The Overnight Report: Adrift

This story features TECHNOLOGY ONE LIMITED. For more info SHARE ANALYSIS: TNE

By Greg Peel

The Dow closed down 31 points or 0.2% while the S&P lost 0.1% to 2086 and the Nasdaq closed flat.

Two Markets

The pain continued for the local resources sectors yesterday and on last night’s performance things are not going to look a lot rosier today. For one brief moment last week it looked as if the US dollar might be set for a correction on the basis the currency was pricing in a too rapid Fed tightening cycle. But further dovish rhetoric from the ECB in particular has ensured that in the race to the bottom for currencies, the greenback is the loser.

Yesterday saw the local materials sector fall 1.0% and energy 0.4%, leaving these two the only sectors to finish down on the day. Elsewhere the buying was relatively even across all sectors with the exception of an out of the box performance from consumer staples, up 2.0%. Media suggestions about private equity interest for Big W explain most of the move. Plus perhaps bargain hunters are looking for something positive to come out of Woolies’ AGM on Thursday.

Yield remains popular, with utilities and the telco posting solid 0.8% gains.

As we approach the Silly Season proper, it appears Bridge Street is waiting now for something to happen. The December Fed meeting is still a good three weeks away and it would appear that meeting will be critical to whether or not Santa wants to show his hand this year, just as was the case two years ago when we went through exactly the same soap opera over the issue of Fed tapering.

There’s little point in looking for a clear lead from Wall Street this week as all and sundry look ahead to the Thanksgiving break.

Hitting the Ton

The US dollar index traded at 100 for a heartbeat last night before settling back again to be up 0.2% from Saturday morning at 99.80. The index spent a brief time over 100 earlier this year when a June Fed rate rise was supposedly a given but before that, we have to go back to 2002 to see the index trading for any time over the ton. Then Alan Greenspan started cutting the Fed cash rate in order to ultimately create the GFC.

The bottom line is that while talk now may be of just how slowly the pace of the upcoming Fed tightening cycle might be, the market is still only pricing in a 70% chance of a rate hike in December. This is at odds, so to speak, with commentary both here and in the US within which it’s hard to find anyone not assuming a December hike.

Fedspeak nevertheless remains mixed and as unhelpful — some might say destructive — as ever. Last night San Francisco Fed president Evan Williams reiterated the case for a December hike while Fed governor Daniel Tarullo declared he is not keen to go ahead given inflation is not rising towards the Fed target as expected. On Friday night Fed vice chair Stanley Fischer suggested inflation would reach the target soon.

Shoot me now.

Either way the US dollar continues to rise, suggesting the market is still moving towards greater December hike expectations.

The US stock market has otherwise gone quiet, with volumes very much to the low side last night. After last week’s big recovery it’s now a matter of what to do next, and again that Fed meeting is the focus. Might as well just take a three week break for Thanksgiving.

There is a lot of data to consume in the early part of the week nonetheless. Last night saw a 3.4% fall in October existing home sales, as expected, while the Chicago Fed national activity index remained in contraction on a rise to minus 0.04 from minus 0.29 and a flash estimate of the November manufacturing PMI suggested a drop to 52.6 from 54.1 in October, which would represent the lowest reading in two years.

Bring on the rate rise!

The US materials sector had a hard time of it last night but elsewhere Wall Street is being buoyed by further share buyback announcements. A proposed merger between global pharma giants Pfizer and Allergan took centre stage, although both stocks were sold down and the deal sparked much criticism as a bold-faced attempt for Pfizer to relocate its HQ in Dublin and thus drop its tax rate to 18% from 25%.

Through all of this, the past week has seen the US ten-year yield cemented at 2.25%, rising and falling only a point or two over the past several sessions. It seems the bond market has settled at a point suggesting a coin-toss on the December Fed meeting.

Commodities

A report from the International Copper Study Group published last night noted a 70,000t global surplus of the metal in the first eight months of 2015. Copper duly fell 2%, to levels last seen in 2009. Copper has nothing on nickel when it comes to oversupply however. Last night nickel crashed 5% and continues to trade at 2002 pre-China boom levels.

Dour sentiment and the stronger US dollar ensured all base metals were down last night by at least one percent.

Iron ore fell US80c to US$44.20/t.

I suggest that resource sector investors should brace themselves for another round of broker downgrades to base metal price forecasts. While analysts have rejigged to the downside on several occasions this year, forecast prices, used to provide stock valuations, remain well above spot prices by those analysts’ own admission. Some now make a point of noting large variations in their valuations of mining stocks were spot prices to be used.

The oils had a bit of a pop last night when the Saudis suggested they would work with OPEC members to return oil markets to some level of stability. While this might imply Saudi Arabia is finally ready to concede to production cuts, we’ve seen this movie before. Plenty of talk but no action, as OPEC members continue to borrow to overcome their budget shortfalls.

West Texas is up US34c to US$41.91/bbl and Brent is up US53c to US$44.99/bbl.

As the US dollar continues to climb back, gold continues to fall. It’s down US$9.20 to US$1067.40/oz.

Today

The SPI Overnight closed down 18 points or 0.3%.

RBA governor Glenn Stevens will make a speech tonight and thereafter Wall Street will see house price and consumer confidence data and the Richmond Fed index. A revision of the first estimate of September quarter GDP will also be published, with economists expecting a rise to 1.9% from an initial 1.5% reading.

Locally there are several AGMs planned for today and TechnologyOne ((TNE)) will release its FY15 result.
 

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