The Overnight Report: More For Less

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By Greg Peel

The Dow closed up 65 points or 0.3% while the S&P rose 0.2% to 2246 and the Nasdaq gained 0.4%.

Breakout

The ASX200 surged through the 5500 resistance level from the open yesterday and continued to track higher through the session, following Wall Street’s lead. Buying was centred in the large caps and cyclicals, and particularly the financials.

It was a good day for the banks but it was insurance companies that stole the limelight yesterday as the financials index rose 1.7%. Aside from a new lease of life for QBE Insurance ((QBE)) thanks to rising US rates, Insurance Australia Group’s ((IAG)) well-received investor day had that stock leading the charge.

Materials rose 1.5% thanks to another big jump in the iron ore price while energy was once again the only loser on the day, falling slightly on the lower oil price. Not participating in the rally were utilities and healthcare.

There were mixed data releases out yesterday on the trade front, whether or not it was going to make any difference.

In the wake of Wednesday’s shock GDP contraction came a shock blow-out in Australia’s trade deficit in October. It widened to $1.54bn from $1.27bn in September when economists had forecast a narrowing to $0.6bn due to rising commodity prices. But while exports rose 1.4%, imports rose 2.3%.

It was a mixed bag among exports, with coal rising 7% in value but iron ore falling 11%, and rural exports falling 4%. On the import side, lumpy aircraft orders were an influential element behind the jump. They don’t happen very often.

Yet economists continue to believe the numbers will improve from here, as those slow moving commodity export prices catch up to reflect spot prices. If only we could look into the future, so to speak. Oh wait, we can.

China’s exports rose 0.1% year on year in November when a 5% drop was forecast. Imports rose 6.7% when a 1.3% drop was forecast. That’s the biggest gain in two years, and attributable to a surge in the imports of iron ore, coal, oil and copper. China’s housing boom and government infrastructure program are making their mark, although there is likely some distortion provided by the week-long Chinese holiday in October, which would have delayed exports until November.

Putting the Australian October and Chinese November numbers together, there was no reason the stock market needed to pause for thought yesterday.

Indeed, the technical breakout of the 5500 level has chartists now eyeing off a move back to the previous 6000 high.

No Taper Tantrum

The European economy has been growing modestly and managed to sail through the Brexit vote unscathed. But 2017 is the year Brexit will actually begin to happen (presumably, although there remains a school of thought it won’t happen) and the Italian referendum has put the spotlight on next year’s elections in major eurozone economies. The December ECB meeting typically brings major policy announcements, and last night didn’t disappoint.

Heading into the meeting, the popular assumption, given the risks, was that the ECB would extend its bond purchase program (QE) for another six months from the current March 2017 deadline and then consider tapering purchases thereafter. Instead, Draghi threw a bit of a curve ball. QE will be extended all the way to the end of 2017 but as of April, monthly purchases will be reduced to E60bn in value from the current E80bn.

Markets were initially a tad confused – Wall Street dipped early – but by the end of the European sessions and half way through the Wall Street session it was decided this was good news. QE will continue to support the eurozone economy but tapering suggests confidence in growth ahead.

The German stock market jumped 1.8% by the close and Wall Street once again pushed higher, ticking off another quadrella of all of the Dow, S&P, Nasdaq and Russell hitting new all-time highs.

What was notable on Wall Street however was a clear rotation trade. Strength in the indices came from those sectors initially sold off in the Trump rally, such as yield plays and Big Tech, while a drag was provided by selling in the big Trump winners to date, such as infrastructure stocks and banks.

As profits are taken on the expensive winners and redirected back into the cheap losers, the debate heats up over just how far Wall Street can run before Trump even gets into office, how much gain is being “borrowed” from 2017, and just what sort of correction may transpire given this initial over-exuberance.

Commodities

“Non-OPEC” will hold a meeting this weekend to discuss its part in OPEC’s planned production cuts. For “Non-OPEC” read Russia. There are fourteen oil producing nations attending but once you drop past Mexico and below, contributions to global production become more negligible. The gorilla not in the room is the US.

The meeting has nevertheless reversed the last few days of drift in the oil price. West Texas crude is up US99c at US$50.85/bbl.

More ups and downs for base metals overnight. Aluminium rose 1% and copper 0.5% but lead and zinc fell 1.5% and nickel 3%.

Iron ore dropped US50c to US$81.90/t.

The ECB announcement had the euro heading lower, sending he US dollar index up 0.9% to 101.06. Industrials metals prices appear to be uncorrelated to the greenback at present but gold is not, although gold is only down US$2.90 at US$1170.80/oz.

The Aussie is off 0.3% at US$0.7459.

Today

The SPI Overnight closed up 16 points or 0.3%

Local housing finance numbers are out today and China will release inflation data.

Westpac ((WBC)) will hold its AGM.

Rudi will connect with Sky Business through Skype at around 11.05am to discuss broker calls.

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