Daily Market Reports | Dec 22 2015
By Greg Peel
The Dow closed up 123 points or 0.7% while the S&P rose 0.8% to 2021 and the Nasdaq gained 0.9%.
Divergence
One would be hard pressed to find too many examples of when the Dow falls 350 points overnight and the Australian market closes flat on the session. Indeed, the thirty odd points the ASX200 did fall by yesterday, by midday, was proceeded by an early attempt to rally almost from the opening bell. A second attempt in the afternoon succeeded.
The divergence in US and Australian stock market sentiment now apparent can be largely attributed to a divergence in central bank policy. In Australia, the RBA is currently comfortable with its interest rate setting but has left the door open for more cuts, and most economists anticipate one or two more next year. Meanwhile, the Fed is now in a tightening cycle. The implicit stronger US dollar is weighing on US forecasts while the reverse is true downunder.
The negative impact of a higher US rate is a tighter carry trade gap, meaning Australian yield stocks are less attractive to US investors. We note that yesterday the losers on the session included telcos and utilities, while otherwise ongoing fallout from the MYEFO healthcare scare saw that sector as the worst performer, down 0.9%.
But a rally in iron ore saw materials up 0.5% and some consolidation in oil saw energy as the best performer, up 1.0%. In the US, ongoing oil price weakness will lead to inevitable defaults and bankruptcies amongst smaller oil producers, which is why high yield debt is under pressure. Australian oil producers don’t issue junk bonds as a rule (witness Santos’ recent equity raising) thus locally we don’t have the same problem. One wonders just how much more value can be stripped off local Big Oil.
That is not to say Australia can have its own little Santa Rally while Wall Street falls in a heap, if that is to be the case. But 2016 is shaping up as year in which Wall Street movements are noted, but not blindly replicated.
Is Santa Not Real?
Wall Street has begun to concede that history does not necessarily have to repeat itself every year. Just because it’s Christmas it does not mean a Santa Rally is thus a given. The first Fed rate hike in a decade clearly does not happen every year, for one, and concern over the energy sector is not going away anytime soon.
There was an attempt to rally early in the session last night, on the assumption Friday night’s big fall was as much about quadruple witching volatility as it was about actual negative sentiment. But when WTI crude fell to below US$34/bbl early on, that negative sentiment took over once more.
It was expiry day for the January delivery WTI contract so we can’t read too much into the final day’s move. If we look to the new February front month, it closed slightly lower but at least has a 35 in front of it. The big talking point on the day was, however, the Brent-WTI spread.
If we go back a few years, that spread was as much as US$27/bbl, back when oil was heading up towards triple digits. The reason was that there was an oversupply of WTI and not enough storage, or sufficient pipeline infrastructure to move crude out of Flushing Oklahoma. US oil could not, by law, be exported, thus there was no relief valve.
The US government is now in the process of lifting America’s longstanding oil export ban, which was put in place when the country was totally reliant on imports from the Middle East. That is no longer the case, and given the extent of US oversupply it is no longer worth arguing America needs to preserve its energy security.
The result is that last night the Brent-WTI spread reached as low as a mere US44c. With WTI soon to compete with Brent on the high seas, the two oils have become closer to interchangeable.
The only US economic data release of the day was the Chicago Fed national activity index for November, which showed a fall to minus 0.30 from minus 0.17 in October.
There is nevertheless a minor avalanche of US data due over the next two sessions before the Christmas Eve half-day. As to whether Wall Street can get excited about it all now the Fed has made its move is another matter. Traders suggest that most US fund managers closed up shop on Friday, not to return until the new year.
The Dow was up 150 points early in the session last night, fell back to the flatline, and staged a late comeback to be up triple digits at the close. But not convincingly.
Commodities
West Texas crude fell US32c to US$35.74/bbl on the new February delivery month. Brent, already on February delivery, fell US51c to US$36.18/bbl.
A group of major Chinese copper smelters has agreed to enact production cuts next year, providing some hope as LME traders begin squaring up for 2015. Copper rose 1.5% last night, and all base metals were stronger largely on a book-squaring basis. Lead was up 2.5% and nickel and zinc rose 1%.
Iron ore rose US10c to US$39.40/t.
The US dollar index was down again, overcoming potential weakness in euro following the weekend’s inconclusive Spanish general election result. The ruling centre right party failed to secure a majority, so weeks of negotiation with minor parties will now begin.
Oh goody, maybe Greece 2015 can now become Spain 2016.
European stock markets fell last night on the lack of result, particularly Spain’s, while the 0.3% fall in the US dollar index to 98.38 helped gold to another US$13.20 gain to US$1078.70/oz.
The Aussie is up slightly at US$0.7187.
Today
The SPI Overnight closed up 20 points or 0.4%.
Tonight in the US sees the final revision of US September quarter GDP, along with house prices and the Richmond Fed activity index.
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