The Overnight Report: Drifting

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By Greg Peel

The Dow closed down 13 points or 0.1% while the S&P lost 0.1% to 2030 and the Nasdaq fell 0.5%.

Resource Rout

When China’s data came out on Monday the local materials sector fell a percent but the energy sector was little moved. On Monday night oil fell a couple of percent and base metal and iron ore prices fell, so yesterday the local materials sector fell 2.1% and energy 3.3%.

It seems like a delayed reaction. Perhaps traders were satisfied on Monday with China’s GDP result actually coming in better than expected at 6.9%, while ignoring weaker than expected industrial production and fixed asset investment numbers for the month of September.

Yesterday’s 0.6% fall for the ASX200 was all about those two sectors. The offset was telcos, up 2.6%, because for some reason a very unloved Telstra on Monday became the go-to stock yesterday. Perhaps those dumping resources switched into Telstra instead.

The banks are usually the counter-sector for resources, but yesterday they had their own issues. The government’s response to the FSI did not have a huge impact – the financials sector only fell 0.8% — because there were no surprises on important capital ratios or risk weights. The main issue was a ban on excessive credit card surcharges, but we’ve been down this path before with excessive bank fees and late payment fines and the banks have managed to sail through.

There was some weird trade on the open on the ASX yesterday but we’ll ignore that as being a blip, and thereafter the index just quietly faded away all day. Not a lot of conviction. The minutes of the October RBA meeting would not have provided much excitement either.

The rate that stops the nation

Australia’s June quarter GDP growth was weak, the RBA board members noted at the meeting, but in line with expectations, due to “what appeared to be temporary weakness in resource exports” and a further decline in mining investment. But, and this is the big “but”:

“…there had been further evidence of rebalancing from the resources sector towards non-mining activity. This rebalancing was being increasingly supported by the depreciation of the Australian dollar, which had led to a noticeable increase in net service exports over the past year.”

The RBA also gave a nod to unemployment not being as high at this time as was expected earlier in the year, but otherwise the board could not ignore the ever lurking housing bubble, if that’s what it is. The board suggested that “The key domestic sources of risk to financial stability, and stability of the Australian economy more broadly, revolved around developments in local property markets”. Recent APRA tightening was having an impact, it was acknowledged, but clearly the housing market remains one of the central bank’s primary concerns.

Now, bear in mind that this meeting was held before the September US jobs number release kicked Fed rate rise consensus into 2016, and before Westpac led out with a mortgage rate increase. Both provide just a little more room for the RBA to cut its cash rate again. However that aside, the minutes suggest we can scratch a Cup Day rate cut here and now. The words are in front of us: temporary weakness; evidence of rebalancing; supported by Aussie depreciation; notable increase. And, the RBA is still very worried about the housing bubble – the “key domestic source of risk”.

Scratch December too.

Earnings Mix

Australia’s housing concerns currently revolve around apartments, and US housing starts data released last night showed an overall 6.5% jump in September starts thanks to an 18.3% increase in apartment starts. Starts of houses rose only 0.3%. Whole apartment blocks of course make the numbers lumpy.

Thus while it was the first monthly increase in net starts following two months of decreases, there was no great reason to be excited. The focus thus turned back towards earnings season.

Among the Dow components, “old tech” IBM’s fourteenth consecutive quarter of lower revenue sent its shares down 6%, balanced by beats from aerospace company United Technologies (up 4%) and financial conglomerate Travelers (up 2.5%). Harley Davidson blew a gasket and fell 14%.

“New tech” names like Facebook, Google and Amazon all saw some selling last night as traders decided these had become a bit overblown, sending the Nasdaq lower. The Dow balanced itself out and the S&P netted out a slight decline.

Beyond earnings, there’s not a lot of impetus evident.

Commodities

Nor is there much commitment in commodities markets at present. Sluggish trading on the LME last night saw all of aluminium, copper, lead and zinc a little lower while nickel rose 0.5% and tin jumped 2%.

Many an analyst expects iron ore to slide back below 50 and that’s a story in progress. Last night iron ore slipped another US40c to US$52.10/t.

West Texas fell another US51c to US$45.55/bbl while Brent was as good as unchanged at US$48.73/bbl.

The US dollar played no part, its index is flat at 94.90.

The Aussie is 0.2% higher at US$0.7260.

Today

The SPI Overnight closed down 12 points or 0.2%. It would seem this consolidation phase just above the 5200 break-out level is set to continue.

There is very little in the way of data out over the next 24 hours, locally or globally.

BHP Billiton ((BHP)) will report quarterly production numbers today, along with other iron ore juniors. Amcor ((AMC)), Insurance Australia Group ((IAG)), Medibank Private ((MPL)) and Origin Energy ((ORG)) are among those companies holding AGMs today while Macquarie Atlas Roads ((MQA)) will provide a quarterly update.
 

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