. It has been driven higher lately by investors seeking yield. The buying has been so strong that it has even offset the effects of the last Reserve Bank of Australia interest rate hike on August 2.

Some traders believe the Australian Dollar has room to the upside before its strength begins to exert a negative influence on Australian exports and hence the economy. However, another rate cut by the RBA and a rate hike by the Fed before the end of the year, will likely put a cap on the Aussie Dollar and likely fuel a break back into the .7300 area.

Look for a lower opening based on a general decline in demand for risky assets. However, if investors decide to shed the influence of the global stock markets then the direction of the S&P/ASX 200 will likely be determined by the strength or weakness of the key earnings reports.

S&P/ASX 200 Fundamental Analysis – August 19, 2016 – Forecast

The S&P/ASX 200 posted a lower close on Thursday, finishing down 0.5%. The index remains range bound so although a 0.5% loss should be considered relatively modest, it represents the index’s biggest decline in a week.

The current trading environment is being dominated by earnings. The numbers have been mixed and the gains and losses in the index seem to be flip-flopping between the major sectors on a daily basis. This type of price action has been largely responsible for the sideways movement. On the positive side, support has been holding.

Some will then argue that the tops have also been holding. This is also true because if they weren’t, we wouldn’t be in a range. Valuation issues in the global equity markets may be responsible for the ASX 200’s inability to smash through the resistance and into new high territory.

Fresh Central Bank Stimulus Supportive Over Long-Run…

The international picture remains quite bullish with interest rates at historical lows and a few central bank providing fresh stimulus including the Bank of Japan and the Bank of England. Their moves have green-lighted the next rally while giving permission to long-term investors to hang on to their positions while the market currently sorts out short-term valuation issues.

Domestically, the Australian Dollar is struggling this week after the Reserve Bank’s interest rate cut on August 2 and the RBA minutes which suggested another rate cut is coming. The recent run-up in the currency was fueled by foreigners seeking higher-yields. So although money was flowing into Australia, it was primarily moving into the Aussie bond market. Equity markets took a backseat to this fresh asset allocation, adding another reason for the recent sideways price action.

But Investors May Be Worried About Valuations

The questions being raised about the ASX 200 at current price levels is similar to questions being raised in Asia, Europe and the US. Investors are questioning whether is it prudent to continue to chase stocks higher because of the free-flow of money from the central banks.

This week’s price action suggests that investors may be realizing that valuations may be off the charts, and that value may be more important. Furthermore, with the emphasis on earnings this week, perhaps investors are choosing to avoid the urge to buy stocks simply because they are the only asset class paying a decent return, and instead, are shifting their focus back to traditional valuation analysis.

Australian Stocks
Daily S&P ASX 200

Forecast

Miners and energy stocks could dominate the trade today due to the strong gains in the global crude oil market. The price action in crude oil suggests that the commodity has begun a new bullish leg higher after a 10-week decline. Although U.S. stockpiles remain at or near historical price levels, investors have shifted their focus from the “now” and into the “future”.

The catalyst behind this week’s gains in crude oil has been speculation that Saudi Arabia and Russia are going to agree to a production freeze that would help the smaller-producing nations. This decision may not come for over a month when OPEC next meets, but the story has been strong enough to scare commodity and hedge fund money managers to aggressively cover their short positions that stood at record levels about three weeks ago.

Today, we’re going to monitor the price action in the energy sector to see if rising oil prices are impending valuations.