The Overnight Report: Range-Bound

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

The Dow closed up 67 points or 0.4% while the S&P gained 0.5% to 2102 as the Nasdaq jumped 0.8%.

Adjustments

Commonwealth Bank ((CBA)) shares recommenced trading yesterday having successfully put away the institutional allocation of its $5bn capital raising and despite the 10% discount offered on the rights issue, fell only 1%. This contrasts heavily with ANZ Bank ((ANZ)) which, the week before, placed new stock at a 5% discount and saw its shares open down 7%.

The vote of confidence in CBA prompted a vote of confidence in the banking sector in general yesterday, which ultimately finished up 0.5%. Buyers are clearly interested in returning following the capital raising sell-offs as yield once again becomes difficult to ignore.

However it must be remembered that index-tracking funds and other large institutional investors in the Australian market must hold the banks, which represent over a quarter of market capitalisation, and therefore must buy CBA to reweight their portfolios. Ditto ANZ. Something then must be sold to adjust across both sector and index weightings.

The ASX200 was off to a flyer yesterday, aided by some reasonable earnings reports, and at 11am was up 43 points. But that was the end of that. Perhaps it provided a good opportunity to sell whatever it is one chooses to sell to fund new CBA shares.

Japan would not have helped either, posting a June quarter GDP result of minus 0.5% quarter on quarter growth, down from plus 1.0% in March. While not unexpected, it does bring into question the success, or lack thereof, of Abenomics. The June quarter saw 1.6% annualised GDP contraction. Exports are down 16.5%. Household consumption is down 3.1%. Inflation is nowhere to be seen.

Massive debt-funded QE may have driven optimism two years ago but the subsequent fiscal trade-off of an increased sales tax has killed off the momentum. Japan is Australia’s second biggest trading partner.

Familiar Territory

Wall Street was stunned at the open of trade last night when the Empire State activity index came in at minus 14.9, down from plus 3.9 in July, when economists had expected a rise to plus 4.5. It is the worst reading since April 2009.

The Dow promptly fell 120-odd points on the news, but in contrast, the US housing market sentiment index saw a one point rise to 61 to mark the highest level in a decade. The Dow then ran all the way back, and more.

The argument is that the Empire State index is merely a measure of one manufacturing region – New York State – and not a national indicator, and moreover it can be, and has been of late, very volatile. Housing sentiment, on the other hand, is national.

Or you can argue that the opening plunge based on the Empire State result was overrun by those cheering on weak data, as it implies delay from the Fed. The US ten-year bond yield fell 5 basis points to 2.15%.

Or you can look at the reality, which is that every time the broad market S&P500 index falls below its 200-day moving average, the buyers step in. This has been the case all year. Hence the S&P first hit 2100 in January and last night returned to 2100, having done nothing but travel backwards and forwards across that mark for eight months, whatever has been thrown at it – Greece, China, you name it.

We could speculate that given January was around the time debate began in earnest over a first Fed rate hike, all Wall Street has done ever since is mark time until the policy change is confirmed.

Commodities

A slowing economy has not stopped China increasing its production of metals. Data over the weekend showed production of aluminium, copper and nickel all rose in July, a point which was not lost on the LME last night. Base metal prices were all flat to modestly weaker.

Iron ore fell US20c to US$56.00/t.

The pervading opinion in oil markets is now one of oil must go lower. For a while there, after the rebound, the pervading opinion was US$50-60/bbl for WTI was about right, but not so anymore. West Texas fell US22c last night to US$41.91/bbl and Brent fell US47c to US$48.72/bbl.

Gold rose slightly to US$1117.40/oz despite a 0.3% gain for the US dollar index to 96.82. The Aussie is steady at US$0.7373 ahead of today’s release of the RBA August minutes.

Today

The SPI Overnight closed up 11 points or 0.2%.

Aside from the RBA minutes the focus today and for the next two weeks will be on corporate earnings reports. Highlights today include Asciano ((AIO)), Challenger ((CGF)), Dick Smith ((DSH)) and QBE Insurance ((QBE)).

We have now passed the halfway mark, time-wise, in the result season, but only a quarter of reports are in. The rest now flow in an avalanche.

The score card to date, according to the FNArena Reporting Season Monitor, is beats and misses equally on par but FNArena database broker upgrades to downgrades running at 29/18.

Please note that CBA goes ex-dividend today, as do a number of other stocks, so the index will start with a handicap.
 

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