The Overnight Report: Earnings Bite

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Greg Peel

The Dow closed down 217 points or 1.2% while the S&P fell 1.0% to 2064 and the Nasdaq lost 1.0%.

Technical Madness

It was another case of the computers going nuts from the opening bell on Bridge Street yesterday, this time to the upside, sending the ASX200 up 83 points in a blink. By midday the index was only up 27 points – basically where it ended the session – suggesting that’s about what where we should have been from the start.

Yes, it had been the biggest day on Wall Street in two months and oil prices were higher, likely triggering the algorithms as the rest of the market stood aside. It is becoming increasing dangerous to play the opening rotation – something ASIC should be having a chat to the ASX about. But Wall Street’s rally was largely technical, and itself computer-driven, and lo and behold the ASX200 breached a longstanding upside technical target of 5400 from the open before the buying simply disappeared.

Back on earth, we saw the rotation trade of Tuesday – selling resources and buying yield through the banks and telcos – partly reverse. Interestingly, it was materials that fully reversed, rising 2.7% despite another fall in the iron ore price, while energy managed only a 0.3% recovery despite a higher oil price. The banks only fell back 0.1% and the telcos actually rose again, up 0.5%.

Put it down to chatter from CEOs yesterday but clearly the “value” players have been out in force since the bottom of the market earlier this year, buying up beaten-down large caps because they lack the imagination to see that often the world actually changes. Thus stocks like BHP Billiton ((BHP)) and Woolworths ((WOW)) had another good run yesterday and have had very good runs all the way from the bottom. Money has certainly been made in the short term, but what of long term trajectories?

One problem is the “growth” stories of 2015 have to a large extent run too far away in 2016, leaving investors disinclined to play at stretched PEs. This has been reflected in the past couple of weeks in the number of ratings downgrades implemented by major broking houses for no other reason than over-valuation. Yet by the same token, short-side traders are also abandoning the market. The shorters have been increasingly burnt, it appears, and for the time being have crawled back into their holes.

The ASX200 has now hit 5400 which on a technical basis, should open up the door to 5700 and ultimately 6000 if the tea leaves are accurate. But what will get us there? Ongoing buying-back of overproducing miners and yesterday’s-model supermarkets? Pushing milk powder and Big Data names ever higher still? A Turnbull victory? Another RBA rate cut?

I’d suggest that if we’re going to see 6000 again we would have to see the economies of China and the US both pick up.

Australian consumers are brimming with confidence nevertheless. Westpac’s confidence index jumped 8.5% this month to its highest level in two years. Mind you, one might see it as “upside-down” confidence. The RBA cut its cash rate, which it wouldn’t do if the Australian economy was strong, and the federal budget produced no howlers, albeit pre-election budgets never do.

Speaking of the RBA, there would have been some head-scratching going on in Martin Place yesterday after March housing loan data showed a resurgence in loans to investors and a drop in loans to owner-occupiers. The central bank was able to cut the cash rate because the opposite has been true in prior months, supposedly taking some heat out of the housing bubble.

Structural or Cyclical?

Iconic US department store Macy’s posted its seventh quarter of declining sales growth last night and missed broker forecasts, sending Macy’s shares down 14% and dragging the whole US bricks & mortar consumer sector down with it, including America’s Bunnings (Home Depot) and America’s Woolies (Wal-Mart), both Dow names.

The question on everyone’s mind was: Does ongoing decline represent the slow death of bricks & mortar retail as online rises, or does it reflect a presently weak US consumer? Commentary tended to favour the latter, although the elephant in the room must be Amazon’s forecast-smashing result posted last month.

If it is the latter, then the US economy is not going to be picking up pace anytime soon.

Meanwhile Disney (Dow) posted a rare earnings miss with its result, and subsequently fell 4%. The combination of Disney and retail turned Tuesday night’s rally on Wall Street, which seemed no more than technical, into a full reversal, this time on reality, despite another strong jump in oil prices.

Commodities

Last night’s weekly US oil data showed a bigger than expected drop in inventories and another reduction in production. As a result, West Texas crude is up US$1.44 or 3.2% to US$45.99/bbl and Brent is up US$1.83 or 4% at US$47.30/bbl.

Just when it looked like oil might head south again, the opposite is true.

And iron ore has also bounced, up US$1.20 to US$55.40/t.

There has been a bit of assistance from the US dollar which, having risen back steadily for several session, last night fell 0.5% on its index to 93.81. This assisted all commodity prices. Base metals were mostly 0.5-1% stronger, although zinc jumped 3%.

Gold is up US$11.40 at US$1276.70/oz.

Despite the drop in the greenback, the Aussie is holding its ground at US$0.7377.

Today

The SPI Overnight closed down 33 points or 0.6%. Not sure what Macy’s and Disney has to do with Australian banks and resources.

The Bank of England will hold a policy meeting tonight but despite some surprisingly weak data of late, is not expected to budge ahead of the increasingly worrying Brexit vote.

Before that we will see AusNet Services ((AST)) post earnings today and Myer ((MYR)) provide a quarterly update. AMP ((AMP)) and Westfield Corp ((WFD)) will hold AGMs.

Westpac ((WBC)) will go ex today which will distort the financials sector performance.

Rudi will make his weekly guest appearance on Sky Business, 12.30-2.30pm.
 

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