The Overnight Report: Consolidation

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By Greg Peel

The Dow closed down 77 points or 0.4% while the S&P lost 0.4% to 2165 and the Nasdaq fell 0.3%.

Stall

The ASX200 posted its tenth gain in eleven sessions yesterday but conviction waned as the day wore on. After such a solid run, not only recovering the Brexit plunge but far overshooting it, it is inevitable that a pullback of some extent should occur as profits are booked.

Having opened up over 40 points, the index closed only up 24. With Wall Street also finally seeing some consolidation last night, the futures are suggesting an open of down 32 points this morning.

Healthcare was again the star yesterday, having previously been a bit of a laggard in the rally. It rose 1.5%, outperforming more modest and relatively even gains in other sectors. The exceptions were materials, which fell another 0.4% having led out the rally from the start, and telcos, finally seeing a dip of 0.1%. Utilities were still in favour nonetheless, rising 0.6%.

The materials sector should continue to play more of an “alpha” (stock-specific) game through to next week as more quarterly production reports roll in, and as they wrap up we’ll be into the reporting season proper.

Technically, the ASX200 has done all the right things in rising to 5500. The next target should be 5800 but first we need to get past a couple of significant central bank meetings and then we need to see a successful reporting season.

Banking It

A market can’t make new highs forever, which is why nobody much minded that Wall Street pulled back last night. There were some good and not so good earnings reports on the day, but Wall Street is now looking ahead to next week’s central bank meetings and deciding to move to the sidelines.

The Fed will release its policy statement on Wednesday. A rate hike is not expected at this meeting but in the constant ebb and flow of Fed speculation, September is now firming as a good chance. Brexit has been a storm in a tea cup and recent US data, including jobs, housing industrial production and retail sales have all been solid – solid enough to put the onus on the Fed to explain why it would not raise.

The US ten-year yield has moved back up from its Brexit low of 1.36% to now sit at 1.56%. Gold has stopped rising, although it’s interesting to note that having fallen around US$15 on Wednesday night understandably, gold last night rallied back US$15.40 to US$1330.70/oz on only a 0.3% retreat for the dollar index to 96.88.

Next Friday the Bank of Japan will meet. No one knows for sure what it has in mind, but ever since the Abe government won a sweeping majority in the recent upper house election the market has assumed that whatever it is, it won’t be pop gun stuff. Mind you, I have noted before that whenever the world assumes big things from the BoJ it does nothing, and vice versa.

And on that subject, nothing is exactly what the ECB did last night, unsurprisingly. Mario Draghi pledged low rates for longer and a continuation of QE into 2017, and perhaps beyond, but saw no reason to introduce any new measures. The ECB’s status quo decision follows the Brexit rebound and a similar decision by the Bank of England last week.

Had any combination of the BoE, ECB and BoJ been forced to act swiftly to stave off post-Brexit disaster, the Fed would have an argument that staying put is the sensible option. We still await the BoJ.

And just to underscore the argument for a Fed rate hike, US existing home sales rose 1.1% in June to the strongest rate since February 2007.

Commodities

There is talk of Libya being able to recommence export from an oil terminal and that had a negative impact on oil prices last night. However, the West Texas contract rolled over into September front month delivery and often we see some selling at expiries. It’s down US$1.21 to US$44.54/bbl.

Aluminium continues to suffer from building inventories and it was down another 1.5% last night in London. The Philippines story continues to drive nickel, which rose 1.5%, while the other metals were quiet.

Iron ore rose US$1.00 to US$56.10/t.

On the dip in the greenback, the Aussie is up 0.4% at US$0.7495.

Today

The SPI Overnight closed down 32 points or 0.6%. And it’s Friday.

Japan, the eurozone and US will all post flash estimates of July manufacturing PMIs today/night.

Santos ((STO)) and OZ Minerals ((OZL)) will post production reports today.

Rudi will Skype-link with Sky Business this morning at around 11.05am to discuss broker calls.
 

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