Daily Market Reports | Jul 08 2016
By Greg Peel
The Dow closed down 22 points or 0.1% while the S&P lost 0.1% to 2097 and the Nasdaq rose 0.4%.
Inevitable
There is much talk at present on US business television of the runaway performance of the S&P500 utilities sector over the past two years, in which downstream energy companies for example can offer, heavens above, yields in excess of 4%! And inevitably there is also much talk of this sector, and to a lesser extent the similar telco sector, being overpriced and a dangerous space to be buying into right now.
The Australian utilities sector can offer yields of 7% or more, particularly from infrastructure funds, when the differential on the US-Australian cash rate is only 1.5%. Thus it is no surprise the local utilities sector has also outperformed, and very much outperformed in the latest round of plummeting global interest rates post Brexit.
Yesterday saw a choppy session in the local market but ultimately every sector finished in the green. Except, that is, for utilities, which fell 0.9%. Telcos rose 0.5% but unlike the S&P500, in which telcos are not a big market cap, the gorilla that is Telstra is a must-have for any index fund and any offshore “Buy Australia” trade.
It was a good day for the banks, resource sectors and consumer sectors yesterday. Unfortunately it may not be so today. Late yesterday, ratings agency S&P put the country and the big four banks on negative watch implying, in the case of the country, the possible loss of a coveted AAA rating.
S&P has banks across the globe in the spotlight post-Brexit so no surprise there. These fools are geniuses when it comes to telling companies the risks have increased after the risks have increased. Pre-GFC, a brown envelope would have sorted the issue. In the case of the country, it’s all about political uncertainty post-election. There was likely some influence in yesterday’s rally from the ongoing improvement in the Coalition’s seat-count, and the increasing possibility of a majority government.
So not that much to worry about. The Aussie took a dive on the news but has since recovered to only be down 0.5% over 24 hours at US$0.7478, with the US dollar index up 0.2% at 96.24.
As to how investors respond to the banks today is another matter, if capital raising fears return. Meanwhile, a near 6% plunge in the oil price overnight does not bode well for energy today, which was yesterday’s outperformer with a 1.6% gain. Metals prices are also lower this morning, including that of gold.
Wall Street may have closed a little weaker but a 0.4% drop in the futures hints of greater weakness locally.
All About Jobs
With the pound now trading below 1.30 to the US dollar, the FTSE 100 continues to rally. It was up another 1.1% last night. It is also hoped that the weaker euro can help overcome both Brexit-inspired risk in the EU and last night’s news German industrial production took a dive in May, pre-Brexit. The German market still managed at 0.5% rally.
Wall Street opened to the upside last night, sending the S&P500 clearly through the 2100 resistance level. But then the weekly US oil inventory numbers came out.
US oil inventory numbers are a strange thing. Every week, early in the week, the American Petroleum Institute publishes its assumption on inventory changes from the week before. Then later in the week, the Energy Information Agency publishes what are considered to be the official numbers. And rarely, if ever, do the two correlate. Indeed often the results are wildly different.
On Thursday night the WTI price rallied on the expectation of a bigger than expected drawdown last week, which makes sense at the height of the summer driving season. Last night the EIA numbers indicated that the drawdown was only about average – in other words, a lot less than the market had priced in. Thus WTI plunged, it is currently down US$2.72 or 5.7% at US$45.19/bbl.
Week on week numbers may be influential but the reality the oil market is facing is that when WTI trades up to 50, some of those rigs that were shut down over the past year are fired up again.
On the back of the oil price, the Dow fell from being up 66 to being down a hundred. But then it quietly made its way back.
The ADP private sector jobs number for June came in at 172,000 when 158,000 was expected. The forecast for tonight’s non-farm payrolls number is 210,000, which is a big step up from May’s shock 38,000. Not only will the June number be very much in focus tonight, but so too will be the inevitable revision to the May number. Revisions of US data can often be very substantial given the rush to get some sort of early guesstimate out as quickly as possible.
If it is a big number, and big revision, tonight, do we go back to expecting a September Fed rate rise? Or has Brexit put the kybosh on that concept now for the foreseeable future?
That is the question no one can answer right now. Tonight’s market response will indeed be interesting.
Commodities
As noted, West Texas crude is down US$2.72 or 5.7% at US$45.19/bbl.
Base metal prices were all weaker in London, with copper leading the way down 1.6%.
Iron ore fell US60c to US$55.20/t.
Gold finally had a down day, but only by US$3.40 to US$1359.80/oz.
Today
The SPI Overnight closed down 21 points or 0.4%.
The world once again awaits the US jobs numbers.
Beijing will publish Chinese inflation data on the weekend.
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