The Overnight Report: Uncertainty Home And Abroad

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By Greg Peel

Groan

On Saturday morning futures traders had pushed the SPI Overnight up 32 points by the close, one hour before the first polling booths opened. Sure enough, the ASX200 closed up 35 points yesterday.

But it wasn’t cut and dried. The rise in the futures would largely have been driven by big gains on Friday night for metals prices and ongoing strength in gold. There was something new for the market to consider on the weekend nevertheless, when the election provided a no-result and a big win collectively for minor parties. The risk of either a Labor government being formed or a Coalition government being forced to bow to cross-bench wishes lifted the risk of an oft called for Royal Commission into the Australian banks.

So down went the banks from the opening bell yesterday, and down went the index, by 28 points. The selling did not last long, however, and fortunately for the banks APRA made a timely announcement in declaring it was satisfied Australia’s Big Four were carrying capital ratios that put them in the top 25% globally.

By day’s end the financials sector only lost 0.1% while the materials sector led the gain to the close with a 2.6% rally, backed up by energy on 1.4%.

While APRA’s announcement may take the pressure off the banks in the short term, vis a vis feared capital raisings, the banks are still awaiting the finalisation of international capital rules for banks deemed “too big to fail” domestically and APRA has yet to quantify its “unquestionably strong” requirement. The banks are not out of the woods just yet.

The Aussie dollar also took a tumble in early trade yesterday thanks to the election, given the ratings agencies wasted no time in warning Australia’s AAA rating will be under threat if the job of budget repair is undermined by whatever new multi-headed beast emerges as the country’s parliament. But the Aussie, too, turned around. Having traded as low as 74.6 the currency is currently up 0.5% over 24 hours at 75.3.

Helping the Aussie rebound, aside from commodity price strength, was the Melbourne Institute’s inflation gauge for June, which showed a larger than expected 0.6% gain following a 0.2% decline in May. Would this threaten an RBA rate cut in August?

Not likely. The annual headline pace on the MI’s measure is 1.5% and the core rate of inflation, which excludes a recent rise in petrol prices, rose only 0.2% to be up 1.2% annually, well below the RBA’s 2-3% target band.

More of an issue, therefore, is the local labour market.

ANZ reported a 0.5% rise in job ads in June for an annualised rate of 8.0%. June’s gain was down on May’s 2.2% surge but ANZ’s chief economist suggested: “The strength in labour demand over the past two months is consistent with robust business conditions and solid momentum in the domestic economy. This should support a healthy pace of employment growth in the near term”.

So inflation is still weak but jobs growth looks solid. How’s the housing market faring?

Building approvals fell 5.2% in May when 3.5% was expected, to be 9.1% lower than a year ago. This looks ominous, but the approvals are falling from quite a peak and we do have this big dichotomy in place between the states. The May RBA rate cut is yet to influence the numbers, thus economists are not sounding the warning bells just yet.

So how will the election turn out? Why do I get the feeling we’ve just been through all this? The bookies had the “stay” vote in Britain comfortably ahead and the bookies had decided the Coalition would cross the line locally. Let’s hope the bookies don’t have Clinton in front, or we’re all in trouble.

Stock markets do not like such uncertainty but ultimately just get on with it. When 2011 produced the hung parliament and eventual Gillard minority government the local index fell over 2% initially before rallying back fairly soon after. Yesterday we saw a dip and rebound all in one day.

Frustration is the more likely response to the mess rather than fear.

Commodities

After their big surges on Friday night, base metal prices pulled back a bit last night despite a 0.2% dip in the US dollar index to 95.48. Zinc fell 2% and copper 1%.

However, iron ore jumped US$1.90 to US$55.90/t. Helping iron ore was the announcement from BHP Billiton ((BHP)) it would shelve its African project that threatened to add to global oversupply, and concentrate on squeezing the most out of the Pilbara instead.

For an oil market missing US traders, we had Saudi Arabia on the one hand reiterating its forecast that the global market will return to demand-supply balance by year’s end, and Morgan Stanley on the other warning oil prices are set to take another dip.

In the end, West Texas crude has fallen US57c to US$48.73/bbl.

As uncertainty continues to reign across the globe – and we can throw in a major Italian bank that is in trouble – gold continues to find favour. It’s up another US$8.60 to US$1350.50/oz.

The Aussie is up 0.5% at US$0.7534.

Today

The SPI Overnight closed down 13 points.

Locally we’ll see retail sales numbers and the services PMI today before the RBA meets and decides to leave its rate on hold.

Caixin will publish its take on China’s services PMI as other countries around the globe follow suit.

Counting will recommence locally, but it’s going to be a long wait.
 

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