The Overnight Report: Squaring Up

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

Greg Peel

The Dow closed up 82 points or 0.5% while the S&P gained 0.4% to 2088 and the Nasdaq rose 0.5%.

Nabbed

The ASX200 followed up Wednesday’s 134 point fall with a 46 point fall yesterday but the point to note is that shares in National Australia Bank ((NAB)) have been placed in a trading halt to facilitate Australia’s largest ever capital raising at an extraordinary 25% discount, which is not reflected in those 46 points.

Indeed, the financial sector faired relatively well yesterday with only a 0.4% fall thanks to bargain hunting in Commonwealth Bank ((CBA)) when falls across other sectors came in at a consistent 1.0 to 1.5%. The other two standouts were healthcare, which only fell 0.2%, and yield-heavy utilities, which was carted for a second day with a 2.2% fall.

All this fuss over the cash rate going no lower than 2% when some utilities yield 8%, plus franking. And they’re yielding more now for new entrants.

The relative outperformance of the banks, sans NAB, yesterday seems to imply the market sees the capital raising as NAB-specific, for the purpose of floating off Clydesdale Bank in the UK, and not a sector issue. But in its announcement NAB suggested part of the raising will be used to meet tighter capital regulations and whatever else APRA may decide to throw at the lending market. At least one broker believes all of the Big Four will need to raise capital for regulatory purposes. The one bank that might squeak through is CBA due to its current superior capital position.

Beyond the banks, the last two sessions smack of a general groundswell sell-off as a result of the index failing no less than four times to breach 6000. Markets that cannot go up will always go down. RBA policy aside, there may also be an element of moving to the sidelines ahead of Tuesday night’s federal budget.

The NAB announcement yesterday rather sucked the oxygen away from the monthly jobs lottery. On Tuesday the RBA statement noted “available information suggests…stronger growth in employment”, but the unemployment rate ticked up to 6.2% from 6.1% in April. The move is immaterial, nonetheless. As CBA’s economists point out, the underlying trend in the unemployment rate is currently to the downside despite the odd monthly fluctuation, consistent with forward indicators (such as ANZ’s job ads series).

And speaking of jobs…

The UK election is taking centre stage as we speak, as anyone who hopped on Sky Business this morning for any overnight news would attest. The exit polls suggest the Tories could form a majority coalition government even with what’s left of the Lib-Dems but it’s early days, so no point in drawing any conclusions.

Across the pond, Wall Street appeared very much in square-up mode last night ahead of tonight’s non-farm payrolls report. Everything that’s been going up lately went down, and vice versa. The US April jobs numbers also appear a bit of a lottery as well, not because the calculation is being questioned but because this week’s weak private sector number has thrown doubt on whether the March quarter snow excuse is actually valid. Thus best not to go in with a big position one way or the other.

US stock markets rebounded to recover what they lost on Wednesday night, the US ten-year bond yield fell back 6 basis points to 2.18% having risen steadily of late, and the US dollar index rebounded 0.4% to 94.54 after a period of correction. As to what Wall Street’s reaction to the jobs number will be is also a bit of a lottery. Is good good or bad, in the context of a Fed rate rise? Is bad thus good, or is bad simply bad?

The steady rise in US bond yields has surprised some, given recent weakness in US data and the shock GDP result would suggest the opposite. But it’s all about differentials. Eurozone QE has only been in play for a couple of months thus is yet, sentiment aside, to really have an impact. But recent eurozone economic data releases have been surprisingly positive and the European quarterly earnings season, which gets a lot less attention than the US season, has also delivered some surprisingly good results.

So why is the German ten-year yield trading near zero? Well actually it’s not anymore. Many a commentator has argued that the bonds of the strong eurozone members have been well overbought, so suddenly there’s been a bit of a rush to the exits. Last night the German yield jumped as much as 22 basis points to 0.8% before settling back to 0.64%. While 0.8% may not seem like much, it’s a lot different to 0.08%.

Slippery Oil

“The oils fell last night as well but only a little bit, however it was enough to evoke calls that we may have now seen the near-term top.”

That’s what I reported yesterday, and it appears those calls may be right. With a little help from the US dollar rebound, West Texas fell US$1.66 to US$58.96/bbl last night and Brent fell US$1.73 to US$65.74/bbl. Given WTI has rebounded over 30% from its low point in mid-March a bit of consolidation is clearly overdue, inventories and rig counts notwithstanding.

Maybe 60 is just a scary number. Last night iron ore fell back US10c to be right on the US$60.00/t mark.

Having moved mostly as a bloc both up and down this week, base metal prices became mixed last night as LME traders, too, await the US jobs number. Aluminium was slapped another 2% and copper lost 0.5%, but nickel and zinc were stronger.

Gold fell US$6.80 to US$1184.40/oz which I can put down to the stronger greenback, although the daily relationship is never consistent.

Today

Wall Street’s rebound does not appear to have sparked up any thoughts of bargain hunting on the local market today amongst futures traders, given the SPI Overnight closed down 8 points.

More colour will be added to the RBA’s apparent end to its easing cycle today when the central bank releases its quarterly Statement on Monetary Policy. China’s April trade numbers are out today and should prove fodder for the resource sectors after two days of falls.

All eyes tonight will be on whether or not the UK election can be called and on the US jobs numbers.

Macquarie Group ((MQG)) will release its full-year profit result today.
 

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