The Overnight Report: Take A Breath

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By Greg Peel

The Dow closed down 40 points or 0.3% while the S&P lost 0.5% to 1917 as the Nasdaq fell 1.0%.

All is Forgiven

The best day on Bridge Street so far this year had several drivers. Primarily, we opened higher on strength overnight on Wall Street which was a lot to do with strength in the oil price, which also affects our market directly.

Extreme volatility continued in the energy sector yesterday, which finished up 5.3%. In three days energy has been up 4%, down 4%, and up 5%. Not sure where that’s getting us but one thing is certain – there will be no output reduction stemming from OPEC or anyone else by virtue of agreement.

The materials sector just seems to fall into lockstep with energy now as if the oil price is the global indicator. Iron ore took its first dip in a while and base metal prices were mixed overnight but materials was up 3.8%, mostly because investors cannot overcome the mindset of buying the market means buying BHP.

The next driver yesterday was a solid result from wealth manager AMP ((AMP)), the shares of which rose 10%. Buying the market also means buying the banks, but the financials sector has not been anywhere near as volatile as the resource sectors over February. AMP is part of financials and the banks count among major wealth managers so that sector was up 2.3% yesterday and represented a big chunk of the ASX200’s 2.3% gain.

Then we had the January unemployment numbers. We must recall that the minutes of the last RBA meeting, released on Tuesday, included a new statement, “Over the period ahead, new information would enable the Board to assess whether the recent improvement in labour market conditions was continuing,” implying the RBA was not sufficiently convinced the strong jobs numbers to date looked accurate in the face of weak GDP growth.

Well yesterday we saw the unemployment rate tick back up to 6.0%. Such bad news is wonderful news as it supposedly suggests the RBA will now be more inclined to deliver a rate cut.

It’s all just statistical noise of course, and by the ABS’ own admission, the increase represents the make-up of the different sample set surveyed in January as compared to December. Smoothing out the numbers over time, we find the unemployment trend rate fell to 5.8% in January from 5.9%. But don’t tell that to investors who piled into the consumer discretionary sector yesterday (+2.6%), or to traders who sold the Aussie (down 0.3% to US$0.7156).

So we had a strong lead from Wall Street, a big jump in the oil price, some positive earnings results and well-received weak economic data all conspiring yesterday to drive the ASX200 back towards – you guessed it – 5000. We only fell a handful of points short.

Not all earnings results were positive yesterday. A weak report from new kid on the block Estia Health ((EHE)) put the frighteners through the high-flying aged care space and ensured the healthcare sector did not participate in yesterday’s buy-fest.

When I returned from my summer break late in January my first remark was “well here we are, back at 5000”. In that case, we’d had to come down from where we were in December. And now I can say it again. Here we are back at 5000, this time having rallied back from oversold levels. Through all the carnage, we’ve gone nowhere.

Pause

It’s not surprising that after three consecutive up-days in excess of 1%, Wall Street should take a breath last night. Basically the US market went very quiet, outside a bit of micro influence. Dow dinosaurs IBM and Wal-Mart traded profit guidance upgrade/downgrades but largely cancelled each other out.

St Louis Fed president James Bullard suggested it would be “unwise” to further raise rates in the current conditions, but by now Wall Street has baked in an expectation there will not be a March hike.

Oil prices had pushed higher from the open last night but they came back to earth following comments from the Saudi foreign minister, who in the context of supposed attempts to agree to a production level freeze among OPEC and non-OPEC members, insisted that Saudi Arabia had no intention of actually cutting production.

Why the market pays attention to this stuff is anyone’s guess but the comments were enough to bring oil prices back down to where they started the day.

Outside of a solid weekly new jobless claims number last night, US economic data releases were weak. The Philly Fed index posted its sixth consecutive month of contraction and the Conference Board’s leading economic indicators measure came in negative for the second month running, which has not happened for some time.

It’s all good news of course, vis a vis Fed policy.

Commodities

James Bullard’s comment was at least enough to spark the gold bugs into action again. Gold is up US$25.60 at US$1236.20/oz despite the US dollar index being up 0.1% at 96.93.

West Texas crude is up US14c at US$30.73/bbl and Brent is down US18c at US$34.15/bbl.

Base metals were little moved last night but for an inventory-related 2% jump for zinc.

After one session’s dip, iron ore is back in the green with a US70c gain to US$46.50/t.

Today

The SPI Overnight closed down 22 points or 0.4%.

US inflation data is out tonight, to add more fuel to the Fed rate debate fire.

The local earnings season rolls on in earnest with another big day today and more than half of all companies reporting across next week.

Today’s highlights include Fairfax Media ((FXJ)), James Hardie ((JHX)), Medibank Private ((MPL)) and Santos ((STO)).
 

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