The Overnight Report: Pull The Other One

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By Greg Peel

The Dow closed up 222 points or 1.4% while the S&P gained 1.7% to 1895 and the Nasdaq jumped 2.3%.

Afternoon Delight

The local market appeared not particularly keen to go on with it from the open yesterday following Friday’s rally, with no lead from Wall Street possibly suggesting some caution. A stuttering morning session saw ups and downs before the ASX200 was down around 30 points at midday.

There began a very steady rally through the afternoon, culminating in what was an almost 20 point pop at 3.59pm to close us up 66. These last minute moves are becoming disturbingly frequent.

Sector-wise, the two big movers were again the resource sectors. Materials starred on Monday with energy riding shotgun but yesterday energy led the way with a 4.8% rally, followed by materials with 2.1%. These numbers look pretty big, but we must remember these sectors have fallen a long way this year and now only represent around 10% of market cap.

Which leaves the banks as the biggest market cap sector by a margin. They rallied 1.0% yesterday but had to account for CommBank going ex, while the other big market cap name – Telstra – stalled after two sessions of outage-related selling. Utilities, up only 0.2%, was the other sector not to really join in the fun yesterday afternoon.

Was the afternoon rally a result of the morning’s release of the minutes of the RBA’s February meeting?

Back in December the RBA considered the outlook to be sufficiently balanced to suggest the current cash rate is appropriate, while adding “that the outlook for inflation may afford some scope for a further easing of monetary policy should that be appropriate to lend support to demand”.

February’s minutes concluded with an identical paragraph but for the addition of one new sentence:

“Over the period ahead, new information would enable the Board to assess whether the recent improvement in labour market conditions was continuing and whether recent financial market turbulence presaged weaker global and domestic demand”.

It sounds like the board is beginning to wonder whether last year’s strength in employment can be maintained in 2016 and, in line with major central banks around the world, is worried about the markets. Market turbulence is enough to keep the Fed on hold and to prompt the ECB into reiterating it will do “whatever it takes”, and now it appears the RBA is singing from the same song sheet. If needs be, the RBA will cut again. It’s as simple as that. And that is enough to encourage stock market strength.

But we won’t think about what might have to happen to prompt the RBA into action.

Crying Wolf

The global rally either side of the weekend came full circle last night when Wall Street re-opened for business and kicked on with what began with Thursday’s late market turnaround. That turnaround commenced off the S&P500 technical support level of 1810 and traders suggested resistance would kick in at the technical level of 1880. Last night the S&P went through that level and subsequently pushed higher still.

Most notably, the US stock indices rallied despite a fall in the oil price. The stock market-oil correlation has otherwise been running at 98% this year. Indeed, the US energy sector rallied despite a fall in the oil price.

We recall that it was oil’s turnaround on Thursday which prompted the turnaround in the US stock indices. The WTI price had just hit a new low when, blow me down, the UAE oil minister announced OPEC was ready to talk production cuts. WTI rallied 12% — not because anyone believed the minister, but because no one wanted to be caught short over the long weekend.

Scepticism turned to surprise last night when there was, indeed, an announcement about an agreement on supply curtailment having been reached between OPEC members Saudi Arabia, Qatar and Venezuela and non-OPEC Russia. Oil opened higher as a result. But then began falling back rather swiftly.

Firstly, the four nations have not agreed to cut production, merely to freeze production levels at January rates. Saudi Arabia, for one, posted record production in January. And what’s more, they will only do so if other major oil producing nations do the same.

This caveat clearly points the finger squarely at Iran. Good luck with that.

So WTI is down 2% on the session but Wall Street is nonplussed. The OPEC-Russia fun and games have worn thin, leaving investors to concentrate on the reality of global oil production cuts ultimately being achieved through sustained lower oil prices and subsequent defaults and bankruptcies amongst marginal US producers.  

This expectation implies the oil price has a definable bottom, and judging by moves in global energy sectors these past couple of sessions (US energy up last night despite lower oil, Australian energy up 4.8% yesterday), many believe that bottom is in.

Commodities

West Texas crude is down US62c at US$29.09/bbl and Brent is down US$1.07 to US$32.27/bbl.

London base metal traders are relieved the Chinese didn’t return from holiday and slam prices, but there is no great sense of optimism on the LME. Oil price moves are also making their presence felt in base metal prices but last night it was a mixed bag, with aluminium and nickel up over a percent and lead and zinc down over a percent.

Iron ore continues to push higher, up another US50c to US$46.10/t.

Goldman Sachs must have been caught short gold because the bank has put out a note to suggest clients should short gold for this recent rally is but a blip. Gold is down US$5.70 at US$1203.10/oz. To be fair to Goldman, they’re not Robinson Crusoe.

The US dollar index is relatively steady at 96.86 but the Aussie is down 0.6% at US$0.7101 thanks to the RBA.

Today

Futures traders are clearly sceptical of the local market putting in a third big rally today. The SPI Overnight closed up a mere 6 points.

Just as the RBA minutes were scrutinised by the market yesterday, tonight’s Fed minutes will be poured over.

And what does happen in the local market today could well come down to what is the biggest day on the earnings calendar to date in terms of volume of reports. And there are bigger days yet to come.

Today’s highlights include Coca-Cola Amatil ((CCL)), Domino’s Pizza ((DMP)), Insurance Australia Group ((IAG)), Lend Lease ((LLC)) and the Healthcare duo Primary ((PRY)) and Sonic ((SHL)). The biggest headline will nevertheless be saved for Woodside Petroleum ((WPL)).
 

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