The Overnight Report: Greenback Hits The Ton

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By Greg Peel

The Dow closed up 21 points or 0.1% while the S&P rose 0.1% to 2166 and the Nasdaq fell 0.2%

Easing Back

It appeared as if the ASX200 would give back yesterday all that was gained last Friday as the Trump rally starts to wane and commodity prices took a turn for the worse. But positive news for the banking sector helped to reduce the losses by the closing bell.

The financials sector closed down 0.5% but that’s actually a gain net of both ANZ Bank ((ANZ)) and Westpac ((WBC)) going ex, which was worth around 15 index points. The good news relates to capital requirements.

APRA announced that the new Basel 4 rules will require no significant lift in capital for the banks. In terms of APRA’s intention to ensure Australia’s banks are “unquestionably strong” and requiring of more capital than Basel 4 dictates, the regulator will consult with the banks all of next year and changes would not come into force until a year after that. Up till now, it was assumed new requirements would be known early next year.

On the resource sector front, gold stocks were unsurprisingly hammered yesterday and falls in base metal and coal prices also helped to offset another big jump for iron ore. The materials sector proved the worst performer on the day with a 1.3% drop. Elsewhere, telcos finally caught a bid, rising 1.0% despite an 0.8% fall for utilities, and industrials was the only other sector to finish in the green.

After an initial drop, the local market saw a bit of a kick from the release of Japan’s September quarter GDP result. The June quarter had seen 0.7% growth and economists had forecast a lift to 0.9% for September, but the number came in at 2.2%. Japan these days lives in China’s shadow but remains one of Australia’s most significant trading partners, and buyer of bulk minerals and gas.

On that note, Australia’s biggest buyer yesterday provided a monthly data dump around midday local time, after the Japanese release. Chinese industrial production grew 6.1% year on year in October, flat on the September result. Economists had forecast 6.2%. Retail sales grew 10.0%, down from 10.7% in September. Economists had forecast 10.7%.

On the other hand, fixed asset investment rose 8.3% year to date, up from 8.2%. While the numbers are incremental October does represent a turnaround from earlier weakness, and two months of growth have now been booked. Growth suggests Chinese infrastructure spending is making its mark, and infrastructure is a major consumer of steel, copper and other materials.

The Chinese numbers provided some disappointment and some level of hope. The ASX200 dropped to the low of day shortly after before beginning its afternoon recovery. Metal markets were far more encouraged overnight by the numbers, but still we see the futures suggesting a weak open this morning.

Caution sets in

The rush to exit the bond market continued in the US overnight. The US ten-year yield jumped another 10 basis points to 2.22%. The US dollar also accelerated its post-Trump rally in rising 1% to 100.09 on its index.

Strength in the greenback and weakness in bonds reflect expectations of a Trump-led jump in US economic growth on the back of increased spending. Such a scenario is also good for the stock market in general, albeit mixed across sectors, but the 100 mark for the dollar index is considered a bit of a tipping point, beyond which Wall Street will start to worry about the negative impact on US exports.

Add in concerns that Trump’s intention to whack tariffs on Chinese goods is likely to prompt a tit-for-tat backlash from China, or at least a shift away from American goods to Chinese knock-offs, and last night we continued to see falls for Big Tech names and others fearing a loss of Chinese business.

Meanwhile, beneficiaries of higher US rates and renewed US infrastructure spending once again found buyers last night, being banks and large industrials. But just how far can this Trump rally run? The Dow was up almost 90 points early on but faded as the day progressed.

Wall Street now wants to see who will be given the important roles in the Trump Administration, such as Treasury Secretary, which JP Morgan’s Jamie Dimon has supposedly shied away from. Otherwise commentary suggests that while a Trump presidency should prove longer term bullish for the US stock market, in the near term markets will need to settle down and possibly pull back.

Commodities

Volatility in base metal markets continued in London overnight. Having responded negatively on Friday night to increased margins on metal contracts, prices last night flipped back the other way on ongoing growth in Chinese fixed asset investment, ignoring the drag of the greenback.

Copper and aluminium were little changed but nickel rose 1%, lead rose 4% and zinc, which has been the best performer this year on dwindling supply, jumped 5.5%.

Iron ore was unchanged at US$79.70/t.

Gold continued to sink, falling another US$5.30 to US$1218.50/oz.

Wes Texas crude rose US33c to US$43.51/bbl.

Today

The SPI Overnight closed down 7 points.

The minutes of the November RBA meeting, held at a time Hillary Clinton was seen as a shoe-in, will be released today.

Tonight the eurozone September quarter GDP result is due and retail sales numbers are out in the US.

On the local stock front, Ozforex ((OFX)) will post its earnings result, BlueScope Steel ((BSL)) will host an investor day and Nine Entertainment its AGM and Incitec Pivot ((IPL)) goes ex.

Rudi will connect with Sky Business, via Skype, to discuss broker calls at around 11.15am.
 

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