The Overnight Report: Three Day Reprieve

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By Greg Peel

The Dow closed up 257 points or 1.6% while the S&P gained 1.7% to 1926 and the Nasdaq jumped 2.2%.

Stock Picking

The ASX200 was all over the shop yesterday, reflecting on the one hand indecision from a macro level as to where to go to next and on the other hand, mixed sector moves based on individual earnings reports.

The index opened down 40 points, was up 16 after lunch and closed down 27. There was very little consistency among sectors, with the consumer sectors, banks and industrials registering minimal change. The big downside move was in energy, which fell 4% having rallied 4% the day before. I’m not sure what Tuesday’s buyers of Woodside Petroleum ((WPL)) were looking for, given a “beat” on profit and, importantly, on dividend, sparked a 7% thumping yesterday.

Materials was down 1.5% in sympathy while healthcare (-1.3%) was also weak despite a 20% pop for one of the most shorted stocks in the market, Primary Health Care ((PRY)).

It was not a session from which one could derive any sense of market direction. It was the biggest day to date in the earnings season in terms of number of reporting companies but today will be one of the biggest all up, before the final and most crowded week of the season.

Triple Crown

The weekend’s energy market news was a supposed agreement between Saudi Arabia, Qatar, Venezuela and Russia to limit monthly oil production to January levels as long as other major oil producers followed suit. I noted that this was a clear finger point at Iran.

Last night’s news was that Qatar and Venezuela got together with Iraq and Iran in the hope of extending the agreement and the great news is that Iran is in full support of the idea. That is, as long as it does not include Iran.

The other OPEC members expressed sympathy for a country trying to emerge from years of sanctions. As to where Iraq stands on the matter is unclear, but I would assume Iraq’s stance would be “We will if Iran will”. So if Iran won’t, then presumably none of Saudi Arabia, Qatar, Venezuela, Russia and Iraq will either, as the deal had a caveat of “as long as the others do too”.

West Texas crude jumped another 5% last night.

No doubt the oil market is still very short, as this sort of news is hardly concrete. Maybe the oil market believes that while such a road is a long and difficult one, moves are being made in the right direction with regard global supply curtailment. But until the US joins in, there will be no real impact. And the US will never join in.

Oil market volatility has been the predominant driver of general market volatility in 2016, and this has worried the Fed. The US economy is not showing the signs of growth the FOMC expected it to show back in December. On that basis, the majority of FOMC members are in favour of waiting for more data indications before making another move on rates, as was evident in the minutes of the January policy meeting, released last night.

This implies no rate rise in March and thus a more dovish stance from the Fed, unless of course US economic data suddenly turn very positive in the next month. While last night’s measure of January industrial production showed a 0.1% gain when a 0.2% decline was expected, one swallow does not a summer make. And housing starts were down a worse than expected 3.8%.

So Fed dovishness, and another short-covering jump in the oil price, sent Wall Street rallying strongly form the third day in a row. It is the first time in 2016 the S&P500 has put together three consecutive up-days, and the first time since 2011 those up-day gains were each in excess of 1%.

The S&P bottomed out at 1810 support, broke through 1880 resistance and ploughed on to 1925 resistance, where it currently sits. Technically, a move through 1950 suggests a sustained rally. But just how much of the rally to date in stocks is also short covering? A lot, it is assumed. There is not a great deal of confidence on Wall Street that this week’s action is anything more than a blip in what is still a fundamentally weak market.

Something is needed beyond OPEC fantasies and Fed caution.

Commodities

West Texas crude is up US$1.50 or 5.2% at US$30.59/bbl and Brent is up US$2.06 or 6.4% at US$34.33/bbl.

Base metal trading remains directionless. LME traders are also looking for a sign. Last night saw copper and nickel up 1%, tin up 2%, but lead down 2%.

The iron ore price has finally taken a dip, down US30c to US$45.80/t.

The US dollar index was steady last night at 96.82 but gold clawed back US$7.50 of this week’s losses to US$1210.60/oz.

It looks like someone piled into the Aussie overnight and sparked some short-covering there as well. It’s up 1.1% at US$0.7182.

Today

The Dow was up a couple of hundred points on Tuesday night and yesterday morning the SPI Overnight was up 6 points. The Dow was up a couple of hundred points last night and this morning the SPI Overnight is up 66 points, or 1.4%.

Australia’s January unemployment numbers are due today. Beijing will release Chinese inflation data.

A very big day in the local earnings season includes reports from AMP ((AMP)), Origin Energy ((ORG)) and Telstra ((TLS)).
 

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