The Overnight Report: Thursday In Reverse

This story features BHP GROUP LIMITED. For more info SHARE ANALYSIS: BHP

By Rudi Filapek-Vandyck

Up. Down. Up. Down.

Pick any asset or potential investment -any- and this is the moving pattern from day to day. Yesterday on Wall Street, and in Europe, was no different as listed assets that had moved up in price the previous day (oil, commodities) switched roles with those that had proved temporarily out of favour: the US dollar and banks and consumer discretionary stocks.

Is it that difficult for the market to make up its mind?

Well, yes and no. While there will always be buyers and sellers, bulls and bears, for any asset at any given time, the current extreme volatility has more to do with investors changing market positions, and having to cover their shorts whenever the market appears to move in the opposite direction.

As pointed out through various FNArena news stories over the past weeks, the global investment community has started to reposition itself. Instead of pro-oil and pro-commodities (in other words: the pro-inflation trade) global professionals have turned the focus to slowing economic growth and as a result the former overweight positions are now being unwound in favour of banks, consumer discretionary stocks and other industrials.

Despite the extreme volatile trading patterns that come with such a change, the underlying trend is unlikely to change anytime soon. Especially when economic data continue to support this change in views. Yesterday didn’t offer anything new. Those events that are being characterised as having had an impact on overall market direction hardly deserve the label “new” or “newsy” – but they did move the markets.

Second quarter GDP figures (nil growth) released in the UK again highlighted Brittannia could be battling a technical recession soon. Fed chairman Ben Bernanke used his annual retreat at Jackson Hole, Wyoming to tell the world inflation was likely to become a lesser evil as prices for oil and commodities were coming down. Elsewhere, JP Morgan strategists told their customers corporate earnings in the US would receive support from the previously weaker US dollar. Anything new, anyone?

And so it was that the market took direction from the “news” that was flashing across their pc screens, buying US dollars instead of euros and banks and industrials instead of energy and base materials. The US currency received an extra boost from Warren Buffett declaring he currently had no market position against the greenback, and with Bernanke talking “a stable US dollar” the message seemed clear: buy USD.

Light Sweet Crude Oil fell a little over US$6.50 to US$114.59 per barrel, fully erasing the previous day’s strong gains, plus some more. With oil providing guidance for the rest of the commodities spectrum, gold landed back at US$822/oz (a fall of US$13.90) and base metals lost between 1.6% and 2.2%.

The euro dropped to a session low of US$1.4760. Earlier in the week the currency had fallen to a six-month low at US$1.4631. The Aussie fell too and was trading at around US$0.8666 last time we checked.

The bets on whether US investment banks will still exist when the current crisis in the finance sector is over are ongoing. Yesterday saw the overall mood change from “Lehman Brothers is likely to go the wall soon” to “surely someone is going to buy them”. This provided financial stocks with the opportunity to enjoy a positive session. Whether this will reverse again on Monday, remains anybody’s guess.

Even though US shares ended the week on a positive note, Bloomberg points out the Standard & Poor’s 500 index nevertheless recorded its first weekly loss (0.5%) since July. Bloomberg also carried an interview with one of the (reportedly) successful hedge funds over the past year, Haugerud. The fund’s executive Renee Haugerud, whom we assume is responsible for the fund’s name, pointed at over-enthusiastic investors for being responsible for record high oil prices earlier this year.

Investors should prepare to see oil back at US$80 per barrel in the year ahead, said Renee. We note that specialists at BCA Research in a recent note on the sector said that, according to their calculations and models, the fair value of crude oil was currently around US$84 per barrel.

The SPI futures are indicating a positive opening for the Australian share market on Monday morning. However, all of the above means the market will again be split between banks and industrials on one side and energy and resources on the other. (No prizes for guessing which ones will open higher and which ones won’t). BHP Billiton ((BHP)) shares lost a little less than 2% in the US session.

The S&P500 gained 1.1% to close at 1,292.20. The Nasdaq gained 1.4% to 2,414.71. The Russell 2000 gained 1.7% to 737.60. The Dow Jones Industrial Average gained the most: up 1.73% to 11,628.06.

Greg Peel was talking ANZ Bank/Opes Prime and Babcock & Brown on Sky Business’s Business View this morning. He’ll be back on Tuesday. Also: the UK has a public holiday on Monday.

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