Daily Market Reports | Mar 03 2016
By Greg Peel
The Dow closed up 34 points or 0.2% while the S&P gained 0.2% to 1981 and the Nasdaq was flat.
Slowdown? What Slowdown?
Relax said the night man, we are programmed to receive. And whaddya know? We’re back at 5000 again.
The local market was already off to a flier from the opening bell yesterday, courtesy of the big rally on Wall Street. The 5000 level for the ASX200 hove into view. But the kicker came with the mid-morning release of the December quarter GDP result.
Quarter on quarter growth of 0.6% clearly beat forecasts of 0.4%. The September quarter result was also revised upward, leaving 3.0% growth for 2015 when 2.7% had been predicted.
Non-mining growth overcame the drag from resource sector contraction, led out by the housing market but specifically surprising on consumer spending. The good news is that the decline in resource sector spending is reaching its nadir, and it appears we may be seeing a bottoming out of commodity prices.
On the bad news side, the question is one of just how much longer support from the housing market can last. Housing has started 2016 with another flurry, but many an analyst is expecting a cooling as the year progresses, following such a bubbly run. Looking at this season’s earnings reports from relevant retail outlets, a lot of consumer spending has been housing-related. If the housing market softens presumably this area of spending will too.
And given a lack of any notable wage growth, consumer spending has been driven by a reduction in household savings. Consumers have recently begun to emerge from behind the couch where they’ve been hiding since 2008, and pulled out their wallets once more. But unless wages pick up, there is a limit to how far into the savings built up since the GFC consumers are prepared to dip.
Strength in employment suggests wages must eventually grow, but can employment remain strong? Retrenchments continue in the resource sectors and are soon to hit peak levels in retail (Dick Smith, Masters), for example. Strength in employment over the past twelve months has surprised everyone from economists to the RBA, and there are those who suggest it’s just a misleading head-fake up to now.
As is suggested by the move in the Aussie dollar over the past 24 hours, an RBA rate cut now looks like a distant hope. Having already spiked up on Tuesday when the RBA offered no fresh hint of a rate cut – and sensibly so it would now seem – the Aussie is up another 1.6% at US$0.7293. Rate cuts are bad for banks, and hey, if the March quarter GDP looks just a strong, we’ll be talking rate hike once more.
The banks were up 3.0% yesterday. There’s the bulk of your hundred points in the index right there. Energy was up 3.8% despite little movement in oil prices overnight, but like the banks, the energy names are among the most beaten-down. A jump in the iron ore price helped materials to a 1.9% gain, and having now gone ex-div, even the telco was back in favour.
It appears investors dipped into utilities to fund their cyclical purchases, while mixed individual stock moves kept the diverse industrials sector at bay. Ex-divs would have had an impact.
Is it happening?
After rallying 350 Dow points on Tuesday night with no real impetus from the oil price, it was not surprising Wall Street opened lower last night. But it was a case of the oil story re-emerging once more.
US weekly crude inventories rose by more than expected last week, it was revealed. Down went WTI, by as much as 2%, and down went the Dow, by a hundred points.
But wait!
The same data release showed US weekly US crude production fell again, as it did last week. The supply is still building ahead of short term demand but if production continues to fall, so, eventually, will excess inventories. WTI spun around and rallied, to be up just slightly on the session.
It looks like we might finally be seeing the impact of low oil prices on the marginal US oil industry. But it is a balancing act. If prices keep rising because production keeps falling, then higher prices may well bring production back on line. Realistically, oil needs to stay around US$30/bbl for as long as possible to ensure US$50/bbl can ever be seen again.
Meanwhile, last night’s ADP private sector jobs report showed 214,000 new jobs added when economists had forecast 185,000. But January’s number was revised down to 193,000 from 205,000, so there was some trade-off.
The Fed’s Beige Book noted activity continued to expand in most districts over January-February but conditions “varied considerably” across those districts. These are not words the Fed has used in recent times. The points of drag are nevertheless obvious – oil production states are hurting and those with a concentration of manufacturing are finding the stronger US dollar a headwind.
Perhaps Janet Yellen should get on the phone to Glenn Stevens for advice about monetary policy management in a “two-speed” economy, or a “multi-speed” economy, as Australia’s has oft been referred to in recent years. Divergent pockets of economic strength and weakness will make the Fed’s one-rate-for-all policy decision even more complex.
Commodities
West Texas crude is up US23c at US$34.63/bbl and Brent is up US10c at US$36.91/bbl.
Base metals, one LME trader remarked last night, are having “a nice little mini-bull run”. Prices kicked on last night after Tuesday night’s gains, with all metals bar nickel rising roughly 1-2%. Nickel managed 0.5%.
Iron ore is on a tear, it would seem. It’s up US$1.20 to US$51.60/t.
The US dollar index has fallen back 0.2% to 98.19, so gold is up US$4.30 at US$1239.20/oz.
Today
The SPI Overnight closed up 25 points or 0.5%. Have we now entered yet another period of attempting to pull away from 5000 to the upside?
It’s service sector PMI day across the globe, including Caixin’s Chinese number.
Australia will also see January trade numbers.
There are only a couple of ex-divs today.
Rudi will appear on Sky Business today, first time under the new programming, and he'll stay from 12.30 till 2.30pm.
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