Daily Market Reports | Mar 31 2016
By Greg Peel
The Dow closed up 83 points or 0.5% while the S&P gained 0.4% to 2063 and the Nasdaq rose 0.5%.
Struggling
Well the ASX200 was indeed off to the races yesterday, up 54 points from the opening bell, but very quickly it was not to last. If selling on Tuesday had anything to do with fears Janet Yellen was set to offer up a more hawkish Fed stance in her speech on Tuesday night, yesterday’s open supported that theory. But the sellers nipped everything in the bud.
By midday the index was back to square. Energy led the downside with a 1.5% drop thanks to lower oil prices while on the other side of the coin, healthcare rebounded 1.1% having had a hard time of it on Tuesday. Elsewhere, sectors traded off small moves up and down. The banks at the least managed to hold their ground.
The March quarter ends tomorrow and this must be taken into consideration in gauging market mood, given the pushing and shoving that can go on between traders squaring up and fund managers trying to window-dress returns. But we might also take into consideration that while lower for longer interest rates in the US might be good for the US, subsequent strength in the Aussie dollar acts as a brake on Australia’s export economy.
Earnings Loom
The UK and major European stock markets liked renewed Fed dovishness, as they all rose over 1.5% last night. Wall Street kicked on again from the opening bell to send the Dow up 157 points at its peak. But aside from the usual keeping half an eye on the oil price, momentum appeared to fade.
What will drive Wall Street higher from here?
The March quarter earnings season begins next month. The forecast is for a 6.9% net drop in S&P500 earnings and a 1.0% drop in revenues, which would mark the fourth consecutive quarter of negative earnings growth and fifth for revenues. It makes one wonder why Wall Street managed to run as high as it did ahead of the oil price collapse.
A big factor in that 6.9% is energy losses, with materials also chiming in. The banks have also had a tough quarter. The US dollar has only more recently retreated, so currency impact will be a big feature this season. As to why Wall Street can continue to rally on negative earnings growth, we may look no further than Fed influence.
Access to cheap funding has allowed US companies to borrow to buy back their own stock, thus increasing earnings per share not through increased earnings, but through a reduced number of shares. One day, somewhere down the line, the music will stop and so will the buybacks. But this will require Fed tightening, which in turn will require a more robust US and world economic outlook.
Meanwhile, it is typical for companies to suspend their buyback programs over earnings season. Buyback programs are supposed to be market agnostic, and a company would risk insider trading allegations if it were, for example, to suddenly step up its buying ahead of announcing a Street-beating result. This means that for the next month, Wall Street will lack buyback support.
If earnings results then come in net worse than expected, there is no safety net.
Ahead of earnings we have the March non-farm payrolls numbers tomorrow night. Last night the ADP private sector report showed the addition of 200,000 jobs, just a tick down from February’s 205,000 and in line with expectation. Forecasts for non-farm payrolls are for the addition of 205,000 jobs.
Wall Street will nevertheless not pay as much attention to the actual jobs number, assuming it falls within a reasonable band of expectation, as it will wage growth. This has been the missing link in the labour market story that has helped keep the Fed on hold, despite an unemployment rate considered to be near “full employment”. A jump in wage growth would bring a June Fed rate hike back into the frame.
Commodities
The oils were initially stronger during the session but fell back towards the close. West Texas crude is down US17c at US$38.27/bbl and Brent is own US10c at US$39.26/bbl.
Anticipation of Friday’s data, which includes not only US jobs but manufacturing PMIs from across the globe, and particularly China, is keeping LME traders on the sidelines. Base metals split up and down moves last night, none of them greater than one percent.
Is iron ore beginning to succumb to reality of lower Chinese steel production? It’s down US$1.50 at US$53.20/t.
The more interesting metal, nevertheless, is gold. Gold jumped up on Tuesday night, as one might expect, on increased Fed dovishness. But the US dollar index is down 0.3% to 94.84 overnight, and gold has given back most of Tuesday night’s gain. It’s down US$17.90 to US$1224.70/oz.
A couple of months ago it looked like gold was set to challenge 1300. Ahead of the March Fed statement release, gold sold off as traders took precautionary profits. The statement was dovish, so gold rebounded, but did not manage to return to its high. On Tuesday night Yellen was even more dovish, so gold shot up, but again it did not reach the previous high. Last night, despite dollar support, gold fell back again.
Markets that cannot go up do tend to go down instead.
The Aussie dollar is up 0.4% at US$0.7667.
Today
IT would seem futures traders are determined that if the ASX200 could not push away from the gravitational pull of 5000 yesterday, it can do it today. Despite the S&P500 being up only 0.4%, and oil, iron ore and gold prices being weaker overnight, the SPI Overnight closed up 42 points or 0.8%.
Locally we’ll see private sector credit data today along with new home sales.
Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm.
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