The Overnight Report: By God They Did It

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By Greg Peel

The Dow closed up one point while the S&P fell 0.3% to 2198 as the Nasdaq dropped 1.0%.

Don’t Panic

Yesterday’s action in the local market was straightforward. The prices of oil, iron ore and base metals fell sharply overnight. The energy sector was thus down 1.9% and materials 2.8%. Funds from sales in those sectors were rotated into the banks, which rose 0.6%.

There’s little point in discussing the session further given last night OPEC agreed to production cuts and metals prices have managed a reasonable rebound.

We’ll discuss the Great Building Scare instead.

You’ve seen the headlines – the Australian housing market is about to crash. Or maybe not. Residential approvals plunged 12.6% in October to be down 25% year on year. The plunge was driven by apartment approvals, down 23.5% in the month, with detached house approvals slipping only 2.5% to be down 5.7% year on year.

Never mind apartments – non-residential approvals crashed 46.9%. We need to consider the “lumpiness” of this number however, given you don’t just decide to build a new office block every month. Year on year, non-res approvals are up 9.2%.

It looks for all the world like we should be running scared; that the warnings of an apartment bubble are ringing true. But as the CBA economists point out, net annual approvals stood at 233,000 in October, not too far below the peak of 241,000 in October last year. Recent months have seen annual approvals of between 230-240k.

As CBA notes: “This fact indicates that in the big macro picture, the construction sector will still be motoring along at historically high levels and not too far from full capacity in the coming twelve months.  It must be borne in mind that the huge inner-city apartment blocks can have demolition and construction periods of between 2 and 3 years”.

CBA’s view is consistent with the views of stock market analysts. Although there is variation in expected timing, all expect the housing market to “cool off” (not crash) at some point next year or into 2018. The lag effect of approval to construction to sales, and the subsequent lag into spending on household goods required to fill those dwellings, mean the sky is not about to fall in tomorrow. But the cool-off is coming.

Commodities

This time, there really is a wolf.

OPEC has agreed to cut oil production by 1.2 million barrels per day. The market was hoping for one million but prepared for less or nothing. In order to appease OPEC members with varying individual problems, the cuts will not be consistent in percentage terms. Saudi Arabia will carry the biggest load, cutting by 500mbpd. Iraq will cut by a lesser amount and Iran will actually be granted a small increase, but only to a capped level. Cut numbers vary among other members.

Inspired by OPEC’s actions, Russia has agreed to meet the cartel on December 9 to discuss stretching the production cut to “non-OPEC”, which includes Russia as the major player and others such as Mexico but does not include the clear beneficiary of OPEC cuts – the US.

West Texas crude is up US$3.74 or 8.3% at US$49.05/bbl. Brent is up US$3.96 or 8.5% at US$50.47/bbl.

Over on the LME, prices managed to stabilise after Tuesday night’s rout. Aluminium and zinc bounced 1%, nickel 1.5%, copper 2.5% and lead 3%.

The same could not be said for iron ore nonetheless, which fell another US$2.90 or 4% to US$72.20/t. As I pointed out yesterday, we were in the low seventies last week. The blip up to 80 was just that – a speculative blip – and these sharps ups and down have been an occasional feature of the iron ore market all the way back from 40.

The bottom line is the iron ore price remains much higher than it was earlier in the year, and much higher than anyone expected at that time it would be. Ditto coal.

The OPEC decision, and last night’s US economic data which we’ll get to in a moment, lit a fire under the US dollar. It’s up 0.5% on the index at 101.48.

Not good news for gold, which is down US$16.00 at US$1173.00/oz.

The commodity price fall from yesterday weighed on the Aussie dollar and the building approvals number likely had some questioning this newfound belief the RBA will next be hiking rates. Throw in the surge in the greenback overnight and the Aussie is down 1.2% at US$0.7389.

Oiled Up

Obviously, the oil price had a major impact on Wall Street last night. Energy provided the positive balance in the Dow.

US consumer spending rose 0.3% in October and September’s gain was revised up to 0.7% from 0.5%. Incomes rose 0.6% in October. The core PCE measure of inflation, preferred by the Fed, rose 0.1% to be up 1.7% year on year.

The ADP private sector report for October showed an addition of 216,000 jobs, much higher than the 160,000 forecast. This bodes well for Friday’s non-farm payrolls report. There were some trades-off nonetheless, given September’s 147,000 gain was revised down to 119,000.

These data are positive on balance. But the Fed beige Book, released last night, suggested there were no signs of Trump euphoria in the anecdotal assessment of the twelve Fed regions. Growth remains “modest” as it has been all year.

Wall Street pulled back from its highs on the release of the Beige Book, but otherwise what we see in the wash-up was a repeat of what we saw immediately following Trump’s election. Resources and industrials traded higher but Big Tech was sold off. Hence the Dow flat and the Nasdaq down. The US dollar rallied, gold sold off, and the US ten-year yield jumped 7 basis points to 2.37%.

Maybe it was just a last-day-of-the-month trade for the purpose of books close. We’ll need to see how December plays out.

One thing is certain, nonetheless. You have to go a long way to find someone who is not bullish the US stock market in the medium term.

Today

The SPI Overnight closed up 18 points or 0.3%.

Today is the first of the month, which means manufacturing PMIs from across the globe including those of Australia and China. China will also release its service sector PMI.

Locally we’ll also see the long awaited September quarter private sector capex numbers, along with monthly house prices.

With November now out of the way, the AGM season slows right down to a trickle of latecomers. Today’s corporate highlight will be CSL’s ((CSL)) R&D Day.

Rudi will travel to Macquarie Park and join others in the studio to appear on Sky Business today, 12.20-2.30pm.

 

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