Bottom-up recovery outpacing macro risk

Earnings season hits full swing this week, with over 70 ASX-listed companies due to report; the key picks are BHP, WES, FMG, WPL and QBE. 

Source: Bloomberg

It will be a mixed bag as QBE is going to be dragged down by its never-ending issue in the US, as BHP looks to become a four pillar business with diversification being the optimum word.

The rally at the back-end of last week was down to strong cash mix earnings from Telstra, and outlooks on the likes of BHP and stronger overall earnings compositions in the industrial space. However, this week is going to sort out how strong the FY14 numbers truly are as sectors such as mining services see the majority of the stock listings in this space reporting to market. Expectations are for a series of guidance downgrades and soft earnings compositions.

Guidance remains the key point in assessing initial market reaction. CBA is the prime example; despite a very strong number for FY14 the underlying theme for FY15 is plateauing earnings, as loan growth slows, competition increases, transaction earnings suffer from low market volatility and bad and doubtful debts increase from the bottom of the cycle. The fact that CBA has not recovered to its closing price pre-results and is in cum-dividend trading suggests the banks may have had their time in the sun and that all may wane in the back-end of the year.

What must also be taken into account is the reaction in Europe to suggestions that Ukraine destroyed parts of Russian military column. The DAX fell 2.4% in the final hour of Friday’s trading to finish down 1.43%. However, over the weekend further signs of a truce emerged as the Russian aid trucks passed the first check point in Ukraine as Russian and Ukrainian foreign ministers met with German and French counterparts to continue talks towards a more finite solution to the situation.

Macro data is also light this week and therefore earnings season should again be the driving force of equity markets; however central bank communications do start to appear at the back-end of the week.  We will hear RBA minutes tomorrow, however it will be Glenn Stevens’ testimony to the Standing Committee on Wednesday that will be interesting as there will be questions as to what the bank sees as the direction of the Australian economy. The Fed will also be a key player this week as the annual Jackson Hole retreat begins.

Historically, trading leading into Jackson Hole sees increased volatility before easing post the Symposium. Talk so far is that chairperson Yellen is concentrating on employment and the composition of wage growth and full-time versus part time percentages; this issue is likely to be echoed by central bankers around the world as global employment remains soft at best.  

Ahead of the Australian open

We are currently calling the ASX 200 up 12 points to 5578; the stock to watch again will be BHP, after having added 2.33% on Friday on the news that its preferred option for its non-core assets is a listing on the ASX and JSE. The leaner core product producers will have a simpler free model and a more stable structure for further reducing capex and provisioning. 

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