The Overnight Report: Three Times A Lady

This story features SYRAH RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: SYR

By Greg Peel

The Dow closed down 118 points or 0.6% while the S&P fell 0.8% to 2253 and the Nasdaq lost 0.6%.

More General

I have highlighted over the past two or three days that whether the ASX200 has been up a bit or down a bit, there has been no market-wide theme at play. Rather, it’s been a case of sector repositioning after a pretty wild six months that have seen the rebirth of commodities at the expense of yield, and the de-rating of high growth, high PE stocks. Yesterday’s session, on the other hand, saw a more familiar pattern.

It was a “buy the market” day, with one exception. Every sector finished in the green after roughly even moves in percentage terms, other than the resource sectors, which were down a tad. Another solid session the night before on Wall Street that saw Dow 20k in sight probably helped fire up some renewed market enthusiasm, but investors are no longer prepared to keep backing the commodity price rebound theme.

It’s now baked in, probably overcooked, and stock analysts are busily undertaking quarterly forecast revisions that are resulting in steep upgrades to commodity “price decks”. The market knows that a run for resource sector stocks usually ends when the analysts catch up.

Okay, enough fun. To be fair to analysts, they can’t keep shifting their price decks every five minutes or their stock valuations and target prices would be subject to meaningless volatility. Quarterly updates are more sensible, barring any major left field events in between, and it should be acknowledged that more than one broking house has been making it clear for some time their commodity price forecasts are way below spot and thus ripe for upgrading.

The upgrades we are now seeing are significant, but still not close to current spot in many commodities. The market has decided over the past few days that whether the iron ore price be up or down, for example, the big miners and big gas companies have run a very long way very quickly and it’s a good idea to lock that in before the party ends.

That’s at the Big Cap end of town though. The small end of mining town yesterday gave us two material outperformers in the form of battery twins Syrah Resources ((SYR)) and Galaxy Resources ((GXY)), which jumped 14% and 12% respectively. In graphite miner Syrah’s case, an AFR rumour South32 ((S32)) was considering making a bid was the driver. In lithium miner Galaxy’s case, the company confirmed binding agreements for 2017 sales to the Chinese at impressive pricing.

Speaking of takeovers, Tatts Group ((TTS)) got another kicker thanks to a left field counter-bid from a consortium led by Macquarie Group ((MQG)), potentially killing off Tatts’ merger talks with peer Tabcorp ((TAH)). As Macquarie banker in a past life, I am not at all surprised. They’re all mad punters. Tatts shares jumped 8.5%.

Yesterday’s rally took the ASX200 a step closer to the 5600 mark, which chartists see as one of the last major resistance levels before a push to 6000. But if we are going to see 5600 before Christmas it probably won’t be today, thanks to the Fed.

Release the Hawks

The Fed has hiked its funds rate range to 0.50-0.75% from 0.25-0.50%. No surprise there. The surprise was provided by the FOMC suggesting, at this stage, 2017 will see three more hikes. The market had priced in two.

Now, we might think well fair enough – throw Donald Trump into the mix and maybe even three rate hikes will prove to be underdone. But Janet Yellen made it perfectly clear in her press conference that the three-hike call had nothing to do with The Donald. As she rightly pointed out, it is way too early to know just what policies The Donald and Congress will eventually settle on next year so it would be foolish to attempt to assume. The three-hike call is all about the US economy’s performance up to now.

US unemployment has fallen to around target and while inflation remain a little below, it is expected to creep up into the Fed’s target range over the next couple of years. The US economy is performing moderately well, and certainly well enough to decide the process of interest rate normalisation must move forward. It’s three hikes instead of two, cum-Trump.

This surprised Wall Street enough to ensure it was not going to be the day the Dow hit 20,000. Given the run-up so far, a hundred-odd point drop for the Dow is hardly a panic retreat. But Wall Street may now pause for thought, and as I have often pointed out, the smart money usually stands aside from the volatility that typically follows Fed statements and waits until the next day, with a night to think about it, to make its response.

Of course what will be the centre of a lot of discussion after-market is the fact that a year ago to the day, the Fed hiked its cash rate and called four hikes for 2016. We got the one. If history repeats, three hikes could well be no hikes.

2016 was a rather remarkable year nonetheless, featuring a commodity price collapse and rebound, Brexit, and the most bizarre US election of all time. In each case, the Fed decided it would be better to hold off, and hence we’ve only ended up with the one hike. 2017 will no doubt not be a repeat of 2016.

Or will it?

Commodities

The US dollar index has leapt 0.8% to 101.86.

The London Metals Exchange had closed before the Fed announcement. It was another session of mixed moves for base metals with the stand-out being a 6% surge for zinc.

Iron ore dropped US$2.50 to US$79.50/t.

West Texas crude is down US$1.98, or 3.8%, at US$50.86/bbl.

Gold is down US$13.80 at US$1144.90/oz.

The Aussie dollar is down 1.2% at US$0.7416.

Today

The SPI Overnight closed down 42 points or 0.8%. This matches the 0.8% fall in the S&P500.

To add to potential volatility today, it’s futures and index option expiry day on the ASX.

The local jobs numbers are out today.

The Bank of England will hold a policy meeting tonight and there is a raft of US economic data due, that don’t mean a lot right at the moment.

Rudi will present to members of the Australian Shareholders Association (ASA) in Sydney today. Noon-1pm, Mitchell Theatre at the Sydney Mechanics School of Arts.

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