The Overnight Report: Getting High

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By Greg Peel

The Dow closed up 80 points or 0.4% while the S&P gained 0.3% to 2137 and the Nasdaq rose 0.6%.

Surge

Well it’s amazing what one good US jobs report can do. A reconfirmation of a US economy still growing, a big jump on Wall Street, and Australian banks rise 2.5%. The iron ore price was unchanged, gold little changed, and the materials sector rises 2.9%. But was it about US jobs?

It is likely the rebound in US employment, putting to bed any fears over the May anomaly, was a contributing factor. But for further incentive we can look to a 4% jump in the Japanese stock market on the day.

Many have called Abenomics a failed experiment and with good reason. Everything the government and Bank of Japan has thrown at the Japanese economy has amounted to little to date, and the yen remains stubbornly high. Not that it’s all Japan’s fault, as the country continues to lose out in the global race to the bottom.

Over the weekend Shinzo Abe’s coalition won a landslide victory in the upper house election – something a certain Mr Turnbull would give his right arm for (his right arm, of course, being Tony Abbott). The implication is that Abe has been granted an even more definitive mandate to keep doing what he’s doing. It is now expected the government, fiscally, and the BoJ, monetarily, may be preparing for some shock and awe, after a couple of years of pure frustration.

So tick the box on further Japanese stimulus. China is expected to ramp up its stimulus measures any time soon. The Bank of England is expected to cut its cash rate and/or reignite QE on Thursday night. The ECB is no doubt readying itself for more of “whatever it takes” post Brexit. And despite the strong US jobs number, the Fed is not expected to raise its cash rate due to global uncertainty.

Here come the helicopters. What does one do with all that free cash? Invest in the only market offering a positive return.

There was clearly an element of “risk on” in yesterday’s local rally as well as a search for yield. Cyclical sectors performed well. Defensives were slightly more muted. The banks lie somewhere in between. For all the angst surrounding that sector, it’s impossible to overlook the yields on offer.

And while we tend to obsess over China, it must be remembered Japan is also a major importer of Australian resources.

Back to the future

It was May last year when the S&P500 closed at 2130, which for all that time has been the all-time high. Last night the S&P closed at 2137. It was not a volatile session – the US indices opened higher from the bell and despite a bit of a fade in the afternoon, basically held their ground.

Why did Wall Street rally? See all of the above.

The US rally was also more notably “risk on”, with defensive sectors rising but underperforming, having outperformed for a couple of years now. It was also notable to see the US ten-year bond yield spike up 7 basis points to 1.43% despite the promise of more central bank stimulus around the globe. It would appear some investors elected to remove money from that crowded trade to put into stocks.

Similarly, gold fell back US$11.

So, here we are, back at the high. Now attention will turn to the US earnings season. It will begin to kick into gear later this week.

Commodities

Stock markets may have been surging across the globe last night but it was more of a mixed bag for commodities. The US dollar index rose 0.3% to 96.53 which may explain the US$11.10 fall in gold to US$1354.30/oz but this is most likely due to some unwinding of the safe haven trade.

Copper rose 1% on the LME and nickel 1.5%, but the other base metals barely moved the dial.

Iron ore rose US20c to US$55.40/t.

West Texas crude fell US41c to US$44.75/bbl.

Today

The SPI Overnight closed up 26 points or 0.5%

Locally we’ll see the NAB business confidence survey for June today which I believe would have been conducted prior to the election.

Alumina ((AWC)) will provide a quarterly production report.

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