The Overnight Report: What Doesn’t Go Up

This story features BANK OF QUEENSLAND LIMITED, and other companies. For more info SHARE ANALYSIS: BOQ

By Greg Peel

The Dow fell 292 points or 1.6% while the S&P lost 1.5% to 2061 and the Nasdaq plunged 2.4%.

Bank Relief

Were it not for a rally in the banks yesterday, the ASX200 would have finished lower rather than flat. The majority of sectors finished in the red. The rally in the banks can be attributed to the RBA’s biannual Financial Stability Review, which did not suggest any move to curtail investment mortgages is nigh. It did suggest the Aussie is too high, but that’s a broken record.

Macro-prudential controls are something everyone likes to talk about but no one seems quite prepared to act upon. The banks live to fight another day, at valuations few believe are not overblown.

End of Quarter

The March quarter ends with a shortened week next week ahead of the Easter break. While in the US it’s only a three day holiday and banks remain open on Good Friday, the time is upon us when fund managers start to look at squaring up ahead of end of quarter books close. It is a time when profits are taken on strong performers and on weak performers from the short side.

It has also been a week in which March quarter corporate earnings have been in focus. With the Fed’s new stance now absorbed by the market, attention has turned to what looks like being a disappointing quarter GDP wise and a flat to possibly negative quarter earnings wise. The mood is a bit down-beat and last night, for no particular reason, investors started selling biotechs. Soon the trickle became a flood.

With the Nasdaq having regained 5000 recently, a lot of comparisons have been made between “then and now”. Then, dotcom start-ups went “parabolic”. Now, dotcoms are a mature business. But in recent months, biotechs have been going “parabolic”. Biotechs are by their nature very risky, hit and miss affairs (See: Sirtex Medical locally). So if you’ve made some good money out of them, it’s wise to lock that in. Thus last night the Nasdaq fell 2.4% and left 5000 a long way behind.

It was enough to dampen the mood and set all indices off into selling mode.

Good News or Bad?

Since the Fed changed tack last week we have returned to the “good news is bad” theme of earlier post-GFC years which suggests positive economic data will bring forward the Fed rate rise and that is bad for stocks. But as I suggested yesterday, with US indices having recently dabbled with new all-time highs again, can bad news really be good?

Last night’s US data point was February new durable goods orders, which fell 1.4% to mark the third fall in four months. Economists had expected a rise of 0.1%. A lack of lumpy aircraft orders exacerbated the decline, but ex-transport orders still fell an unexpected 0.4%.

This is bad news for the US economy, and by rights should evoke a positive response on Wall Street given it implies the Fed may hold out for longer. But at the end of the day one can’t overcome the fact that bad news is just that – bad. Fears of a weak March quarter GDP result, and weak earnings, have been further heightened. It begs the question, with regard to those all-time highs, “What are we doing up here?” The only answer to that at present is “low interest rates”.

So US stocks fell on profit-taking and weak economic data and just to compound the issue, US bond yields rose. The ten-year yield gained 4 basis points to 1.92% following fairly tepid support for an auction of five-year Treasuries. Given the recent low in the tens was 1.86% and we’d almost reached that once more, profit-taking was likely also at play in the bond market.

Geopolitics

The oil markets have been dominated of late by news of record US crude inventories on the one hand, and rapidly falling US rig counts on the other. Back in those far-off days when crude traded at US$100 a barrel (a year ago), it was all about geopolitics. Then OPEC said “No”.

Last night news hit that the Western-backed president of Yemen had fled the country as militants moved closer to seizing the capital, Aden. Yemen does not produce oil, but does sit at the tip of the Horn of Africa, around which a great proportion of global oil is transported from the Persian Gulf into the Suez Canal.

Suffice to say, West Texas crude rose US$1.58 or 3% last night to US$48.97/bbl and Brent rose US$1.13 or 2% to US$55.26/bbl.

Nickel & Dime

The US dollar index fell another 0.3% last night to 96.86 but that did not help arrest the current pullback in recent star performer nickel. Nickel stocks held at the LME have shot up to record levels and so the nickel price again fell 2% last night. Aluminium fell 1%, while other metal moves were minor.

Iron ore fell US10c to US$55.50/t.

Gold rose US$2.60 to US$1195.70/oz.

The Aussie is off 0.4% to US$0.7844.

Today

It’s a safe bet that when markets can no longer find a reason to go up, they must go down. Both Wall Street and Bridge Street have struggled this past week, so last night on Wall Street the inevitable was in play. With quarter-end approaching it will be interesting to see if any of those yield buyers poised to jump on slightly lower share prices will stick their heads up today locally. The SPI Overnight closed down 43 points or 0.7%.

It’s stock option expiry on the ASX today, and there’ll be a few options market-makers kicking the dog on the way out the door this morning. The last thing you want is a big move on expiry day if you’re the option seller.

Bank of Queensland ((BOQ)), which is a bank, and Brickworks ((BKW)), which doesn’t make bricks, will post their interim results today.

Rudi will appear on Sky Business's Lunch Money today, at noon, and return later, between 7-8pm to re-appear, this time on Switzer.

Tomorrow, Rudi will appear on Your Money, Your Call. Bonds versus Equities, Sky Business, 8-9pm.
 

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