The Overnight Report: Meandering

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up one point while the S&P closed up one point at 2357 and the Nasdaq was flat.

The Too Big Australian

In a session that began with the iron ore price down solidly and the futures suggesting a -16 point fall, one would not have expected a 50 point gain for the ASX200 by day’s end, led by a 2.1% surge for the materials sector. But that’s how yesterday played out on the local market.

Within materials, the big influence was the Big Australian, rising 4.6%, on the back of a list of suggestions from an “activist” investor, US-based hedge fund and 4% owner of BHP Billiton ((BHP)), Elliot International. The price surge occurred mostly late in the afternoon.

Elliot suggested in its note that up to 50% of value could be added to shareholdings if BHP were to spin off its petroleum business into a separate listing, unlock franking credits for existing shareholders through off-market share buybacks, reassess legacy Billiton assets that are underperforming, and scrap the dual Australia-UK listing, to be listed only in Australia.

The suggestions have apparently prompted a “no interest” from BHP, and at 4% Elliot is not in much of a position to force the board’s hand, but the genie is now out of the bottle and clearly investors liked the ideas.

The day’s gain for the materials sector was backed up by colleague energy (+0.9%), which continued to follow a rising oil price. Oil has risen again overnight as tensions in the Middle East and with regards Russia play out.

The banks entered the fray as well, rising 0.8%. National Bank ((NAB)) has again implemented a mortgage rate rise, this time targeting new fixed rate loans. Mortgage repricing is seen as a positive for the banks, until it isn’t. Higher SVR rates for existing mortgages increase earnings margins but higher rates in general will ultimately serve to dampen demand.  

On that note, the value of new housing loans fell -2.7% in February, driven by a -5.9% drop in investor loans. Interestingly, it was the March Fed rate hike that prompted a round of mortgage repricing from the banks, particularly targeting investor loans, and APRA’s most recent round of tightening of lending practices came early this month. These measures, and repricing, are expected to weigh on investor demand.

These measures weren’t yet in place in February.

But all in all a buoyant day across the board for the local market, which saw the ASX200 close above the 5900 mark. Talk of 6000 being the next move is rife, thus while we may get there soon, it will take a lot of work to push any higher.

Bring on Earnings

Having last week surpassed Ford in market cap, last night Tesla surpassed General Motors to become America’s biggest (by value) carmaker. The fact that Ford and GM sell cars by the millions per year and Tesla by only tens of thousands doesn’t seem to bother investors. Of course there’s also the battery business.

The fact Wall Street closed flat as a tack would suggest it was a very quiet and dull session. But from opening bell to closing bell the Dow was up 90, then down -40, then up 60 before closing little changed. To say investors are struggling for direction might be an understatement.

Congress is now in recess, so there won’t be much going on on the Trump policy front for a while. Yet that said, last night Team Trump indicated that the tax reform policy they were hoping to put forward by August (previously “in a couple of weeks”), may now not emerge until next year. This is because the team wants to completely throw out the old ideas (which won Trump the election) and start from scratch.

One might have expected a negative response from Wall Street, given tax reform is apparently the Holy Grail, but it was not the case. Perhaps now the initial exuberance has worn off, average investors appreciate that Rome will not be built in a day. And starting from scratch might actually be a good thing.

There are US war ships in the Sea of Japan, quite close to both China and Russia, keeping an eye on North Korea. Tensions between Russia and the Free World with regard Syria continue to simmer. Wall Street continues to shrug.

Nymex is not shrugging nonetheless, with WTI crude rising another 1.6% overnight on the same geopolitical theme. Syria is not an oil producer of note, but its major allies Russia and Iran certainly are.

US energy stocks had another strong session but it was not enough to counter selling elsewhere.

The US earnings season always used to unofficially kick off with Alcoa, but the ex-Dow stock doesn’t have the same clout it used to. The new unofficial kick-off is now the release of the first major bank results, and that occurs this Thursday. Between now and then, Wall Street will be in a bit of a vacuum.

Unless something else happens.

Commodities

A -7% fall in the iron ore price was only good for a -0.2% dip for pure-play flagship Fortescue Metals ((FMG)) yesterday, given the BHP news seemed to spur on all comers. The iron ore price is down another -US$2.00 this morning at US$73.00/t.

The LME missed a lot of the late strength in the US dollar on Friday night, which is off -0.1% at present at 101.02. That may explain why aluminium, copper and nickel are all down -1-2%.

Gold is flat at US$1254.40/oz.

West Texas crude is up US82c to US$53.15/bbl.

The Aussie is flat at US$0.7501.

Today

The SPI Overnight closed down -2 points.

NAB’s monthly business confidence survey is out today.

Rudi will connect with Sky Business via Skype this morning, at around 11.15am, to discuss broker calls.
 

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