The Overnight Report: Doha Indifference

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By Greg Peel

The Dow closed up 106 points or 0.6% at 18,004 while the S&P gained 0.7% to 2094 and the Nasdaq rose 0.4%.

Playing it Safe

The primary talking point across financial markets over the last 24 hours is Doha, and genuine surprise that oil prices did not collapse in the wake of a lack of agreement at the meeting. But given no one believed there would be an agreement reached, why the surprise?

The Australian market had to make the call yesterday before northern hemisphere oil trading provided direction. I had noted yesterday that the Aussie had plunged over a cent on the Doha news but immediately recovered more than half of that drop, and suggested that might just be a hint as to what would happen in other markets.

Sure enough, the ASX200 fell 39 points from the open yesterday, led down by the energy sector, and it looked like we might be in for an ugly session. But no, by late morning the index was back to square.

We drifted off again in the afternoon to a close down 20 points, and the energy sector closed down 2.9%, suggesting it might be a good idea to square up ahead of what no one was sure was going to happen in oil markets last night. But the energy sector had fallen well over 3% initially.

The banks took a similar tack, given the market is tying in the energy sector loan factor at present. The financials sector fell 0.7%. Materials fell 0.9% on a pullback in the iron ore price.

Those losses were nevertheless offset by two other sectors – healthcare, which rose 1.1%, and telcos, which rose 1.5% after analysts all agreed a share buyback will likely follow Telstra’s ((TLS)) asset sale last week.

It was not the stuff of disaster. And just as well, given what did actually eventuate in oil markets and on Wall Street overnight.

Doha Schmoha

The WTI price plunged 6% on the open last night, hitting US$37.61/bbl. The fall most likely reflects buyers standing aside to see what would happen rather than sellers going in hard. When the price found a bottom, the buyers came in and steadily pushed the price back again throughout the session, to only a modest drop.

US energy stocks all opened lower from the opening bell, sending the Dow down 50 points, but as soon as the oil price found a bottom, so did Wall Street. Not only did energy stocks recover, they quickly became the leaders in a rally which took the Dow up to the 18,000 mark for the first time since last July. The suggestion is the market had set itself short oil and short oil stocks ahead of Doha, expecting a big plunge when no agreement was reached. As soon as buying appeared, a short-covering scramble was triggered. Oh no, we got it wrong.

I don’t buy that argument. I believe nobody expected an agreement in Doha and on that basis, WTI at 40 was already pricing that reality in. All that happened last night is that buyers stood aside in the oil and stock markets to let a few wood ducks make fools of themselves early, providing an opportunity for the smarter money to take advantage. WTI is at 40 because US production is on the decline. It’s got nothing to do with OPEC.

There is also a suggestion a strike by oil workers in Kuwait overnight was actually oil’s saviour. Nah.

Meanwhile, in US economic news, an index of housing sentiment held steady at 58 for the third month running, suggesting modest but consistent optimism. In earnings news, Morgan Stanley became the fifth major US bank to release a less-bad-than-expected earnings result. Pepsico also beat on earnings, while Disney had a strong session following solid weekend box office on the release of its Jungle Book remake.

I remember going to see the original when knee-high, at the Sky studios in North Ryde. Of course back then it was a drive-in.

On last night’s rally the Dow is now a mere 300-odd points shy of its all-time high. The S&P, which is the “real” market, is about 40 points shy. The Dow has reclaimed the psychological level of 18,000, while the S&P only needs a few more points to retake its psychological level of 2100, above which traders see only upside.

With the Yellen Put in place, and on the assumption the less-bad theme continues throughout the US earnings season, traders are feeling pretty confident. This week is an important one for earnings as the first of the big multinational industrials release their numbers.

Commodities

West Texas is down US37c at US$40.05/bbl and Brent is down US13c at US$42.93/bbl.

An increasingly more volatile iron ore price has bounced back a solid US$2.40 to US$59.90/t.

Aluminium, copper and zinc all rose around 0.5% on the LME and nickel managed 2%, while tin fell 1%.

Gold is relatively steady at US$1232.50/oz despite the US dollar index being down 0.3% at 94.46. The Aussie is nevertheless up 0.3% as a result to US$0.7749 – above where it was before Doha.

Today

The SPI Overnight closed up 53 points or 1.0%.

Presumably today we’ll see a recovery in the local energy sector after the safety game played yesterday. We should also see a reversal in the materials sector’s fortunes thanks to iron ore. And Dow 18k will likely in itself provide optimism the local market might just now have the capability to push through to the 5400 mark chartists have been adamant about for some time. Although it will depend on further US earnings reports.

And last night it was all but confirmed Australia is headed to, as the Brick would call it, a “double dis-allusion” election. While history shows stock markets are indifferent to political stripe, the prospect of a government being able to govern without the hindrance of senate cross-benchers resembling a bowl of mixed nuts should be a positive for sentiment, if that’s how things play out.

Back in the real world, Rio Tinto ((RIO)) and Oil Search ((OSH)) both report quarterly production today, Burson Group ((BAP)) hosts an investor day and Recall ((REC)) hosts an EGM with regard the Iron Mountain takeover offer, which has now been given the green light by the FIRB.

The minutes of the April RBA meeting will also be released today, with the market wondering what the central bank might ultimately do about the Aussie. Glenn Stevens will speak tonight in New York, which probably won’t be a forum for offering currency hints.

Rudi will Skype-link up with Sky Business at 11.15am today to discuss broker calls.
 

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