The Overnight Report: Mixed Messages

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By Greg Peel

The Dow closed down 10 points while the S&P gained 0.3% to 2099 and the Nasdaq rose 0.7%.

Rudderless

Tuesday’s solid local retail sales number provided a boost for the consumer sectors that lasted all of a day, with both retracing those gains yesterday on Bridge Street. Materials bucked an overall soggy trend in rising 1.2% thanks to some welcome relief for metals prices, but metals prices turned around last night so that little rally may also prove short lived, depending on what sort of profit result Rio Tinto posts this morning.

Energy was unsurprisingly the worst performer, down 1.6%, and wouldn’t you know, utilities and the telco fell back again, by the same amount they went up on Tuesday and the same amount they fell on Monday.

If someone can explain to me why these two defensive sectors are among the most volatile on the ASX at present, albeit without actually going anywhere, I’d like to know. Or perhaps the answer is simply a more general one – investors simply do not know what to do right now.

Maybe result season will change that, or maybe we just have to wait for the Fed to make its move to remove that long-hovering cloud of uncertainty.

Each month I criticise the Australian manufacturing PMI as being a statistical joke but that’s probably due to the fact that sector has become so small as to almost be an irrelevance in GDP terms, thus subject to lumpy numbers. Australia’s most dominant sector is services, and here the monthly PMI does appear to be less volatile and thus more reliable. Yesterday saw an encouraging gain to 54.1 for July from 51.2 in June.

Manufacturing is still a significant sector within the Chinese economy but the service sector is the fastest growing, and to that end Caixin’s PMI reading of 53.8, up from 51.8, is similarly encouraging as Beijing tries hard to transition to a domestically-driven economy. Caixin’s number underscores a similar tick-up in Beijing’s official reading.

But neither the Australian nor Chinese PMIs engendered any excitement on Bridge Street yesterday. Elsewhere, Japan fell to 51.2 from 51.8, the eurozone fell to 54.0 from 54.4 and the UK fell to 57.4 from 58.5.

More Fed Confusion

The big PMI move came from the US, which saw its service sector number jump to a rapid-paced 60.3 from 56.0, far exceeding expectations. It is the highest result in a decade.

Offsetting the strong PMI was the ADP private sector jobs number for July, which came in at a tepid 185,000 when 215,000 was expected.

Put the two together and the Dow rallied over a hundred points on the open. The question is, did the Dow rally on the strong PMI or rally on the weak ADP and its implications of maybe stalling a Fed rate rise? Whatever the case, the rally proved short-lived and another Fedhead piped up with his personal view to add further confusion to the mix.

This week has seen both the Atlanta and St Louis Fed presidents and FOMC members backing a September rate rise, but last night Fed governor and voting member Gerome Powell insisted he was undecided, and that he would let the data, particularly jobs, inform his decision. There is more slack in the US labour market, Powell believes, than a 5.1% unemployment rate implies.

So whether the US stock indices went up and down on hawkishness/dovishness it’s hard to say at this late stage in the game. Nor is it particularly important. The US bond market seems to be backing September, given the ten-year rose another 6 basis points to 2.27% last night.

Weighing on the Dow was a somewhat Mickey Mouse result from Walt Disney, for which an 11% rise in profit was clearly not enough to satisfy the market. Disney shares fell 9% which equates to around 70 Dow points. The drop was not about kids’ movies but about Disney’s cable bundling business, which was the source of concern. Every listed cable company copped a thrashing in sympathy last night, while the leader of the new order of streaming – Netflix – was a beneficiary of those divestments.

Me? I loved the Drive-In.

Disney was virtually the sole reason the Dow finished slightly lower last night, and the knock-on held back the S&P500 which otherwise managed a 0.3% gain, and boosted the Nasdaq for a 0.7% gain.

Commodities

Tuesday night’s sudden bout of short-covering proved short-lived on the LME as last night saw a return to weakness in base metal prices. All metals fell over 1% bar copper, down 0.7%, and nickel, relatively flat. LME traders are backing a September Fed rate rise, and as such are concerned about US dollar strength.

Iron ore continued on its meandering path nonetheless, rising US$1.40 to US$56.40/t.

The oils went up a bit on Tuesday night and down a bit last night, with West Texas falling US83c to US$45.12/bbl and Brent falling US64c to US$49.61/bbl.

Gold fell slightly to US$1084.60/oz despite the US dollar index ultimately losing 0.1% to 97.88.

The Aussie has drifted back 0.3% to US$0.7358 following its post-RBA surge.

Today

The SPI Overnight closed up 15 points or 0.3%.

It’s jobs day today locally, with economists predicting a tick up to 6.1% from 6.0%, but as we know, it’s a lottery.

Downer EDI ((DOW)) and Rio Tinto ((RIO)) will report profit results today. ANZ Bank ((ANZ)) shares have gone into a trading halt amidst increasing speculation a capital raising is nigh.

Rudi has returned from the AIA National Conference on the Gold Coast and will make his sole TV appearance for this week between noon-12.45pm on Sky Business' Lunch Money.

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