The Overnight Report: Consolidation

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By Greg Peel

The Dow closed down 23 points or 0.1% while the S&P was flat at 2090 and the Nasdaq rose 0.1%.

Resistance

After another strong session on Wall Street, the ASX200 shot up 30 points from the bell yesterday, hit a brick wall at 5400, and promptly tumbled just as quickly to be down on the day. After dusting itself off, the index again staged a rally before running into the weak capex numbers.

Again we were in the negative. But ultimately the market grafted its way back to a close of 5388, once again eyeing off the 5400 barrier.

It was a mixed bag among the sectors yesterday. Energy (2.0%) and materials (1.7%) again led the charge to the upside with the banks providing only limited support, while the selling continued in Wesfarmers ((WES)) following prior announced impairments. Hence consumer staples fell 2.1%. Telcos and utilities also came under some pressure.

The headlines have all been typically sensationalist over a weaker than expected March quarter capex result but in fact the numbers weren’t as bad as they looked, if one considers that there are two sets of numbers. There is the “what was” of actual capital expenditure over the period and there is the “what will be” of capex intentions for the next financial year.

“What was” fell a larger than expected 5.2% and will have economists trimming their March quarter GDP forecasts. Mining fell 12% and non-mining rose 0.4%. We can take some solace in the fact the “mining” number must eventually stop falling, although we still have to get past the ramp-up (and subsequent end to capex) of the big LNG projects. Meanwhile, non-mining is just not gaining enough traction to make the difference.

If we look at the “what will be”, the second estimate of FY17 capex intentions came in at a better than expected $89.2bn, up 6.3% higher than the first estimate a quarter ago. Of that $89.2bn, mining accounts for $36.0bn and non-mining $53.2bn. That would seem a step in the right direction.

While the RBA will be keen to have learned just how the Australian economy really did fare in the March quarter, it is capex intentions that inform monetary policy going forward.

Meanwhile, the market still gives the impression it really wants to break through 5400. Perhaps once the profit-taking is exhausted, it might. But today is a Friday, there is no support from Wall Street for another sortie, and this weekend is also a long one in the US, providing cause for traders to square up.

Happy Birthday

The Dow turned 120 years old last night.

While the Dow Jones company was keen for a celebration, Wall Street had no plans to turn on an exciting session. After two solid days of rallying, the Dow took a breather. While going nowhere does not provide much opportunity to make money, traders were nevertheless pleased to see the indices hold their ground in consolidation rather than sharply fall back again, as is often the case.

In economic news, US durable goods orders rose 3.4% in April but stripping out the lumpy transport component left a more modest 0.4% gain. The core capital goods component, which is seen as a proxy for business investment, fell 0.8%, and has fallen in five of the past six months.

So not a particularly rosy picture there. By contrast, the US housing market continues to surge along, with pending home sales jumping in April to their highest level since February 2006. The pending home sales numbers match very strong new and existing home sales numbers released earlier in the week, as well as an ongoing rise in house prices.

The other important driver of Wall Street at present – oil – saw an initial rally last night to push WTI over the 50 mark, but 50 is to oil what 5400 is to the ASX200 at the moment, and this morning oil prices are down slightly from the day before.

It is a full session in US equity markets tonight but the tumbleweeds will be rolling through the NYSE after lunch as Wall Street is evacuated for the Memorial Day long weekend – the unofficial start of summer.

Commodities

West Texas crude is down US34c at US$49.40/bbl and Brent is down US43c at US$49.47/bbl. I think it is now fair to say WTI has regained its place as the global oil benchmark from Brent, now that the spread is negligible and US oil production is the swing factor in global supply. To that end, Brent prices will continue to appear on the FNArena website but I’ll only mention it here from now on if something strange happens.

When WTI breached 50 last night, LME traders decided enough selling had been seen and piled into base metals, sparking a short-covering scramble. When oil retreated again, so did metal prices, but while copper and nickel only managed gains of around 0.5%, aluminium rose 1%, zinc 2.5% and lead 3%.

Metal prices were also supported by another dip for the US dollar index, down 0.3% to 95.15.

Speaking of magic 50 marks, iron ore fell US10c to US$49.90/t.

Despite the weaker greenback, gold is down US$4.50 at US$1219.50/oz and because of the weaker greenback, the Aussie is up 0.3% at US$0.7223.

Today

The SPI Overnight closed up 5 points.

The US March quarter GDP result will be revised tonight and Fed chair Janet Yellen will speak, potentially sparking some volatility that might otherwise be absent on a pre-long weekend Friday.

Locally, Fisher & Paykel Healthcare ((FPH)) has released its earnings report this morning.

Rudi has returned from his up-close evening with FNArena subscribers in good spirits and he will Skype-link with Sky Business at around 11.05am this morning to discuss broker calls.
 

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