The Overnight Report: All Is Forgiven

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By Greg Peel

The Dow closed up 89 points or 0.5% while the S&P gained 0.3% to 2109 and the Nasdaq rose 0.4%.

Got Your Back

In October, the final paragraph of the RBA’s interest rate decision statement read:

“Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

Yesterday’s equivalent paragraph read:

“At today's meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

The computers initially sold the ASX200 at 2.30pm yesterday, then bought it, and then the humans pushed the index a little higher towards the close. The close was nevertheless not the high of the day, which was achieved on the opening rally.

On a day in which such things are appropriate, the RBA seems to have given the market an each way bet. Economic conditions have “firmed a little”, which is positive, but there is “scope for further easing”, which is comforting too. We can all go long with an embedded put option.

Hence the market did not much respond to the RBA’s lack of rate cut yesterday, which was not expected anyway. The rally occurred from the opening bell, pushing back through the 5200 mark with only a slight stumble. We can perhaps conclude that it was those pesky Mexicans selling the market down on Monday, given in their absence yesterday everything sold down on Monday was bought back, albeit on lighter volume.

The banks led the selling on Monday but they were up 1.6% yesterday, and ditto the telco which rallied back 1.8%. The winner on the day was nonetheless energy, which jumped 2.6% despite oil prices being slightly lower overnight. Energy stocks had rallied around the globe on Monday night, so yesterday Australian names were also well sought after.

We’re now back over the 5200 break-out level and the futures are this morning predicting further gains, so perhaps we can write off Monday’s dour session as an aberration. Oil prices actually shot up last night.

The Chinese president provided further detail of the government’s new five-year plan yesterday, reiterating a goal to achieve no less than an average 6.5% annual growth. The only difference here from what was suggested last week is that the extra decimal point is missing. Last week it was 6.53%.

Xi Jinping also intends to have a fully-floating renminbi by 2020, and will open up more state-dominated sectors to the market, including utilities and telcos. The Chinese will also now be allowed to have two kids instead of one.

Xi did not provide a specific 2016 GDP growth target, but the assumption is that number would be more like the 6.5% general target than 2015’s 7.0%, which at the current rate likely will not be achieved.

High Tide

It’s hard to believe that the S&P500 is now within only 1% of its all-time intraday high, following last night’s positive session. The Dow still needs to push back over the 18k mark.

Last night’s rally was led by energy yet again, this time with the backing of a solid jump in oil prices. Oil rose on news militants were blocking supply in Libya and striking workers were blocking supply in Brazil.

Beyond energy, last night’s slew of US earnings results proved nothing to be excited about and factory orders were revealed to have fallen for the second straight month, by 1.0% in September. Data released in the last hour showed October to have been yet another record month for US auto sales, but Wall Street had already posted its rally by then and indeed drifted off towards the close.

The good news is the small cap index has begun to join in the rally in November, having worried traders all through October by remaining stubbornly weak. The bad news is the rally back to the highs is again evoking talk of an overbought market and stretched PE multiples.

But it’s November, and there follows December, so the mood remains one of “It’s meant to go up, isn’t it?”

Always dangerous of course.

Commodities

West Texas crude is up US$1.68 or 3.6% to US$47.82/bbl while Brent is up US$1.76 or 3.6% to US$50.55/bbl.

Another mixed session on the LME saw aluminium, copper and zinc all up around a percent while nickel and tin fell over a percent. Nickel is now below the psychological US$10,000/t mark once more, having last been this low in August when China growth fears were heightened.

Iron ore fell another US40c to US$48.70/t as its quiet slide continues.

The US dollar index is only 0.3% higher this morning at 97.18 but last night gold took a turn for the worse, having come under pressure this past week. It’s down US$17.30 at US$1117.30/oz.

An RBA rate cut was not widely expected yesterday yet the Aussie still shot up at 2.30pm, reaching well above the 72 level. Greenback strength overnight ensured the net gain over 24 hours is 0.8% to US$0.7194.

Today

The Mexicans are back today with hangovers so we’d best watch out.

It’s service sector PMI day across the globe today, including in Australia. Locally we’ll also see retail sales and trade numbers for September.

Tonight in the US sees the private sector jobs report for October.

The AGMs fire up again locally today after yesterday’s hiatus, while CSR ((CSR)) will report its half-year result.
 

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