The Overnight Report: Midnight Oil

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By Greg Peel

The Dow closed up 183 points or 1.1% while the S&P gained 0.5% as the Nasdaq fell 0.3%.

Hope Abandoned

The carnage was relatively uniform across the local market yesterday and the sell-off was quite orderly. Having opened lower on Wall Street’s influence, the ASX200 just kept sliding away all day to a 2.3% loss.

Weaker oil prices assured the energy sector (-3.9%) was the worst performer as speculation mounts ahead of results season that the likes of Woodside Petroleum ((WPL)) will cut its substantial dividend and that the other gas majors will not be paying dividends ahead that had previously been assumed.

The dividend story extended into the materials sector (-2.8%), where lower iron ore prices and downgraded credit ratings are expected to force the big miners into dividend cuts they have tried so hard not to have to implement. The ongoing rally in the iron ore price this week has been lost in the wash.

The resources sectors received no respite from yesterday’s December trade numbers, which showed a much bigger than expected deficit. It was all down to commodity exports, of course, but once again it’s interesting to note the volume of iron ore and coal being shipped to China is not wavering, just the prices.

There was nowhere much to hide yesterday, although the “outperformers” on the day, being utilities (-0.8%) and telcos (-1.1%) showed that yield is still king when dividend values are not under threat.

With mining in the mire, the RBA appeared pleased this week to note the non-mining sectors of the economy are beginning to carry the can. We’ve seen ongoing expansion in manufacturing but that sector is now tiny compared to the services sector. Yesterday’s services PMI result showed a plunge into steep contraction at 46.3 last month from 48.2 in December.

The major issue is the retail sector, reflected in ongoing rampant discounting. Didn’t do Dick much good. Meanwhile, health again starred as the fastest grower.

I noted on Tuesday that the world’s morbid obsession with a weakening Chinese manufacturing PMI fails to take into consideration the fact Beijing is forcing that sector to contract, while trying to boost the Chinese services sector. Beijing’s official services PMI showed a slight slowing in January but ongoing expansion (51.4), while yesterday Caixin’s independent PMI came in at 52.4, up from 50.2.

On any other day that might have been good news.

Around the Grounds

January service sector PMI results in other major centres included a rise for Japan to 52.4 from 51.5 and a tick up in the UK to 55.6 from 55.4. Losers included the eurozone, which disappointed with a fall to 53.6 from 54.3, and the US, which saw a drop to 53.5 from 55.8.

Rock and Roll

That US services PMI sparked a bit of a straw and camel effect. The US manufacturing result earlier this week had also been disappointing, but the US services sector is much, much bigger. Down went Wall Street, and down went the US dollar. Big time.

ADP’s measure of private sector jobs added in January came in at 205,000, down from December’s 267,000. The US dollar index is currently down 1.6% at 97.29 but had been lower earlier in the session.

The fall in US stocks took the S&P500 down to the technical support level of 1870 in the first hour, and at that point the buyers stepped in. Technical support notwithstanding, it was not lost on Wall Street that the weak data only served to increase the likelihood the Fed will not be raising again in March.

The ensuing rebound was relatively half-hearted until someone pointed up at the screens and said “Look at oil!”. West Texas crude was suddenly screaming upwards.

It was screaming upwards because, yet again, there were murmurs out of Russia about another meeting with OPEC to discuss potential production cuts. The growing belief on Wall Street is that every time WTI slips below US$30/bbl, Vlad starts talking about cutting supply. He has no intention of actually doing so of course, but as last night’s 8% oil price rebound suggests, it’s a ploy that tends to work.

The Dow had been down around 200 points at its low and as trading entered the last hour, was up around 200. A bit of wavering at the end led to a close of up 183.

Commodities

West Texas crude is up US$2.37 or 7.9% at US$32.33 while Brent is up US$2.35 or 7.2% at US$35.06.

Oil prices were also clearly helped by the plunging US dollar, as were commodity prices across the board. LME traders also cited the strong Chinese services PMI (although I’m not really sure how this translates into copper demand) and, again, squaring up ahead of Chinese New Year. All base metals rose 1.5-2.5%.

Iron ore gained another US90c to US$44.00/t.

Gold is up US$12.00 at US$1140.40/lb.

Every silver lining has a cloud. The Aussie is up a whopping 1.8% at US$0.7175 thanks to the greenback.

Today

The SPI Overnight closed up 32 points or 0.7%.

NAB will summarise its December quarter business confidence surveys today while tonight the Bank of England will hold a policy meeting and while nothing new is expected, recent central bank manoeuvres suggest one should not be too certain.

Downer EDI ((DOW)) and Tabcorp ((TAH)) will post earnings results today while Macquarie Group ((MQG)) will provide an update on whether this latest round of global volatility has dented trading profits.

Rudi will appear on Sky Business at noon, Lunch Money.
 

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