The Overnight Report: Mystery Rally

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By Greg Peel

The Dow closed up 222 points or 1.3% while the S&P gained 1.3% to 2084 and the Nasdaq rose 1.3%.

Rotation

For a long time analysts have been suggesting the strong rebounds in oil and iron ore prices these past couple of months would not last given the fundamentals remain unsupportive in the medium term. Yesterday’s action on the local market smacked of investors suddenly fearing they might be right.

The energy sector closed down 2.3% and materials 2.0%. Yet the index closed up 0.4%, so clearly there were offsetting trades. But they were hardly market-wide.

Every other sector closed the day little changed except two – the banks (+1.5%) and telcos (+0.9%). Here we see a very old-fashioned “rotation” trade among Australia’s mega-caps, out of resources and into the banks and Telstra.

With the bank reporting season now out of the way the market knows where the sector stands. Yields on offer are still hard to ignore and become even more attractive if the RBA cuts again. If the RBA is not already set to cut again, lower commodity prices provide further impetus. It must be noted that lower rates are a drag on bank earnings, but rate cuts provide the opportunity for the banks to reprice their mortgage rates, ie not pass on the full cut.

Telstra has its issues in adapting to a more competitive industry but still pays a hefty fixed-quantum dividend that analysts expect to rise further very soon.

Oil prices rebounded solidly overnight, so it will be interesting to see what the rotators plan to do today. Iron ore fell sharply again nevertheless.

Commodities

Last night the US Energy Information Administration issued a report which raised its 2017 average WTI price forecast by a whopping 25% to US$50.65/bbl. This seems to counter current fears that ongoing excessive OPEC production will only send prices lower again.

But in actual fact, the EIA also raised its 2017 US production forecast to 8.19m barrels per day from a prior 8.04m. The difference is in the rarely discussed demand side. The EIA believes growing demand out of China and India will usurp increased production to the extent prices will rise.

This was one reason to buy oil again last night, after having sold it the night before. Another reason was supply outages, specifically in Canada, where fires have shut down 1.6m barrels per day of production that will take a week to restart, and in Nigeria, where an escalation of hostilities have prompted Chevron and Shell to evacuate non-essential staff.

This was enough to send West Texas crude US$1.31 or 3% higher last night to US$44.55/bbl and Brent up US$1.84 or 4% to US$45.47/bbl.

No one paid much attention to Kuwait, which last night announced a targeted 50% increase in production over the next four years.

Base metals quietened down last night having tumbled on Monday night. Lead, nickel and zinc rebounded slightly while aluminium, copper and tin held their ground.

Iron ore fell US$1.40 or 2.5% to US$54.20/t.

The US dollar index ticked up another 0.1% to 94.24 and gold is relatively steady at US$1265.30/oz.

The Aussie has bounced back somewhat after its precipitous fall, up 0.8% at US$0.7372.

Technical

The rebound in the oil price was enough to provide a lift on Wall Street last night but now that the direct correlation has faded, commentators were left scratching their heads as to why the US indices had their best session in two months. If anything, recent talk has been of the rally running out of steam.

There may be some clue in the fact three Dow components hit new all-time highs last night – McDonalds, Johnson & Johnson and Home Depot. The three consumer stocks are all consistent yield payers (In Wall Street Land, 2% is considered “yield”), and their strength would suggest ongoing reverberations from last week’s soft US jobs number and subsequent assumptions the Fed will not move in June.

But perhaps the real clue lies in the fact all of the Dow, S&P and Nasdaq posted equivalent 1.3% gains. Such consistency is rare. Traders noted that resistance in the broad market S&P500 was breached at 2074 thanks to the energy sector, opening the door to the next resistance level of 2082. The S&P bumped up against that level for a while before finally settling at 2084.

When 2074 was breached, the computers kicked in. Computers tend not to be stock pickers but market-buyers. At 2082, the computers took profits, but by then momentum traders were in on the act and probably FOMO traders as well.

(Fear of missing out.)

But when all is said and done, in a world where economic data is soft and corporate earnings are weak, central bank stimulus rules.

Today

The SPI Overnight closed up 30 points or 0.6%, no doubt anticipating a rebound in the local energy sector today.

Local housing finance data are out today for March, while Westpac will release its monthly consumer confidence survey.

CSR ((CSR)) will post its earnings result today.

News overnight that the Thailand government has ordered the Chatree gold mine closed will no doubt impact on the share price of Kingsgate Consolidated ((KCN)) today.
 

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