The Overnight Report: Highs All Around

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By Greg Peel

The Dow closed down 26 points or 0.2% but the S&P rose 0.2% to 1987 and the Nasdaq added 0.4%.

After three sessions of uncertainty and contemplation, the Australian market exploded out of the blocks from the open yesterday, pushing PEs higher and putting even more pressure on upcoming earnings results. Wall Street provided a signal that we should not be too worried about potential sanctions against Russia, and BHP Billiton ((BHP)) fired up the mob by announcing record iron ore production. The ASX200 smashed through its previous high, and then the CPI came out.

It is a truth universally acknowledged that were Australia’s headline CPI to reach 3.0%, the response from the general media would be “OMG, we’re at the top of the RBA’s comfort zone!” despite the fact the RBA doesn’t, never has, and probably never will pay any attention to headline inflation. But headline numbers make for good headlines while “the average of the trimmed mean and weighted median” of inflation might push the boundaries of viewer disinterest.

Yesterday it was revealed Australia’s June quarter headline inflation rose 0.5% quarter on quarter, as expected, to an annual rate of 3.0%, which was either as expected or slightly below 3.1% consensus depending on whose poll one chooses. Underlying or “core” inflation, as measured by the average of the trimmed mean and weighted median, rose 0.7% which was a touch more than expected but the 2.8% annual rate was right on expectation, or not, depending on yada yada.

And guess what? That 2.8% rate is bang on the RBA’s forecast and what’s more, if we look at the annualised six month measure, which the central bank does because it smooths out the volatility, we find that’s at 2.5% which, of course, is bang in the middle of the RBA’s target range. And let’s not forget there will be an adjustment down in inflation ahead now the carbon tax is gone, just as there was an adjustment up when it was introduced.

So why, in God’s name, is the Aussie up 0.6% to US$0.9446, all of which happened on the CPI release yesterday? Only He knows. Meanwhile, the CBA economists, who have been among the more hawkish in town, have now pushed out their expectations of a first RBA rate rise to February from a longstanding November call.

The ASX200 kicked on further after the CPI release, to mark a post-GFC record intra-day high of 5598, but then someone pointed out the Aussie had just jumped half a cent and we drifted off to the close. That close of 5576, up 33 on the day, is nonetheless also a new high.

Wall Street’s decision not to worry about the Ukraine situation was evident again last night when news of two Ukrainian fighter jets being shot down by separatists, not far from the airliner crash site, was brushed off.  The Dow did lose around 50 points from the open but only briefly, with earnings results the major focus on a day devoid of any economic data releases of note.

Boeing (Dow) was the laggard on the day, missing estimates and suffering a 2% fall which helped the blue chip average to a negative close. The winners’ circle nevertheless included Pepsico, up 2%, Delta Airlines (3.7%) and Biogen (11%). The latter is interesting in the context of “overvalued” calls on biotechs, including from renowned trader Janet Yellen. Having reported the evening before, Apple rose 2.6% in the session, and after the bell Facebook blew them away and is up 5% in the aftermarket.

On the strength of net positive earnings results, the S&P500 closed at another new high last night. It’s the 26^th high this year so it’s all getting a bit monotonous. And while Wall Street is happy that some 78% of companies reporting to date have posted earnings “beats” to produce around 6% growth, revenue growth of only 3% remains a disappointment.

How much of the growth in earnings per share can be attributed to share buybacks, which mathematically increase EPS ceteris paribus?

The US dollar index continues to graft higher, last night to 80.80, as the euro continues to weaken. Gold is also drifting lower as the geopolitical atmosphere lightens, falling US$3.00 to US$1304.50/oz and looking nervously at that 1300 support level. Only the US ten-year bond yield is bucking the trend, but this has more to do with even lower European rates than with geopolitical fears or US economic concerns. It’s down another bip to 2.46%.

Nickel has withdrawn to the wings lately allowing aluminium to take the spotlight, but after several strong sessions LME traders decided last night aluminium was looking a bit stretched and sold it down 1.5%. Otherwise the metals were mixed on small moves.

Spot iron ore, however, tumbled US$1.10 to US$94.30/t.

The oil markets were a little more inclined to take the Ukrainian fighter jet news on board as well as the usual weekly US inventory chocolate wheel in sending Brent up US$1.06 to US$108.03/bbl and West Texas up US93c to US$103.00/bbl.

Local futures traders are now breathing in the fresh air of new highs and are invigorated. The SPI Overnight rose 16 points or 0.3%.

The flashers are going to be out and about over the next 24 hours so lock up your children. HSBC kicks it off with an estimate of China’s July manufacturing PMI and Japan, the eurozone and the US will follow suit. Retail sales data in the UK will provide yet another talking point with regard a BoE rate rise while new home sales numbers are due in the US.

It’s a big day for resource sector production reports today with Newcrest Mining ((NCM)), Atlas Iron ((AGO)), Beadell Resources ((BDR)), Drillsearch ((DLS)) and Independence Group ((IGO)) all in the frame. Macquarie Group ((MQG)) will hold its AGM and update guidance.

Rudi will appear on Sky Business at noon and later on discuss the upcoming reporting season with Peter Switzer between 7-8pm.
 

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