The Overnight Report: Profit-Taking

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By Greg Peel

The Dow fell 119 points or 0.7% while the S&P lost 0.6% to 1949 and the Nasdaq dropped 0.4%.

It appears Wall Street was not the only market to see profit-taking over the past 24 hours. The selling began from the bell on Bridge Street yesterday despite another rise in the iron ore price. Kathmandu ((KMD)) finally proved it is not bulletproof after all and became the latest retailer to issue a profit warning, but the stock’s 12% fall was a stand-out in a consumer discretionary sector fall of only 0.4%. The damage there has already been done.

It was in fact financials, with a 0.5% fall, that provided the bulk of the 0.4% drop for the ASX 200 over the session. The banks have had a solid quarter – CommBank ((CBA)) in particular – and with Wall Street looking toppy and geopolitical risks rising, the end of quarter, and financial year in Australia’s case, presents a good time to lock in gains.

The Aussie was a victim, having jumped on Monday on the positive Chinese PMI. It began falling back yesterday and is down 0.5% over 24 hours to US$0.9369.

The selling on Wall Street did not start from the bell last night, indeed the Dow was up 32 points at 11am on positive US economic data releases.

Consumer confidence has risen to its highest level since January 2008 this month, to 85.2 on the Conference Board’s monthly measure from 82.2 in May. Economists were forecasting 83.5.

Sales of new homes jumped to their highest level in six years in May at an annualised 504,000 when economists had expected 440,000. Sales are 16.9% higher than a year ago, although that figure read 6% lower in April, so it’s a volatile measure.

The average house price across the largest 20 cities grew by 1.1% in April to mark an annual rate of 10.8%, according to Case-Shiller, which while positive extends a weakening trend. Prices were 12.4% higher in March and peaked at 13.7% higher last November. For houses on Fannie/Freddie mortgages, prices were flat in April for a 5.9% annual gain.

The Richmond Fed manufacturing index disappointed with a fall to plus 3 this month from plus 7, albeit still suggesting expansion.

Collectively the data led Wall Street off to a good start but as the Dow threatened to approach the 17,000 mark once more, the selling quietly began. Around the same time, a US$30bn sale of US two-year Treasury notes attracted greater demand than the market had been expecting. And furthermore, news hit the wires that military aircraft had conducted strikes against ISIL insurgents in Western Iraq.

The planes turned out to be from the Syrian air force, but the Pentagon was nevertheless forced to quickly issue a statement to say they were not American. It came as a surprise that the Syrian government would jump in to support the Iraqi government, but then Iran is offering its support and Iran is Syria’s closest ally. Neither wants the US involved, so it appears the common cause is to counter ISIL on both fronts.

The US ten-year bond yield ultimately fell 4 basis points to 2.58% last night. As to whether this reflected selling in stocks, strong demand for two-years or an escalation of geopolitical risk is unsure. The Syrian strikes have also been offered as a reason for the stock sell-off but if that were the case, one would expect rallies in the oil price and the gold price.

Brent crude inched up US30c to US$114.33/bbl last night but West Texas crude actually fell US21c to US$105.79/bbl, while gold rose only US$1.20 to US$1319.30/oz.

Wall Street has paid little heed to ISIL to date, having registered all-time highs recently, so it is more likely last night’s selling simply reflected concern at the high altitude of Dow 17k and end of quarter squaring.

Base metal prices were little moved last night, other than a 1% fall in ever volatile nickel. The rebound in iron ore stalled momentarily with a US10c fall to US$93.30/t.

The SPI Overnight fell 27 points or 0.5%.

There are four more trading sessions to the end of the June quarter, and the end of financial year locally, so despite the background noise of data releases and geopolitical tensions, stock markets will likely continue to do their own thing until books close. We’ll have to wait until next week to see where they really want to be.

Wall Street will see the last revision of March quarter GDP tonight but with the June quarter now almost complete, the result will have to widely vary from expectations of 1.7% contraction to have any impact. The May durable goods orders release will be more pertinent.

In Australia, Collins Foods ((CKF)) will release its full-year result today while we welcome a new kid on the block in the form of the Scentre Group, along with a new-look Westfield ((WDC)).

Rudi will appear on Sky Business at 5.30pm.
 

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