The Overnight Report: Month End Blues

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By Greg Peel

The Dow closed down 123 points or 0.7% while the S&P lost 0.8% to 1932 and the Nasdaq fell 0.7%.

Flat Finish

It was another choppy session on Bridge Street yesterday as the result season drew to a close. Being the end of month, there was no doubt attempts at window dressing from fund managers, which would explain why we were up 45 points at the peak around midday. That took us to 4925 on the ASX200 which happens to be a technical resistance level.

And it worked. Back down we came for a flat close. All sectors finished mildly positive on the session bar financials and consumer staples, both of which were impacted by stocks going ex-dividend.

Today is a new month.

Yesterday’s January private sector credit data showed assumptions of a slowdown in housing in 2016 are yet to manifest. Certainly in Sydney. The only difference is it is now the owner-occupiers driving the housing market as the investors back off following tighter lending parameters imposed last year.

Housing is particularly important as it is the one true sign of strength in an Australian economy still reeling from the pace of collapse of commodity prices. But for how long can the housing market continue to grow?

The good news in the credit data is that business lending continued to grow a-pace in January. The bad news is that last week’s December quarter private sector capex intentions measure pointed to a significant slowing of expenditure, which would translate to softer demand for credit.

Yesterday’s December quarter data showed corporate profits coming in weaker than expected, dragged down by mining but also disappointing in the non-mining segment. Wages growth remains tepid, which belies apparent strength in the employment numbers.

Soft wages in the face of resilient employment may yet provide the scope the RBA needs to cut its cash rate once more. The board meets today but no change is expected at this stage.

Non-Core Promises

At the G20 finance ministers meeting held over the weekend in Shanghai, the Chinese delegate assured those present China was not about to join in a mutually destructive global war of currency devaluation, otherwise known as “the race to the bottom”. Yesterday the PBoC pegged the renminbi lower for the fifth straight session.

It was in August last year when the PBoC sent the world into a tailspin by suddenly floating the renminbi against a basket of global currencies, amounting to a hefty devaluation no one saw coming. It was all about the renminbi being included in the IMF’s basket of reserve currencies. Having achieved inclusion, the PBoC is back to pegging against the US dollar once more.

Yesterday the PBoC also cut the bank reserve ratio requirement by a further 50 basis points. This is a more typical monetary easing tool China has deployed over past years, alongside occasional interest rate cuts. China may deny any attempt to join the race to the bottom, but it’s in stimulus mode nonetheless.

Being will release February manufacturing and service sector PMIs today, and Caixin will release its independent manufacturing PMI.

Decouple

It must have been the last day of the month. Oil rallied and US stocks indices fell. It’s been a positive month on Wall Street, having bottomed out at 1810 in the S&P500 and rallied all the way back to meet 1950 resistance. Last night’s selling was likely related to end of month profit-taking.

Last night it was Nigeria’s turn to talk up the possibility of an OPEC production freeze. Oil prices dutifully rallied, but one wonders whether much was made of further OPEC rhetoric. Last week’s US rig count showed the tenth straight week of rig declines and this week’s production data will be closely watched. Oil markets also applauded China’s RRR cut in rising a couple of percent.

In US economic news last night, pending home sales fell 2.5% in January, but weakness was partly attributed to the east coast’s Snowzilla blizzard.

Having leapt up solidly in January, the Chicago PMI – a measure of economic activity in the Chicago area – crashed back again into contraction in February, at 47.6. The underlying trend suggests contraction for the past three months.

The Fed remains data dependent, but the data are not painting a very clear picture at present.

Commodities

West Texas crude is up US79c at US$33.75/bbl while Brent is up US66c at US$36.01/bbl.

It was a quiet session on the LME for once, with a 1% gain for lead the only movement worthy of mention among the base metals.

Iron ore fell US10c to US$48.90/t.

The US dollar index is relatively steady at 98.19 but gold is up US$14.50 at US$1238.10/oz.

The Aussie is steady at US$0.7136.

Today

The SPI Overnight closed down 12 points or 0.3%.

The world will release manufacturing PMIs today, including those for Australia and China as noted.

Locally we’ll also see monthly building approval and house price numbers while the December quarter current account will be released, including the terms of trade.

The RBA will meet today.

There’s another sizeable round of ex-divs today, including AMP ((AMP)), Bendigo & Adelaide Bank ((BEN)), and the mother of all dividends, Telstra ((TLS)).

Rudi will make a brief appearance on Sky Business today at around 11.15am through Skype-link to discuss broker ratings.
 

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