The Overnight Report: Santa Mario

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

By Greg Peel

The Dow rose 320 points or 1.9% while the S&P gained 1.7% to 2052 and the Nasdaq rose 1.7%.

Santossed

A weak opening sent the ASX200 back down towards the 5200 support level again yesterday morning but this time the turnaround point was 5217. There began a choppy rally back into the green to close the session up 15 points on the day.

When the dust settled, most sectors had traded off modest up or down moves but one sector stood out, that of energy, up 3.1%. Yesterday debt-burdened LNG major Santos ((STO)) announced it had received a takeover offer from private equity at $6.88 per share. The news sent Santos shares up 16% to close at $6.32.

Analysts have for some time been predicting M&A activity in the energy space and recently we saw Woodside Petroleum take an opportunistic swing at Oil Search. The bid was subsequently rejected and there has been no new news out of Woodside since so the consolidation story faded again, until yesterday. Woodside was only up slightly yesterday but Oil Search jumped over 1% and the Cooper juniors, such as Senex Energy (up 8%), all received significant attention.

Suddenly there was something to focus on in the market yesterday, after a week of meandering and wondering what might happen next. But what has also happened next is Mario Draghi.

QE2

The European Central Bank’s QE program, implemented earlier this year, is set to expire in December. QE1 has managed to stabilise the eurozone economy, but growth remains sluggish and deflation remains a threat. Speculation has grown recently that the ECB would extend its QE program into 2016.

ECB officials recently threw cold water on the notion but last night president Mario Draghi, speaking at a press conference following the ECB policy meeting, all but confirmed QE2 would be announced in December. It is likely the failure of the Fed to act on its first rate rise, and waning expectation of a 2015 lift-off, provided impetus.

The German stock market rallied 2.5% last night and France 2.3%. The mood flowed over into Wall Street, where the indices opened to the upside and continued to rally all day, turbocharged by domestic factors.

McMuffins Rule

After two years of continuous declines, which many assumed heralded a structural shift away from unhealthy fast food, McDonalds (Dow) last night posted an earnings increase and forecast beat for the quarter. It all came down to a rebound in China following a previous food safety scare, and the introduction in the US of all-day breakfast. Oh, and now they spread butter on the McMuffins. You want fat with that? Mickey D shares jumped 8%.

Manufacturer 3M, another Dow component, also posted an earnings beat and saw a 4% gain. Together these two stocks were worth 100 Dow points on the day.

Last night also saw some positive US economic data releases. Existing home sales rose 4.7% in September to the second highest level since 2007. Prices of houses with Fannie/Freddie mortgages rose 0.6% in August. And in defiance of recent weak monthly jobs numbers, the monthly running average of new jobless claims has fallen to a four-decade low.

There were also some less positive releases nonetheless. The Conference Board leading economic index surprised economists by falling 0.2% in September – its first decline in seven months – when a flat result was forecast. The Chicago Fed national activity index remained in contraction in September at minus 0.37, up from minus 0.39 in August.

But that’s okay, because all week Wall Street has been looking for something – anything – to provide a reason to buy. On Wednesday night the market closed on its lows after a late sell-off, and suddenly there was talk of the August lows being retested once more. But Mario and Ronald have saved the day.

The trade-off is nevertheless the US dollar, which last night jumped 1.4% on its index to 96.38 as the euro plunged on QE speculation. Many a US company reporting so far has pointed to the strong greenback as a drag on earnings.

Commodities

Base metal prices initially jumped on the LME last night on expected ECB stimulus, with shorts being caught. But the offset for metal prices is the US dollar, so by the close prices had drifted back again. Copper managed a 0.8% net gain but aluminium lost 2% on its own oversupply issues.

Iron ore fell US50c to US$51.40/t as the decline many an analyst has predicted continues.

The oils similarly traded off the positive of ECB stimulus and the negative of the stronger greenback. West Texas rose US24c to US$45.44/bbl and Brent rose US36c to US$48.23/bbl.

One would expect gold to fall on a 1.4% jump in the greenback but the trade-off here is the EUR gold price and the implications of more money printing in Europe. Gold is steady at US$1166.20/oz.

And a similar explanation can be given for the Aussie, which is steady at US$0.7214. The Aussie is not in the US dollar index, and the euro’s plunge does not have to impact on the AUD-USD exchange rate.

Today

The SPI Overnight closed up 78 points or 1.5%. Happy days are here again. If accurate, that would take us to a new post-correction high.

But it’s flash day today. In particular, Caixin will release its flash estimate of China’s October manufacturing PMI. Mind you, if it’s not too “flash” then the market will likely not panic, expecting Beijing to announce new stimulus measures at its Plenary Session next week.

Japan, the eurozone and US will also flash.

On the local stock front, OZ Minerals ((OZL)) and Santos feature among the quarterly production reports due today while Qantas ((QAN)) features among the AGMs and ResMed ((RMD)) will report quarterly earnings.
 

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