The Overnight Report: Flip Flop

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By Greg Peel

The Dow rose 113 points or 0.6% while the S&P gained 0.5% to 2109 and the Nasdaq added 0.5%.

Interest Rate Tango

Three factors impacted on the local market yesterday: Friday night’s weak US jobs number; yesterday’s weak local inflation gauge; and the storms wreaking havoc on Australia’s east coast.

While Wall Street would have been surprised if the Fed chose to hike again as early as this month, Friday night’s shockingly weak US jobs number left markets in no doubt it’s not going to happen. Janet Yellen has since implied as much overnight. This has two implications for Australian stocks.

Firstly, the resultant plunge in the US dollar lifted commodity prices and in particular the gold price, lighting a fire under the materials sector yesterday. While gold stocks rallied hard, 4% gains for both BHP Billiton ((BHP) and Rio Tinto ((RIO)), thanks to stronger iron ore and copper prices, helped drive the materials sector up 3.8% to be the clear winner on the day.

Secondly, a move up in US rates makes Australian yield stocks incrementally less attractive to US investors, hence the fact the weak jobs number has killed that off for now provided incentive to buy the yield-payers, being the banks, utilities, consumer staples and to some extent, BHP and Rio. Telcos should also be in that group, but they stayed put yesterday, probably because of weekend outages due to the storm.

The flipside of no US rate hike being positive for yield-payers is an RBA rate cut also being positive for yield-payers. From May into June we’ve seen expectations of further RBA rate cuts leap up on the weak March quarter CPI result and fall back again on the strong March quarter GDP result. Yesterday the Melbourne Institute’s monthly inflation gauge showed a 0.2% fall in headline inflation in May.

That follows April’s 0.1% gain, and takes annual inflation to 1.0%, down from 1.2% in April. That’s the lowest annual reading ever in the history of the gauge. Result? The market is now back to expecting further RBA rate cuts – not today, but probably in August and beyond.

So yesterday the yield-payers were more attractive on two counts. At 0.3%, yesterday’s rise in the financials sector reflected a balance between bank buying and insurance company selling, thanks to the storm. Consumer discretionary missed out, likely due to the impact on retail trade, albeit this sector often sees benefits down the track as affected households look to replace damaged furniture, whitegoods et al.

Add it all up and we saw a 0.8% gain for the ASX200 to 5360. The lead-in is positive again overnight, suggesting further upside today. Technically, if the market holds above 5350 the trend remains to the upside.

Coming Months?

Wall Street opened higher last night before settling down to await a speech by Fed chair Janet Yellen which by coincidence happened to be scheduled for one trading day after the weak jobs number.

In her speech, Yellen echoed the view of many in the market that one should not read too much into one strange looking data release, ie the surprisingly weak May jobs number, but instead concentrate on the trend. Assuming the trend remains intact, the Fed still intends to raise interest rates.

Yellen also confirmed the view of many in the market that the next hike will not be this month, ahead of the Brexit vote. The Fed chair made specific mention of the potential of this event to impact heavily on market sentiment. July would then tighten in the odds, but for one rather glaring omission.

In her previous speech, Yellen had underscored the more hawkish views of her FOMC colleagues in suggesting the next rate hike would occur in “the coming months”. Now, while in theory every month is “coming”, hence this hardly nails down the date, Wall Street took this to mean quite possibly June/July. But last night, all of a sudden, the “coming months” suggestion was gone from Yellen’s rhetoric.

Thus while Wall Street had already assumed the weak jobs number took both June and July off the table, Yellen’s comments, or lack thereof, have now reinforced that view.

This was enough to kick Wall Street on last night to its strongest closing level in 2016.

Commodities

A decent jump in the oil price also contributed to Wall Street strength. Oil did not participate in the post jobs number commodity price rally on Friday night because of the first jump in the US rig count in eleven months. But with Yellen’s effective confirmation, and further pipeline attacks in Nigeria, last night West Texas crude rose US82c to US$49.72/bbl.

Copper was the star base metal on Friday night while the others were caught in the headlights, but last night aluminium and lead rose over half a percent, and nickel and zinc both rose around two percent. Copper had a rest.

Iron ore is up another US$1.10 at US$50.60/t – back above the psychologically critical 50 mark.

Gold had its big move on Friday night and is steady at US$1244.70/oz, thanks to the US dollar index ticking back up 0.2% to 94.04.

The Aussie is steady at US$0.7365.

Today

The SPI Overnight closed up 15 points or 0.3%.

We saw 4% gains for BHP and Rio on the local market yesterday, and in London overnight the big miners each gained 6%. While there’ll be an element of double-counting, gains in iron ore and oil last night should ensure further strength today.

At 2.30pm the RBA will release a policy statement that will leave the cash rate unchanged, so the market will be very eager to read between Glenn Stevens’ lines to gauge whether an August rate cut is still a likelihood.

Meanwhile, as the storm rages on through Tasmania and damage begins to be assessed in Queensland and NSW, the scramble is on amongst analysts to figure out which of the insurers will be hardest hit and by how much, and which have sufficient reserves set aside.

Rudi will link up with Sky Business via Skype at around 11.15am today to discuss broker calls.
 

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