The Overnight Report: Oil Reversal

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

By Greg Peel

The Dow closed up 117 points or 0.6% while the S&P rose 0.5% to 2185 and the Nasdaq gained 0.5%.

Phone Home

We don’t have to look far to see why the ASX200 closed down 35 points yesterday. The big movers to the downside were telcos and banks.

Telstra ((TLS)) posted a disappointing result and an undercooked dividend increase, sending its shares down 1.6% and the telco sector down 1.3%. Westpac provided a soft quarterly update which renewed the pressure on all bank stocks, sending that index down 1.2%.

Energy was weaker on the fall in the oil price but that will likely reverse with interest today. Materials were also weaker but that includes Rio Tinto going ex.

Elsewhere we saw another 1.1% fall for utilities matched out by a 1.2% gain in consumer discretionary – the rotation trade out of expensive yield and into growth. We must remember that the discretionary sector covers a wide range of companies, not just traditional shop-front retailers. There’s pizza, there’s car parts, there’s classifieds, hotels and vitamin tablets, to name a few.

We also recall that investors shifted into banks early in the week on a good result from Bendelaide and a positive update from ANZ, assuming all boats would float. We’ve since seen a so-so result from CBA and a soft update from Westpac, thus the market has shifted back out again.

We can also note from a technical perspective that while the index traded as low as 5483 yesterday, it closed a little above 5500. We like round numbers. If we can see 5600 reached in the near term the technicals remain bullish. This morning the futures are suggesting we should recover yesterday’s losses but next week will be telling as the earnings season significantly steps up the pace.

Triple Header

All of the Dow, S&P and Nasdaq closed at new all-time highs last night. It has taken until 2016 for the Nasdaq to regain its prior all-time high posted in 2000, just ahead of the tech-wreck. Therefore while it has been common in recent years to see the Dow and S&P both hit new highs in a session, last night was the first time since 1999 all three major indices achieved the feat simultaneously.

There were two major drivers for last night’s strength on Wall Street. The first was a big move up in the consumer discretionary sector, which has distinct importance in America’s consumer-driven economy.

Department store Macy’s posted an earnings beat which took the market by surprise, but the main reason the stock jumped 17% in the session was the announcement Macy’s would close 100 stores across the country. Finally, investors concluded, the old world retailers are realising floor space is but a cost-drag in the online world. Rival Kohls also posted an earnings beat, and its shares jumped 18%.

The other major driver was the oil price, which having fallen on Wednesday night on announced record Saudi production, rebounded over 4% as the shorts scrambled to cover. As to whether such cover is necessary is nevertheless debatable.

I noted yesterday, “OPEC will be meeting shortly for the usual charade of talking production cuts, but it is unlikely Saudi Arabia will do anything other than stay the course”. Well whaddya know, last night the Saudis indicated that in the unofficial OPEC production meeting set for September (the next official one would be December), Saudi Arabia would be open to discussions about production freezes.

They must all fall about over in Riyadh every time they pull this stunt and the oil price stages a Pavlovian surge. OPEC will meet, Iran, if it attends, will say “we’re not freezing” and thus the Saudis will say “well we’re not freezing either”. Then everyone will go home.

But on the Nymex, it would seem it’s safer to be square than caught out.

While such a sharp reversal for oil was interesting last night, it was also interesting to see the US dollar index jump back up 0.4% to 95.93, having fallen on Wednesday night, and the US ten-year yield jump back up 6 basis points to 1.57%, having fallen on Wednesday night. Unusually, stocks are leading bonds on Wall Street at present, traders have noted.

Commodities

West Texas crude is up US$1.92 or 4.6% at US$43.45/bbl.

It was a mixed bag in London, with aluminium, copper and lead all rising 0.5% while zinc fell 0.5% and nickel fell 1%.

Iron ore fell US$1.10 to US$59.60/t.

On dollar strength, gold is down US$7.50 at US$1338.30/oz.

The Aussie is a tad lower and sitting smack on US$0.77.

Today

The SPI Overnight closed up 33 points or 0.6%.

Following the strong department store numbers overnight, Wall Street will be looking tonight to see whether this is matched in July retail sales figures.

Ahead of that release we see a data dump from China today, featuring July retail sales, industrial production and fixed asset investment numbers.

James Hardie ((JHX)) is among those reporting earnings today while Suncorp ((SUN)) will go ex.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms