The Overnight Report: What Goes Up

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

By Greg Peel

The Dow closed down 113 points or 0.6% while the S&P lost 0.5% to 2091 and the Nasdaq closed flat.

Energised

A 5.7% gain for the energy sector about sums up yesterday’s session on Bridge Street, although it was not a lonely journey. A strong gain for oil prices overnight spurred on energy stocks but ongoing gains for iron ore with support from base metals had materials up 2.0%, while the dominant market cap sector of the banks posted a 0.8% gain.

The banks may currently be under siege from all quarters but it seems the market is more interested in bad debt relief being offered by the commodity price rebound and the flow-on of stronger commodity prices into a reduced likelihood of the RBA having to cut its cash rate.

Assuming the commodity price rally holds. But it must be said some previously bearish analysts are beginning to concede there may be some justification in recent strength beyond just short-covering and seasonal restocking.

Healthcare and consumer staples both posted 1% gains yesterday but elsewhere movements were more modest, with the telcos missing out altogether.

The ASX200 has now left 5200 behind and is eyeing off 5300 on its way, chartists are assuming, to 5400, but we may see a stumble today after Wall Street decided to take some money off the table last night. It might be a mixed bag nonetheless, with oil prices off a bit last night but iron ore going nuts with another 7% jump.

Yield Off

Mario Draghi offered up no surprises last night in leaving ECB monetary policy unchanged following the shock & awe package delivered in March.

After a couple of strong post-Doha sessions which took oil prices to new 2016 highs, it was no shock to see a bit of a pullback last night. But while this did mean a bit of selling in US energy stocks, it was not the primary reason for a generally weaker session on Wall Street on the oil correlation, which was more of a March quarter story.

With the Dow having hit 18,000 and the S&P 500 having hit 2100, following a strong run up, it was time for some consolidation. These numbers are no more important than any other but because they are round, they are targets traders will often set as a triggers for taking profits.

Yet while the pullback in stocks last night was not surprising, the spread of sector movements was interesting.

The US ten-year bond yield has been moving up recently, rebounding from the depths reached following the aforementioned shock & awe package from the ECB which dragged down German yields and thus US yields on a relative basis. While the Fed has indicated it is in no rush to hike yet and US economic data releases have not been too encouraging of late, bonds have been sold off across the globe as general panic has subsided.

As US bond yields rise, the value of high-yielding US stocks eases. When the wheels fell off in January and into February this year as the oil price collapsed, investors ran to the shelter of yield stocks such as utilities and telcos and out of cyclicals such as resources. They were rewarded as bond yields continued to fall.

That trade is now reversing. With Wall Street having returned to 2016 highs on a commodity price rebound that is looking more entrenched, steadily rising US bond yields (now back at 1.87% in the tens having been down towards 1.6%), investors are switching out of those defensive yield names in fear they may miss a cyclical push higher.

Thus last night’s hundred point fall in the Dow and pullback from the high in the S&P was more about sector rotation than it was about general market selling. We note the Nasdaq, in which it would be hard to find a solid dividend payer among the growth stocks, closed flat.

Of course we’re also in the midst of US earnings season, and after a strong start it has to be said the results have become more mixed, offering another reason for Wall Street to take a breather.

Among the Dow stocks, misses led to sharp falls for Verizon and Travelers last night while American Express managed a modest gain. In the wider market, General Motors managed a decent gain but Mattel had a session Barbie would prefer to forget.

It got worse after the bell. All of Microsoft (Dow), Visa (Dow), Google and Starbucks posted misses and their shares are down 3-5% in the aftermarket.

Tonight sees results from some heavy industry names in the form of General Electric, Caterpillar and Honeywell and global barometer McDonalds. A common theme among reporters so far has been the impact of the strong greenback in the March quarter, as well as commodity price weakness, so given both have since reversed, traders are prepared to give some weaker results the benefit of the doubt as the June quarter progresses.

Commodities

West Texas crude is down US75c at US$43.43/bbl for the new June front month and Brent, already trading June, is down US84c to US$44.73/bbl. Note how tight that spread has now become.

Iron ore, blow me down, closed up US$4.40 or 6.8% at US$68.70/t.

Trading was mixed on the LME, with nickel down 2% and zinc 1% but copper and aluminium continuing their steady rise with 0.5% gains.

The US dollar index is up 0.1% at 94.66 but gold is a little higher at US$1248.00/oz.

It looks like perhaps the forex cowboys had set themselves for an ECB rate cut into the negative last night even though no one else expected such. The Aussie had pushed higher above 78 all through the local session then suddenly plunged in European trading to be down 0.7% over 24 hours at US$0.7739, despite the big jump in iron ore and despite little movement in the greenback.

Today

The SPI Overnight closed down 29 points or 0.6%. We’re probably due an index pullback, but it could be a jumble among the sectors.

Japan, the eurozone and US will all publish flash estimates of April manufacturing PMIs tonight.

Santos ((STO)) will release its quarterly production report today.

Rudi will link up with Sky Business through Skype this morning, probably around 11.05am to discuss broker calls. Citi is calling for dividend cuts from both National Australia Bank ((NAB)) and ANZ Bank ((ANZ)) over the next few weeks, so that might have an impact in today's session too.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms