The Overnight Report: Into The Transporter

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

By Greg Peel

The Dow closed up 297 points or 1.6% while the S&P gained 1.3% to 2241 and the Nasdaq rose 1.1%.

No Worries

It’s been interesting of late to note quite a level of variance emerging with regard Australian economist views, distilled down to forecast for the RBA cash rate. The popular media had, prior to yesterday at least, hyped up some expectations that the next rate move would be up. There are indeed such expectations, but a rate rise is not expected into late next year at best.

Other economists are happy to simply suggest 1.5% is the bottom, but don’t yet foresee a hike in the offing, but there remains quite a cohort that are convinced that by next year the RBA will be forced to cut to 1.25% or even 1.00%. Suddenly, yesterday, this view seemed more viable.

Australia’s GDP contracted by a worse than expected -0.5% in the September quarter, and the annual growth rate fell to 1.8%. The rate in the June quarter was 3.3% — much higher than expected at the time (and March brought a positive surprise as well) – hence sudden calls that the RBA would soon have to hike. Now the picture is more clouded.

Just some give-back? All agree December will bring about a reversal of fortunes as higher commodity prices flow through. And if the stock market is the barometer of economic expectations, the fact yesterday saw the ASX200 rally almost a percent, and actually kick up late morning when the GDP data dropped, suggests there’s not a lot of concern.

Presumably there was some element of “central bank put” at play. If the economy slows the RBA will cut – all good. If the RBA doesn’t cut it’s because the economy has picked up again – all good. But the funny thing is that while yesterday’s index rally was indeed all about interest rates, it was not about the RBA.

National Bank ((NAB)) and Westpac ((WBC)) yesterday announced increases to their variable investor mortgage rates. The bank sector rallied a market-leading 1.3% and provided the bulk of the 0.9% index gain. The GDP offers up RBA rate cut possibilities, and the banks implement rate hikes.

Funny old world. Of course it is that funny old world that keeps Dr Lowe awake at night. How can the RBA use one, and one only, interest rate to alleviate pressures on the wider economy while not adding further fuel to the housing market fire? Well he got an answer yesterday – leave it to the banks.

By contrast, among the better performing sectors yesterday (energy was the only loser, on the lower oil price), the consumer sectors, telcos and utilities all had good sessions, just as they might if an RBA rate cut were nigh.

But what we have seen these past few sessions is a move back into the high yield and high growth stocks that have been beaten down these past few months. This has helped to broaden the base of the rally back post Italy scare. The same theme has been playing out on Wall Street. Last night that story took a remarkable turn.

Bow to the Dow

For many on Wall Street there is one technical theory that remains sacrosanct one hundred years after it was posited. Dow Theory suggests that when the Dow Jones Industrials Average and the Dow Jones Transports Average hit new highs simultaneously, it signals a bull market.

One hundred years ago the US economy was all about building railroads for steam trains, pumping out Model Ts and hooking up the first telephones. Thus the parallels to 2016 are obvious, of course. The Dow averages are arcane measures that most traders ignore completely given the weightings therein are a reflection of share price rather than market cap. That’s why the S&P500 is seen as the “true” measure. But when Dow Theory kicks in, suddenly everyone dons a top hat.

Wall Street opened last night about where it left off the night before and began a modest rally. At around lunchtime, the Dow Transports hit an intraday high for the first time in two years, and every gain for the Dow Industrials at present is a new high. When that happened, someone placed a US$5bn program buy order into the S&P500 futures. All hell broke loose.

A “program” order is one in which a buyer approaches a proprietary desk of a broker with an order to buy “the market”. The broker offers a price for the stocks therein (using computers of course) and then covers that order in the futures – being the market proxy. The broker prices in a premium to cover the risk of having to unwind their stocks/futures position over time. The buyer has what they want in one smooth hit – not having to place 500 individual stock orders.

Nothing else happened on Wall Street last night. One buy order and the Dow is up 300. Just about every other US index, major and minor, hit a new all-time high as well.

It’s interesting that Dow Theory should suggest a bull market for Wall Street in December 2016. Wall Street has been in an uninterrupted bull market since March 2009.

Commodities

Oil is now acting as if it has been pushed a little too far ahead of actual evidence of OPEC production cuts. West Texas crude is down US90c at US$49.86/bbl.

Base metals are acting as if they had become speculatively overbought in the near term. All closed lower in London, with copper, nickel and zinc all down 2% or near to it.

But Lord only knows what’s going on in iron ore. It’s up US$3.80 to a two-year high US$82.40/t.

The US dollar index is down 0.3% at 100.18, helping gold up US$6.20 to US$1173.70/oz.

The Aussie dipped briefly on the weak GDP number yesterday but has since rebounded, up 0.3% over 24 hours to US$0.7479.

Today

The SPI Overnight closed up 49 points or 0.9%. Is today the day the ASX200 rallies through 5500 and, this time, keeps going?

China will release its trade balance data for November today and Australia will release its trade balance data for October.

The ECB will hold a policy meeting tonight. The expectation is that QE will be extended another six months from the current March timeframe. The December meeting has recently been the one in which Draghi makes the big policy announcements. Volatility alert.

Insurance Australia Group ((IAG)) and Santos ((STO)) host investor days today.

Rudi will appear on Sky Business twice today. First from 12.20-2.30pm and later he'll return for an interview on Switzer TV between 7-8pm.
 

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