US War of words with China heats up

Analysts are sitting on the fence in terms of determining whether it will be politics or the performance of the corporate sector that drive the market this week as President-elect Donald Trump’s inauguration takes place and the US reporting season kicks into gear.

Regards the latter, there was some promising newsflow on Friday with JP Morgan and Bank of America both delivering strong results. If this is replicated by Goldman Sachs, Morgan Stanley and Citi in the coming week Australian financials could receive support.

However, last Friday’s lead may be enough to trigger interest in the sector on Monday morning, particularly the likes of Macquarie Group and Magellan Financial Group which generate significant income from their overseas operations.

Mining stocks could also perform well on Monday after strong surges in base metals with copper pushing up towards the high of approximately US$2.70 per pound that it hit at the start of December, a level that it hadn’t traded at since 2015.

Warehouse stocks indicate the supply demand dynamics are pointing in the right direction. Zinc and nickel were also up with a strong rally by the former pushing it up to approximately US$1.26 per pound, close to a 30 day high, which in effect represented a long-term high which stretched back about nine years.

Gold had a mixed finish to the week but still pushed up above the psychological US$1200 per ounce level. Its fortunes this week could be driven more by the Trump factor and the war of words between the US and China where the issue of trade protectionism flared up following recent comments from China.

With regards to China, it released export data at the end of the week, the worst since 2009. If Australian markets are shaped by a combination of economic information and political rhetoric stemming from our largest trading partner, other positive leads could have little impact.

The significant increase in the Australian dollar from less than US$0.72 start of the week to US$0.75 on Friday could take some of the shine off the mining sector, particularly in relation to Australian-based producers across the iron ore, coal, gold and base metals sectors.

It is worth noting that the share prices of both Rio Tinto and BHP were relatively static in overseas markets. This could also relate to the fact that production reports are imminent, and investors may be fence sitting ahead of these events.

One production report to keep an eye on today is Whitehaven Coal. Its shares are up from circa $2.50 as the New Year ticked over to Friday’s closing price of $3.00, not too far shy of its 12 month high, and a push above this level would see it make a new four year high.

At 7:30 AM AEDT, the SPI futures was up 18 points or 0.3%, suggesting a relatively positive day’s trading.