Weaker $A and profit season wash up delivers solid start

A relatively steady lead from US markets and a weaker $A has seen a firm beginning to this week’s trading.

At the index level, markets are also likely to be relatively happy with the wash up of a difficult profit reporting season. The reporting season revealed many underlying problems but at the same time had more than its fair share of positive surprises. Despite this morning’s firm start, traders are likely to be relatively cautious ahead of a big week of economic news releases in Australia, the US and China.

The weaker Aussie Dollar may provide some incentive for investors to push the ASX 200 higher. This followed $US strength based on better than anticipated US inflation data.

Friday’s news of stronger than expected US inflation looks significant. There are emerging signs that the US domestic economy is overcoming global weakness and a strong Dollar to deliver an improvement in core prices like rental, medical and airfares.  If this trend consolidates, the Fed is likely to lean more towards getting ahead of the inflation curve by lifting rates than towards caution dictated by weak global economies. That will create a tendency towards $US strength over the coming year. 2016 may yet transpire to be more a case of the US economy and the Fed leading the world out of central bank stimulus than the BOJ and ECB sucking us deeper into it.

Investors will be focussed on the performance of Woolworths shares today after an extraordinary turn around on Friday. The big rally off Friday’s low might reflect a classic case of sell the rumour and buy the fact as short sellers scramble to take profit.

The Woolworths rally may also reflect a re assessment of Mr. Banducci’s appointment as CEO. While the consensus expectation was for an external appointment and cultural change, Mr. Banducci is far from being a Woolworths’ “lifer”. Markets may be prepared to give him the benefit of the doubt given his success with Dan Murphy and the fact that he is in a position to move faster on strategy implementation than an external appointment.

Despite the market turn around, Friday’s profit result reinforced the underlying pressure on Woolworths’ profit margin and rallies may be capped at this stage.