The Overnight Report: Done And Dusted

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

By Greg Peel

The Dow closed up 59 points or 0.3% while the S&P gained 0.45 to 2262 and the Nasdaq rose 0.4%.

Fed Factor

All year a debate has raged in the market as to whether or not Santos ((STO)), the most heavily indebted of the big Australian LNG players, would be forced to raise capital. As costs were cut and the oil price recovered, consensus leant towards no it wouldn’t, and yesterday it did.

The $1.5bn announced raising had Santos shares down 10% on a day when the US dollar shot up, sending the oil price shooting down, and as fund managers reduced positions in the other big oil & gas names to fund their Santos rights, the energy sector fell 3.4% to be the biggest loser on the day.

Elsewhere in the market, sector moves reflected the surprise that was a three-hike call from the Fed for 2017 when the market had expected two. Aside from its impact on the energy sector, the subsequent jump in the US dollar saw the materials sector fall 1.6%, while the impact of higher rates had the yield stocks tumbling once more. Telcos fell 1.7% and utilities 1.3%.

Financials, on the other hand, stood still, ultimately being beneficiaries of higher rates. Healthcare also watched from the sidelines given US exposure and the benefit of a lower Aussie, and info tech was another spectator given Computershare ((CPU)) is another winner from higher US rates.

Not helping matters yesterday was the expiry of December quarter SPI futures and options and ASX200 options, which is likely why around mid-afternoon the index seemed determined to fall all the way back to the crowded 5500 strike price. Down almost 70 points at that stage, a late recovery ensured a less devastating close.

The irony is, of course, that this time last year the Fed said four hikes in 2016 and we got one. The Fed’s now saying three hikes in 2017 when the market thought two and so there’s a bit of a panic.

The same theme continued overnight on Wall Street, with one exception. The knee-jerk of a hundred point drop in the Dow post Fed statement release has been replaced by a tentative rally.

King Dollar

Having leapt on Wednesday night, last night the US dollar index surged another 1.3% to 103.18. The US ten-year bond yield jumped another 5 basis points to 2.58%.

These are the negatives facing Wall Street as investors weigh up the positive implications of three projected rate hikes – a stronger US economy. The strong greenback weighs on the many large US multinationals, while higher rates increase funding costs and increase default risk.

Yet gone are the days when Wall Street would run screaming in panic at the mere hint of a rate rise or, earlier, a taper of QE. Higher interest rates just have to be lived with if they reflect a stronger economy. The surge in the greenback, which began post-election, has shifted attention back to domestically focused and currency ambivalent US small and mid-caps which have returned to favour after a long period in the wilderness. Among the large caps, there are winners and losers. A significant winner is the banks, and last night saw renewed buying in the US financial space, helping the US indices rebound from Wednesday night’s initial drop.

It was otherwise a fairly muted post-Fed session last night. The indices opened higher and drifted back a bit to the close. After twelve months of debating when, exactly, the Fed would finally announce its second hike, there is no doubt a sense of relief, and of ennui.

Bring on 2017! We can spend all year debating exactly when the next rate hike will be.

Commodities

The stronger US dollar has ensured gold has continued to tumble, down another US$15.30 to US$1129.60/oz.

Base metals have not been paying too much attention to the impact of the dollar of late, given demand-supply balances have overridden the currency drag. Zinc gave back around 2% of the previous night’s rally but otherwise price moves were mixed and, in recent context, relatively small.

Iron ore rose US$1.40 to US$80.90/t.

Oil had a solid drop on Wednesday night last consolidated around the 50 level for West Texas crude. It’s little changed at US$50.92/bbl.

The Aussie is enjoying the greenback surge – it’s down another 0.8% at US$0.7358.

Today

The new March SPI Overnight contract closed up 10 points or 0.2%.

Tonight is the quadruple witching derivatives expiry in the US, which could provide some added volatility.

There’s a late flurry of AGMs for the local market today, including those of ANZ Bank ((ANZ)) and National Bank ((NAB)).

Merry Christmas

And that’s it from me.

I’m off on my annual leave as of today and will return, with a new-look Overnight Report, in January. Merry Christmas and Happy New Year to all, and happy trading.

Rudi will connect with Sky Business this morning, through Skype, to discuss broker calls. Probably around 11.05am.
 

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