The Overnight Report: Just Like Old Times

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By Greg Peel

The Dow closed up 49 points or 0.3% while the S&P gained 0.3% to 2100 and the Nasdaq fell 0.4%.

Well Resourced

It was all about commodities and the resource sectors on the local market yesterday thanks to a jump in the iron ore price and no drop in oil prices. We recall that on Monday, energy names were sold down following a lack of agreement coming out of Doha, perhaps not so much as a panic trade but more of a safety trade.

Given oil prices fell initially but ultimately recovered on Monday night, yesterday saw those same energy names bought back again. The banks had similarly seen some squaring up for safety on Monday on the energy sector loan link, and they, too, recovered yesterday.

The ASX200 was up 82 points early in the session before some profit-taking emerged after the solid run up from 4900 in the past few sessions. The close of up 51 points was led by energy (3.8%) and materials (3.3%) with some help from the banks (0.8%).

But interestingly, the resource sectors were the only cyclicals to join in the spoils as the index briefly breached 5200. Industrials actually fell 0.6% and the consumer sectors were flat while the defensives of telcos and utilities each rose 1%. If we are to push upward towards 5400 as the technicals suggest, we cannot be confident in a rally driven by defensive yield and fickle commodity prices.

There is much focus at present on Wall Street and the potential of quarterly earnings results to push the US indices back to all-time highs. But locally we are now entering an important quarterly season of our own – not in the form of official earnings results but in the form of quarterly updates from both resource sector and non-resource sector companies, as is increasingly becoming the norm. By next week we will start to see a flood of AGMs being held by calendar year-reporting companies.

In other words, we are entering a period of micro influence that in aggregate should help paint a macro picture for the Australian economy. The macro has taken a back seat in other developed economies given safety nets provided by central banks. As to whether the Australian central bank can also provide some support is now a subject of heated debate.

RBA governor Glenn Stevens spoke in New York last night and I suggested yesterday it probably wasn’t the forum to discuss currency issues downunder. And it wasn’t. Stevens made it clear he wasn’t there to discuss Australia but to provide his take on the current international economic climate.

Yesterday the minutes of the RBA’s April policy meeting were released, and provided no new insight. The word “complicate” was used in the official statement following that meeting and appeared again in the minutes:

“Oil and iron ore prices had risen noticeably since earlier in the year. The rise in commodity prices had been accompanied by an appreciation of the Australian dollar, which also partly reflected the expectation that US monetary policy would be more accommodative over the coming year than had been anticipated earlier. Members noted that an appreciating exchange rate could complicate progress in activity rebalancing towards the non-mining sectors of the economy.”

We might note that in early April the Aussie was trading around US$0.75 and on the strength of commodity prices and further weakness in the US dollar, is up 0.8% over the past 24 hours to US$0.7812.

A lack of any further hints about a possible rate cut to address the “complication” is likely why the consumer and industrial sectors were held back yesterday. More than one economist is tipping a May rate cut, although you wouldn’t pick one from the RBA’s current rhetoric.

Here We Are Again

With OPEC having failed to agree to a production growth freeze on the weekend it’s perhaps ironic that right now OPEC supply is under restraint thanks to the strike in Kuwait, significant production outages in Yemen, South Sudan and Iraq and pipeline outages in Nigeria. These restraints are helping to support oil prices, which were up a couple of percent last night.

But strikes and outages are usually temporary so the real focus is on US production, and the US weekly numbers are out tonight. Ongoing weakness in the US dollar is also supporting oil prices and indeed commodity prices across the board.

The weaker greenback is also supporting Wall Street. The current focus is on March quarter earnings and whether they’ll be less bad than forecast, and a lot of the weakness built into forecasts reflects a strong US dollar over a quarter in which assumptions were for routine Fed rate rises. Now that those assumptions have evaporated and the greenback has steadily fallen, Wall Street can also look ahead to some better earnings numbers from multinationals in the June and September quarters.

Last night the S&P500 closed smack on the psychological level of 2100. The broad index did reach as high as 2104 early in the session as the Dow shot up 100 points on the open, but there is some nervousness beginning to creep in. It’s only 300 more Dow points to the all-time high and 30 more S&P points. The average PE ratio is starting to test the top of its typical range.

And next month is May. But the “Sell in May” adage usually only works if Wall Street has rallied through the first quarter and into the second, and this year we’re still not yet at the old high as May approaches. The S&P last saw 2100 in November and first saw 2100 in February of last year. The earnings result season has only just begun.

Last night’s earnings results were not that flash. “New tech” Netflix saw its shares down 13% after the company eased back subscriber growth forecasts, which goes a long way to explaining why the Nasdaq bucked the trend last night. “Old tech” IBM (Dow) saw its shares fall 5.5% following yet another drop in revenue. Further old tech disappointment was provided by Intel (Dow) after the bell, and its shares are down 2% in the aftermarket, while Yahoo shares are up 1%.

Commodities

West Texas crude is up US91c at US$40.96/bbl and Brent is up US$1.13 at US$44.06/bbl.

Base metal prices have been given a kicker by the stronger oil price, or perhaps the not weak oil price, and also by the weaker greenback. The US dollar index is down 0.4% at 94.11 and aluminium, nickel and tin all rose on the LME last night, 1% while copper, lead and zinc all rose 2%.

Iron ore’s surge continues. It’s up another US$1.90 at US$61.80/t.

The dollar index briefly breached the 94 support level last night which has the gold bugs excited. Gold is up US$17.80 at US$1250.30/oz.

Today

Hard to ignore commodity price strength. The SPI Overnight closed up 31 points or 0.6%.

BHP Billiton ((BHP)), Newcrest Mining ((NCM)) and Woodside Petroleum ((WPL)) all report quarterly production and sales numbers today.

Rudi will host Your Money, Your Call Equities tonight. Tune in from 8-9.30pm.
 

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