The Overnight Report: Could Pigs Fly?

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By Greg Peel

The Dow closed up 164 points or 0.9% while the S&P gained 1.0% to 2091 and the Nasdaq rose 0.8%.

Bank on it

The prime minister has ruled out a royal commission into the Australian banking industry. ASIC has declared there is no need. Having been sold down steadily in recent sessions, yesterday the banks led the ASX200 up 0.9% single-handedly.

The financials sector finished the day up 1.7%. Daylight took both second and third, ahead of consumer discretionary with a 0.6% gain. Consumer staples again dragged, down 1.0%, as sellers continued to target Wesfarmers ((WES)). Moves in every other sector were negligible.

The ASX200 is once again closing in on 5000. On the strength of commodity prices and Wall Street overnight, along with the indication from the futures, we’ll be back over that mark today.

Again.

If we consider predictable pre-election bank bashing and dodgy accounting at a discount retailer to be micro stories isolated from the current macro environment, we’ll be back at 5000 because quite frankly there’s nowhere else to go. There is nothing going on at present to suggest the market should go meaningfully up or meaningfully down.

If anything, sentiment is leaning to the positive. Yesterday’s NAB business sentiment survey suggested that Australian businesses currently believe conditions are the best they’ve been since the GFC. The conditions index rose 4 points from February to plus 12. The long-run average for conditions (since 1989) is plus 1.

Confidence, which is the tomorrow indicator as opposed to the today indicator, rose 3 points to plus 6, a tick above the long-run average of plus 5.

The good news is capacity utilisation is now at its highest level in over five years and business profitability posted a strong increase, boding well for ongoing jobs growth. The bad news is the forward orders sub-index remains in the negative. An overall healthy picture nevertheless belies the December quarter private sector capital expenditure numbers released a month ago which were decidedly dour on the intentions front. Maybe the next quarterly numbers will be less negative.

Which is a problem for the RBA. It might be a good problem to have in terms of Australia’s economy in isolation, but it does suggest no chance of another rate cut in domestic terms. In international terms, everyone else is cutting (or not raising) which means by default, the RBA has effectively hiked just by standing still.

Economists have pointed to the weaker Australian dollar (as in, no longer up around parity) as a major driver of improving local business conditions and confidence. On a combination of the NAB survey results (which also indirectly suggest the March jobs numbers, due tomorrow, might be strong as well) and sharp overnight rallies in commodity prices, the Aussie is up 1.1% at US$0.7678 over the past 24 hours. We’re almost up US10c from the January low.

That’s the problem for the RBA.

Commodities

Last night the IMF lowered its global economic growth forecasts for the fourth time in twelve months. The IMF also tipped the Australian swimming team to do poorly at the London Olympics. Anyone who remains misguided enough to believe IMF forecasts have any impact on global financial markets might care to note risk assets surged across the globe last night, while bonds were sold.

West Texas crude is up another US$1.28 or 3.2% at US$41.64/bbl and Brent is up US$1.41 or 3.3% at US$44.26/bbl.

On Sunday, OPEC and no-OPEC members meet in Doha to discuss an oil production freeze. Saudi Arabia has always said it would not freeze if Iran doesn’t freeze and Iran has always said it will not freeze. Yet unlike a planned meeting in Moscow last month that was ultimately scrapped for this very reason, Doha is still going ahead.

Which goes a long way to explaining oil’s 10% jump this past few sessions. And the word last night is that Saudi Arabia and Russia now intend to meet prior to the meeting to agree to a production freeze whether Iran agrees or not.

The oil markets are taking this as a further positive. All I can say is you wouldn’t want to be standing under an oil price on Monday night if no Doha agreement is reached.

Oil sentiment is currently a benchmark for commodity sentiment in general. Last night in London, aluminium, copper and lead rose 2%, nickel 3% and zinc 5%.

In Singapore, iron ore rose again by US$2.60, to US$58.50/t.

The gains were achieved without any real movement in the US dollar index, which is little changed at 94.03. Gold is therefore little changed at US$1255.70/oz.

Wall Street

The US stock market rose 1% last night. See: oil.

The US ten-year bond yield rose 6 basis points to 1.78%. See: above.

Tonight JP Morgan (Dow) will report March quarter earnings. The major US banks are tipped to average around 20% earnings declines in the March quarter and indeed their share prices are all down by around that percentage in 2016. If the results aren’t quite so bad, look out. Data suggest net short interest in the S&P500 is currently above 4%, at the highest level since 2009.

Tomorrow night the fun really begins.

Today

Today’s fun will be led by a close in the SPI Overnight of up 42 points or 0.9%.

As business confidence has improved locally, consumer confidence has been declining. Mind you, that’s not unusual heading into a federal budget. Westpac will release its April consumer confidence survey today.

Then we'll see Chinese trade numbers for March.

In the US, retail sales numbers will be the highlight tonight, along with the PPI and Fed Beige Book.

Fortescue Metals ((FMG)) will release its quarterly production report today. IOOF Holdings ((IFL)) will hold an investor day.

Rudi will appear on Sky Business this morning, 10am-noon.
 

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