The Overnight Report: Cheering Defaults

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Greg Peel

The Dow closed up 228 points or 1.45 while the S&P gained 1.5% to 1945 and the Nasdaq rose 1.5%.

Result

And guess where we are now thanks to yesterday’s rally. Yep, right back at 5000. Again.

At the risk of stealing a colleague’s analogy, we have to concede that the 5000 level has become the ASX200’s Hotel California.

Yesterday’s rally was not inspired by Wall Street, unless Wall Street not meaningfully falling can be considered a positive. Oil prices were lower, but only marginally in the context. The iron ore price is rapidly gaining attention, having made a surprising comeback in recent weeks. While Chinese New Year is cited every year as a driver of iron ore volatility, this year we’ve seen the unusual situation of the iron ore price rallying both before and after the break.

The iron ore price is providing the materials sector with ongoing support following its bounce from oversold levels. It’s a big day for the sector today because BHP Billiton ((BHP)) will publish its earnings result. The iron ore price has jumped 7% overnight to over US$50/t. What will BHP’s dividend be?

Yesterday BHP’s two steel spin-offs delivered positive news – BlueScope ((BSL)) posted a surprisingly good result under the circumstances and Arrium ((ARI)) appears to have been saved from oblivion by private equity white knights.

But materials’ 1.9% rally was outstripped by a 2.2% gain for the diverse industrials sector yesterday. Here we can point to a strong result and 8% rally for Brambles ((BXB)), and even make mention of an 11% jump for one-time market dog UGL ((UGL)), the company formerly known as UGLy.

News late last week that Westpac ((WBC)) is in a better capital position than expected has provided some more comfort for the banks sector, which yesterday rose 0.9%.

Amidst all the commodity- and bank-related volatility of the past month, the local results season has to be considered a net positive one to date. There is a big chunk of companies yet to report in this final week, but as of last Friday, FNArena’s Reporting Season Monitor showed a beat to miss ratio of 2 to 1 with 150 stocks reported. Earlier in the month the number of resultant ratings upgrades from brokers was well outpacing downgrades, but last week brought that back into line, indeed, to 37-37.

For the most part, these up/downgrades have been related not to shocks but to value calls – oversold or overbought, at least by the brokers’ assessment.

Oils Well?

The WTI crude price jumped 7% last night which goes a long way to explaining why US stock markets resumed their rally. Oil is back above US$30/bbl and the S&P500 has recovered all the ground lost in the early February sell-off.

On Friday the US rig count was noted as having dropped by another 26 rigs to 413 to mark the ninth straight week of declines. But fewer rigs does not by default imply lower production. US crude inventories are sitting at over 500m barrels following another increase last week – another record level. Those rigs still standing are pumping as fast as they can to generate what cash they can in an attempt to survive.

But surviving, they are not. Up until last week, three US energy companies had defaulted on their debt. Last week alone saw three more. Across the globe, the number is 19. One is reminded of a line in the Big Short – “it’s happening”.

No one puts any faith in OPEC organising coordinated production curtailments but still OPEC keeps talking about it, including just this morning after the US energy markets had closed. So things are heading sufficiently in the right direction for traders to be more and more confident the oil price has seen a bottom, not that anyone would stake their life.

As for last night’s 7% jump in WTI, it was the expiry of the March delivery contract and that clearly brought about a short squeeze on the rollover into April. Let’s see what happens tonight.

Meanwhile, a flash estimate of US manufacturing PMI for February last night suggested a fall to 51.0 from 52.4 in January when economists had forecast 52.5. This didn’t seem to deter Wall Street, but then bad news is good news on the data front.

Commodities

West Texas crude is up US$2.00 or 6.7% to US31.84/bbl on the March expiry. Brent, already trading April, is up US$1.40 or 4.2% to US$34.66. The disparity confirms a short squeeze on expiry.

Iron ore has jumped US$3.30 or 7% to US$50.30/t.

Since Turnbull came to power, all talk has been of the enormous budget black hole that will be left by collapses in commodity prices. Suddenly, talk is of the spectacular windfall the government will enjoy on iron ore’s recovery.

Let’s not count our chickens.

Commodity funds were reported to be back in the base metal markets last night, either buying or short-covering. While lead still managed a 1% fall, aluminium and copper each rose more than 1% while zinc jumped 2% and nickel 2.5%.

It’s a commodity comeback! Buy the Aussie! Our currency is up 1.2% at US$0.7231 despite the US dollar index rising 0.7% to 97.37.

The US dollar has impacted on gold nevertheless, which is down US$18.50 at US$1208.90/oz.

Today

The SPI Overnight closed up 39 points or 0.8%, incidentally at 5000. While that might seem to make sense, there’s still a month of “carry” to go in the March contract, so the futures market is suggesting better things to come.

US data releases tonight include home sales, house prices and consumer confidence.

As noted, BHP is among the highlights of reporting companies today, as are Oil Search ((OSH)), Qantas ((QAN)) and QBE Insurance ((QBE)).
 

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