The Overnight Report: What Goes Up

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By Greg Peel

The Dow closed down 239 points or 1.5% while the S&P lost 1.4% to 1942 and the Nasdaq fell 1.2%.

Rising Sun

The Japanese stock market rose 7.7% yesterday. To put that into perspective, had the ASX200 rallied 7.7% yesterday we would have been back over 5500.

Commentary puts the Japanese surge down to a reaffirmation from Shinzo Abe that he still intends to deliver on his promise of a cut to corporate tax rates alongside maintaining significant monetary stimulus in order to revive the Japanese economy. He did not actually say anything new, and given the success of Abenomics has been clearly lacking to date, no doubt reaffirmation was a political move rather than a pragmatic one.

Abe nevertheless chose to speak at a convenient time, when the world had suddenly become excited about speculation Beijing is set to introduce another round of fiscal stimulus measures to support recent monetary measures. Although, as to whether stimulus speculation is the cause of recent global stock market strength, or just the excuse, is debatable.

More likely the bulk of the big rallies around the globe can be put down to investors suddenly deciding they’d better get in, on the assumption the bottom has now been established, lest the bargains they’d been waiting for quickly become bargains no more.

I tender as evidence, Your Honour, Australian banks.

Banking on it

I noted yesterday the local financials sector jumped 2.2% on Tuesday to provide the biggest points contribution to an index gain otherwise supported by energy, following the big merger offer. Yet banks have little connection to oil & gas, and realistically any connection to Chinese fiscal stimulus is also circuitous.

But yesterday the financials jumped another 3.1%. Daylight came in second, followed by the telco on 2.0%, with the resource sectors managing only around 1.5% each (albeit BHP went ex). The vast bulk of the hundred point rally for the ASX200 was attributable to the Big Four.

I suggest we’re probably seeing a kick-on in momentum from Westpac’s ((WBC)) strategy day on Monday, at which the bank announced some aspirational targets (too aspirational as far as most analysts are concerned) and did not announce a capital raising, as have its three peers. Given the banks were amongst the most heavily sold down in the correction, on a combination of the global macro story and the micro story of increased capital requirements, it stands to reason the banks should lead the rebound from “oversold” territory.

Let’s face it, investors found Australian bank yields very attractive at much higher share prices. They’re that much more attractive now, and no one wants to miss out.

As an aside, the value of Australian housing finance rose by 1.5% in July but the annual rate of growth slowed slightly to 15.0%. The value of loans to owner-occupiers rose 2.2% for a 14% annual growth rate. The number of loans approved over the past twelve months has only actually grown by 3.9%. The difference in number and value is a reflection of surging house prices, and the greater capacity of borrowers due to low interest rates.

Investor loans rose 0.5%, slowing annual growth to 16.5%. Lending to investors is quietly cooling, no doubt due to tighter capital requirements implemented by APRA but also due to the fact rental yields are now falling behind house values, making property investment less attractive.

Westpac’s index of consumer confidence fell 5.6% this month to a pessimistic 93.9. But Bridge Street was unfazed, as was the case with Tuesday’s similar NAB business confidence result, given the survey was conducted at the height of recent global market volatility.

Indeed, the consumer discretionary sector rose 1.6% yesterday. On any other day, such a weak confidence result would have garnered a diametrically opposite response.

So the market has been sold down on fear and over the past couple of days has rallied on fear – fear of missing out. It is not unusual at such times for markets to swing wildly between oversold and short-term overbought as a consolidation process following significant volatility.

And speaking of volatility…the SPI Overnight closed down 82 points.

Mood Change

For the best part of 2015 to date, Wall Street has traded on an underlying adverse economic theme that good news is bad news because good news means the Fed will raise sooner rather than later. Having not had a correction for four years, up until recently, the obvious trigger would be the day the Fed announced its hike, many a commentator suggested.

Well here we are, one week from a highly possible Fed lift-off, and the mood on Wall Street has largely swung around the other way. If fear of a Fed rate rise dominated earlier in the year, the fear now is that next week the Fed won’t hike. The cloud hanging over Wall Street at present is not what damage a rate hike might cause, but what damage ongoing monetary policy uncertainty might engender.

Indeed, commentators warning that the US stock market really needs to go back down to test recent lows before it can truly rise again are suggesting a trigger for a second leg down would be no rate rise and further non-committed waffle from an indecisive central bank. It would suggest either the Fed fears the US economy is not in as robust a position as has been assumed (June quarter GDP up 3.7%, unemployment 5.1%), or that the FOMC really has no idea what it’s doing.

And so it was that the Dow opened up over 200 points last night, riding a global wave that saw Australia up 2%, China up over 2%, Hong Kong up 4%, Japan up almost 8%, France up 1.4% and the UK up 1.4%. Germany had been up there too, but faded away at the close.

Arguably, yesterday’s rallies began on Wall Street on Tuesday night when the Dow jumped nearly 400 points. So it would have been double-counting for Wall Street to go again, rebound euphoria had created a short-term overbought situation, and it was time to take profits and apply caution ahead of next week’s Fed meeting.

And oil dropped 3.5% again, which is never a positive driver for the major indices.

Commodities

West Texas fell US$1.60 to US$44.13/bbl and Brent fell US$1.88 to US$47.50/bbl.

Base metals were nevertheless quiet, for once. All moves were negligible bar lead, which rose 1.4%.

Iron ore rose US50c to US$56.90/t.

It looks like gold traders have decided a September rate rise is booked in. The US dollar index is barely changed at 95.95 but gold has fallen US$15.80 to US$1105.40/oz.

The Aussie traded right up to 70.5 yesterday on short-covering as the local stock market surged, but has since been sold down again to be down 0.4% over 24 hours at US$0.6991.

Today

The SPI Overnight, as noted, closed down 82 points or 1.6%.

Australia’s August jobs lottery will be held today, while Beijing will release Chinese inflation data.

Sigma Pharmaceutical ((SPI)) will release its interim profit result today amidst another handful of stocks going ex-div.

Rudi will make his weekly appearance on Sky Business's Lunch Money at noon and appear again on Switzer TV between 7-8pm.
 

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