The Overnight Report: Looking For The New World

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By Greg Peel

The Dow closed up 47 points or 0.3% while the S&P gained 0.1% to 2017 and the Nasdaq added 0.2%.

Oiled Out

We recall that over a week ago, the head of OPEC suggested two things. Firstly, that he expected the oil market to return to balance in 2016 as rising global demand met falling non-OPEC supply, specifically reduced US shale production. Secondly, that he was prepared to discuss the state of the oil market with the US.

The latter comment sparked hopes OPEC may finally be prepared to look at production cuts, perhaps having expected that by now, oil prices may have recovered above levels that have left most OPEC producers, including Saudi Arabia, underwater on their fiscal obligations. But this is not to be the case. Speaking on Sunday at a conference in Kuwait City, El-Badri reiterated his expectation of a rebalance in 2016 but made no mention of any production cuts.

It was left to the Kuwaiti oil minister to suggest at the conference that leaving OPEC’s output target at 30mbpd was the “ideal solution” to rebalance the market and support prices.

We had to wait until last night to see oil prices respond, and they fell 4%. Having made a couple of attempts to close over the US$50/bbl mark, WTI has now slipped back to the 47s once more. Australian investors did not wait yesterday to see what oil prices would do last night. They sold the energy sector down 2.3% in yesterday’s session.

It was the perfect trigger for a day of profit-taking across the board following five days of rally which had taken the ASX200 from a new post-correction low to a breach of the previous trading range to the upside. While energy led the charge, all sectors were sold off for no other particular reason. While materials suffered the least with only a 0.4% fall, it’s not often we see the materials sector trading lower when iron ore has a good gain and base metals put in a flyer, including zinc up 10%.

Both energy and materials have seen very solid gains in this recent rebound having been the most beaten down on China fears. But yesterday also some of the recent small cap high-flyers copping solid profit-taking hits for no other reason as well.

All up it is exactly what one might expect given the performance of the past week – a bit of consolidation following a solid bounce off the low. We also have China trade data out today, and squaring up ahead of what recently have been some market-crunching data releases out of Beijing makes a lot of sense.

We also have US September quarter earnings season beginning in earnest tonight, with all eyes on the likes of Dow stocks JP Morgan and Intel.

Earnings Angst

Consensus forecast for S&P500 net earnings in the September quarter is for a 5.3% year on year decline. If this forecast rings true, it would be the first negative quarter of earnings for the US market since the GFC rebound began.

Which begs the question, why has Wall Street rallied for seven consecutive sessions ahead of what is expected to be the worst earnings season in several years?

Well firstly, while Wall Street has rallied it has rallied back from a solid fall on the China story, boosted by a shift in expectations that there will not indeed be a Fed rate rise this year, to regain about half of what had been lost. The weak earnings forecast has a lot to do with expectations of lower revenues offshore due to both a stronger US dollar and weaker demand in the likes of China in particular. So we might suggest a reduction in earnings is priced in.

Secondly, ahead of both the March and June quarter earnings seasons, consensus was also for reduction in net S&P500 earnings. In both cases net earnings surprised to the upside to produce basically flat results. Are we about to see the same story play out a third time? The only difference this time, it has been noted, is that in the previous two quarters, net forecasts had been revised up slightly to be less negative just ahead of the results season. That has not happened this time.

Last night was Columbus Day in the US for which banks and the bond market were closed. Stock markets were open but the Dow posted its least volatile session since the China-based turmoil began back in July. Volumes were thin, and all is in readiness for a barrage of earnings reports beginning tonight.

While the energy sector was weak on the day, the usual impact the oil price has on the wider US market was not evident.

Commodities

West Texas is down US$2.06 or 4% at US$47.44/bbl and Brent is down US$2.22 or 4% at US$50.22/bbl.

After very solid gains posted on Friday night thanks to Glencore’s announced production cuts, base metal markets also took a breather last night. Given it’s LME week this week trading can often be thin with most of the market in conferences or at the bar.

Lead still managed to rise another 1% having risen 6% on Friday night, following the Glencore announcement. Zinc only came back 0.6% after jumping 10%. Copper is steady, aluminium down 1%, and the others posted slight dips.

Iron ore rose US20c to US$55.70/t.

The US dollar index is steady at 94.84 and gold has ticked a little higher to US$1162.50/oz.

The short-covering rally in the Aussie dollar has continued despite the easing back in commodity prices and a steady greenback. The Aussie is 0.4% higher at US$0.7359.

Today

The SPI Overnight closed down 16 points or 0.3%. It will be interesting to see if the energy sector goes on with it today, selling once more on confirmation of a drop in oil prices.

RBA deputy governor Philip Lowe will make a speech today and he often has something to say that catches the attention of forex markets. NAB will release its September business confidence and conditions survey, covering the first full month of the new Turnbull government.

Beijing will release Chinese September trade data around midday today. The last round of PMIs were a little more promising, if not mixed, and with China having been shut down for a week, markets have had nothing to be particularly scared about. So today’s data will be interesting.

Tonight in Europe sees the release of the ZEW investor sentiment survey for the eurozone, which will be the first measure since the VW scandal hit its heights.

Telstra ((TLS)) will hold its AGM today and Energy Resources of Australia ((ERA)) will release its quarterly production report.
 

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