The Overnight Report: Caution

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By Greg Peel

The Dow closed down 20 points or 0.1% while the S&P lost 0.3% to 2041 as the Nasdaq fell 0.4%.

Consolidation

On Friday the ASX200 fell 70 points before recovering to a close of down 26, having briefly breached the 4900 mark at the low. Yesterday the index only made to 4910 on a 27 point drop to late morning before recovering to be down 6 at the close.

At the moment it appears the buyers are happy to step in around the 4900 mark. So many times this year we have seen sharp legs down through 4900 very quickly turn into sharp rebounds back again to the safety of the 5000 level. This time we’re actually seeing some consolidation at these familiar lows, which is probably a good thing.

Technical analysts are still calling the index to 5350-5400 as long as the previous lows hold. The last couple of sessions would suggest the lows are holding, barring anything unforeseen. Consolidation in commodity prices is making a supportive contribution, fighting back against bank woes. Other sectors have been largely oscillating up and down of late.

Yesterday the resource sectors held up the market, with energy rising 1.6% and materials 1.5%. Perhaps the interesting point to note is that energy only rose 1.6% when oil prices jumped 5-6% overnight. In the not so distant past, energy was flying around over 3% a day up and down with every little tick up or down in WTI. Similarly, the materials sector rose yesterday despite the iron ore price falling.

We might conclude that the dooming and glooming of analysts in recent weeks — warning that commodity prices were being artificially supported by short-covering and temporary restocking – is no longer striking fear in the market given commodity price consolidation.

Can there be any more bad news for the banks? Well, they may yet be forced to raise more capital on stricter regulatory requirements, but this is pretty well understood and likely well priced in. The banks were off 0.4% yesterday in a session which saw mixed sector moves. An off-target Wesfarmers ((WES)) led the consumer sectors down a percent and helped balance resource sector gains.

Sitting here above the 4900 level, it appears the local market is looking towards Wall Street and the US earnings season to provide direction just as much as Wall Street is at present. But we must not forget China, which, having been out of the news for a few weeks, is back in this week with a load of March data and the March quarter GDP result.

Positive Sign?

China’s CPI came in at 2.3% annual in March, unchanged from February. Economists had forecast 2.5%, and Beijing’s target is 3%, thus the assumption is the door is still well and truly open for further stimulus.

The bad news is the PPI was down again in a negative run that has now lasted four years. The good news is that the 4.3% annual drop in March is an improvement on the 4.9% drop marked in February. Could there be light at the end of the tunnel? We’ll need to get past the typical distortion Chinese data suffers before, during and after the New Year break before any trend can be confirmed.

And We’re Off

Alcoa’s March quarter result beat on earnings but missed on revenue. The result came out after the closing bell and Alcoa shares are currently down 4.5% in the aftermarket, having closed up 4% before the bell.

While the focus is always on the S&P500’s net earnings result – and it is interesting to note these past couple of sessions have seen analyst forecast actually pulling back from the dour numbers previously forecast – it may yet be revenue growth, or lack thereof, that provides the most impact this season. Alcoa achieved an earnings beat through cost cutting. There is only so far cost cutting can go to improve earnings before revenue potential begins to be affected as well.

What Wall Street wants to see is real earnings growth, which needs to be supported by revenue growth.

It’s early days. Alcoa’s release is only considered to mark the unofficial start of each US result season because it was always the first Dow stock to report. Alcoa is no longer in the Dow, but traditions are hard to shake. We now have to wait until the end of the week before the big banks start reporting, including the actual first Dow stock, JP Morgan Chase. Forecasts are for the banks to have had a shocker, losing a net 20% in earnings from the March quarter 2015.

On Friday night the Dow rallied 150 points before pulling back to close up only 35. Last night the Dow rallied 150 points to close down 20. In each case a jump in the oil price provided initial incentive – the oils are up another couple of percent this morning – but Wall Street has not wanted to go on with it.

Patience is required.

Commodities

West Texas is up US75c at US$40.36/bbl and Brent is up US$1.00 at US$42.85/bbl.

Commodity prices were offered some support from the US dollar last night, which is continuing its gradual decline. The dollar index is down 0.2% at an eight month low 93.98.

The greenback didn’t help aluminium nevertheless, which closed down 1% in London, to mark the only move of any real significance amongst the base metals.

Slightly more significant is a near 5% jump in the iron ore price, which is up by US$2.60 at US$55.90/t.

Gold found some support in the greenback, rising US$19.70 to US$1258.10/oz.

But every silver lining has a cloud. The Aussie is up 0.6% at US$0.7598.

Today

The SPI Overnight closed down one point.

The global economic and local stock calendars are both exceedingly bare today. The only highlight is the release today of the NAB business confidence survey for March.

Rudi will appear via Skype-link on Sky Business this morning, 11.15am, to discuss broker calls.
 

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