The Overnight Report: Damn The Torpedoes

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED. For more info SHARE ANALYSIS: ERA

By Greg Peel

The Dow rose 211 points or 1.2% while the S&P gained 1.0% to 2062 and the Nasdaq added 1.0%.

Local Strength

You can’t keep a good market down, not when global demand for yield remains elevated. Yesterday the ASX200 overcame a 2.0% fall in energy and 0.8% fall in materials to rise a net 0.6%, driven by the banks (+1.4%) and the telco (+1.1%). Consumer discretionary still managed to gain 0.9% despite a soft December retail sales number.

Retail sales grew a mere 0.2% in the Christmas month, to mark 4.1% growth in 2014. Confidence remained subdued heading into Christmas, forcing retailers to yet again discount their wares in order to move them. Thus volume growth was reasonable, but revenue growth was not. Retailers are nevertheless more confident heading into 2015 given the flow-through to the pump of lower oil prices (household and transport costs reduced) and this month’s rate cut.

EU Upgrades Growth

The current trend around the world is to ease monetary policy in a self-feeding race to the bottom (Denmark cut its rate again for the fourth time in a month last night, into negative) but the UK is sitting on the US side of the ledger, with markets having spent a lot of 2014 pondering whether the Bank of England might tighten. The UK economy has been a strong performer, in relative terms, ever since the London Olympics.

But last night the BoE elected to retain its 0.5% cash rate, for the 71^st consecutive month, and leave its QE program unchanged. Will the Fed also extend its patience?

The euro rebounded last night as fears began to ease once more over Greece. The ECB decision not to accept Greek bonds as collateral appears to now be seen as less ominous. Moreover, last night the European Commission raised its economic growth forecasts for the EU to 1.3% in 2015 and 1.9% in 2016 from a previous 1.1% and 1.7%.

The bounce in the euro sent the US dollar index down 0.4% to 93.58, which is always a positive for commodities. The Aussie rose in response, but only by 0.2% to US$0.7810.

Oil Recovers

Traders cite the EU forecast increase as impetus for oil’s rebound last night from Wednesday night’s big plunge, but realistically oil is exhibiting a typical consolidation pattern in which fundamentals become less influential. It’s like a bouncing ball that rises and falls less and less until it stops. Volatility should thus start to ease from here, but as to whether this is the “bottom”, and not just a temporary consolidation level, is only something we can confidently say with hindsight.

West Texas rose US$1.66 to US$50.54/bbl last night (is 50 the level?) while Brent rose US$1.96 to US$56.70/bbl.

Wall Street

The rebound in the oil price was cited as one reason Wall Street was again strong last night but really, for how long can these guys give themselves stock market whiplash over a very volatile and currently headless-chook commodity price? Are the computers plugged into the Nymex feed?

The US energy sector, granted, will rise and fall on the oil price but beyond that, we cannot forget what has been the background noise to macro developments this past month – the US earnings season. With around 60% of S&P500 stocks having reported to date, around 70% have beaten estimates. Last night’s results were mostly positive, providing upside support to the indices.

Last night’s weekly new jobless claims number was also positive, priding comfort ahead of tonight’s non-farm payrolls release.

And these 200 point Dow swings seem to have become de rigeur.

Metals

That US jobs number for January is expected to come in at 236,000, and while US stocks and global oil markets are happy to fly around ahead of this globally important release, the LME took the traditional stance last night of squaring up and waiting. Base metal price moves were negligible.

Gold is steady at US$1264.40/oz.

Iron ore is suggesting that one little price rise blip a couple of days ago was just that – a blip – in falling another US30c to US$61.10/t. Chinese steelmakers are clearly winding down now ahead of the week-long New Year holiday, which begins on February 18.

Today

Looks like we’re in for another strong one on Bridge Street today with the SPI Overnight up 39 points or 0.7%. My calls on daily movements have been way off the mark of late so I’ll shut up, other than to say another up-day for the ASX200 would be the twelfth in a row and it is a Friday – a popular day for taking profits and going to lunch.

Australia will see the January construction PMI today and the RBA’s quarterly Statement on Monetary Policy. The US jobs report is the biggie tonight, and on Sunday China releases its January trade data.

There were a handful of local (larger cap) earnings reports yesterday and today Energy Resources of Australia ((ERA)) is in the frame, but beginning next week all hell starts to break loose on the earnings report front. To that end, today will feature publication of the first FNArena Reporting Season Monitor of the season.

The Monitor will track earnings results day by day, providing beat/miss assessments, broker ratings and target price changes and commentary. This is presented in the form of an Excel spreadsheet attachment that will build each day through to the end of the month. Those companies having already reported this week and last are also included.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

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