The Overnight Report: Programming Restored

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By Greg Peel

The Dow closed up 125 points or 0.8% while the S&P gained 0.6% to 1893 and the Nasdaq rose 0.9%.

We Shall Overcome

There must be a few bruised futures traders out there in the local market. On Wednesday morning they called the ASX200 up 54 points and we closed down 60, and yesterday morning they called it down 45 and we closed up 29. In each case the SPI went with Wall Street and in each case that was the wrong call.

I did note in the latter part of 2015 that the typical correlation we’ve come to assume between Wall Street and the Australian market had become blurry. And fair enough too. Energy is, or at least was, a very big chunk of US indices and thus more exposed to the oil price. Talk was of the Fed raising rates and the RBA cutting. Australia is more directly exposed to China. Wall Street boasts a new world big-tech sector led by FANG (Facebook, Amazon, Netflix, Google) that Australia lacks. US investors are excited over 2% dividend yields, here we like at least 6%, fully franked.

The other feature of late 2015 was that whenever the ASX200 dipped below 5000, it didn’t stay there very long. The biggest threat to this near certainty came earlier this month when we dropped below 4900 on the oil price scare, but yesterday we finished back at 4976 after a defiant rally and yet oil is ten bucks lower now than in December. Or 25%.

So clearly there was some technical trading going on yesterday, and perhaps a belief that we do not simply have to follow Wall Street in lockstep. Wednesday night was all about Fed speculation and the heightened volatility that always features on Fed statement days.

Meanwhile, another feature of 2015 was a local market split in two – the big caps of mining, energy, banks and the telco which were bleeding, and a raft of high-flying small caps cashing in on a 21^st century world and/or the rise of middle class China. Blackmores comes to mind, the suite of milk/cheese stocks, anything to do with the ageing population, and also bling peddler Lovisa ((LOV)). Yesterday Lovisa pre-released slightly disappointed first half numbers and was carted 35%.

Caveat emptor.

Back to Oil

Statistics might prove me wrong but I would hazard a guess and say Wall Street more often than not moves in the opposite direction on the day after a Fed statement release than it did on the day. Typically the market, or perhaps more realistically the computers, overreact in those last two hours of trade.

Once the dust of fierce debate over just what the implications of yesterday’s Fed statement really settled, one might conclude the implication was that there may be another hike in March, or maybe not. That’s not news, so back to business. Wednesday night was the first session in 2016 that Wall Street did not trade in direct correlation to the oil price. The oil price rallied strongly on Wednesday night, and rallied again last night.

So there we have two reasons Wall Street was up last night, and we can throw in a strong rally from Facebook after a Street-beating earnings result. The night before Apple did the opposite, and as I write Amazon has just released its report and has disappointed.

Rumours continue that OPEC and non-OPEC are ready to hook up for a co-operative cut in oil production. Last night’s suggestion was that Saudi Arabia and Russia were in talks to do just that. That rumour has since been denied. And seriously, can you see Vlad cutting Russia’s prime source of revenue, when the country’s economy is bleeding, when it is US production that is the global swing factor?

The denial did bring what had been soaring oil prices back down to earth in the session but West Texas is still trading 5% higher as we speak.

Back in the real world, Wall Street had forecast US durable goods orders to have fallen 0.6% in December but they fell 5.1%. Taking out lumpy transport, orders fell 1.2% when 0.1% was expected. Economists are now reeling in their expectations for tonight’s first estimate of US December GDP. But Wall Street didn’t seem too fussed.

Commodities

West Texas is up US$1.71 at US$33.59/bbl and Brent is up US$1.35 at US$34.03/bbl.

January is the month in which Australian resource sector companies post their December quarter production and sales reports and this week has seen a late rush. So amidst all the commodity price horrors, actual numbers have influenced the recent ups and downs of those beaten-down resource names. Yesterday Fortescue Metals ((FMG)) jumped 4%, for example.

We shall soon be seeing those same companies' half or full-year earnings reports, so February may again bring share price movements not specifically related to overnight commodity price shifts.

In the meantime, the US durable goods orders shock weighed on the LME, turning base metal prices around after a couple of days of rallies. Lead was relatively unchanged but aluminium, copper and nickel fell just under 1% and tin and zinc lost over 2%.

Iron ore rose US20c to US$41.50/t.

Gold’s little run, steeped in Fed speculation, came to an end last night. It’s down US$12.50 at US$1115.00/oz despite the US dollar index being down 0.4% at 98.56.

If the Fed doesn’t raise in March, the Aussie carry trade will remain more valuable. The Aussie is up 0.8% at US$0.7084.

Today

The SPI Overnight closed up 14 points or 0.3%. On recent form, this would suggest we’ll be down today, but it is the last trading day of a very bad month so I’d suggest a close above 5000 on that basis alone.

Australia’s December quarter wholesale inflation numbers are out today along with monthly private sector credit. All eyes will be on the Bank of Japan’s policy meeting today – the first since the Fed rate hike.

And Wall Street will hold its breath for the first estimate of US December quarter GDP. The market is tipping 0.7% growth, down from 2.0% in the September quarter.

On the local bourse, Origin Energy ((ORG)) will lead out another bunch of resource sector production reports while Orica ((ORI)) will hold its AGM.
 

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