Daily Market Reports | Jul 13 2016
By Greg Peel
The Dow closed up 120 points or 0.7% while the S&P gained 0.7% to 2052 and the Nasdaq rose 0.7%.
Resistance
Two weeks ago we were worried about the ASX200 falling through 5100. Yesterday the index had a good look at 5400. And to a great extent it’s all about politics.
Eight years ago Barrack Obama said “Yes we can”. On Monday night the Tories said “Theresa May”. At the height of Brexit concerns, and the depth of global markets, the transition from David Cameron to new UK prime minster was expected to take three months. But Cameron is currently wrapping the glassware and souveniring ash trays as we speak.
May may have been anti-Brexit, and bears a scary resemblance to a certain predecessor, but her rapid ascent to PM has ended at least one period of Brexit-related uncertainty. Presumably the Brexit button will now be pushed, but markets have come to acknowledge that the process of exit is actually going to take time, and that time has the capacity to smooth the transition.
On the weekend the Abe government won a landslide victory in the Japanese upper house. On Monday Malcolm Turnbull achieved a majority. That’s actually yet to be confirmed, but who would argue with Anthony Green?
Political uncertainty has thus been dampened. Political certainty means fiscal mandate. Fiscal policies, backed by central bank monetary support, are shortly expected to be underpinning the economies of Japan, China and perhaps even Australia. The bottom line is there’s no reason not to buy stocks.
The ASX200 scored a ton on Monday, and yesterday waved its bat at 50 points up before the air became a bit rarefied. The 5400 level has been brick-wall resistance these past few months. At 5391, the profit-takers moved in. And fair enough – there were plenty of profits to be had.
As the index fell back to close up only 16 points, profits were taken on the cyclicals that have led this recent surge. But defensives continue to be sold, underscoring the “risk on” nature of this rally as opposed to the yield-driven rallies of the previous months. Banks, as I noted yesterday, sit somewhere in between, and closed higher again yesterday. Materials won the day with another 0.9% jump.
Materials is set for another good session today, assuming the stock market hasn’t already jumped the gun. Global stimulus is a boon for commodities prices. Base metal, iron ore and oil prices all surged overnight. The offset is gold – which is not a commodity but a currency – which has fallen overnight in “risk on” fashion.
NAB released its June business confidence survey yesterday, which was conducted post-Brexit but pre-election. Despite the volatility Brexit unleashed, the confidence index (looking ahead) rose to 6.1 from 3.0 in May and the conditions index (right now) rose to 12.0 from 9.7. Stock markets like business confidence. The RBA also pays attention as well.
Sky’s the Limit
Last night the Dow closed at 18,347, above the previous all-time closing high of 18,312 set in May last year. The Dow briefly traded above the all-time intraday high of 18,351 before slipping back a tad. At 2152, the S&P500 has breached 2150 resistance and is now trading in blue sky. The S&P mid-cap and S&P small cap indices also traded up to all-time highs last night, suggesting the rally has breadth.
Supporting the breadth were relatively solid volumes on Wall Street last night. Rising volumes at new highs have chartists all excited. The Nasdaq is still short but is back over 5000 and as of last night, back in positive territory for the year. Still lagging is the Russell small cap, which contains a lot more smaller caps than the S&P small cap, and the Dow Transports.
Proponents of Dow Theory would suggest the rally in the Dow Industrials cannot be sustained unless the Dow Transports is leading the way. Proponents of Dow Theory wear boaters and striped jackets and dance the Charleston.
Confirming the swing to “risk on” in the US were last night’s twenty dollar fall in gold and a further 8 basis point jump to 1.51% in the US ten-year yield. The US Treasury has been holding bond auctions this week and suddenly the buyers have disappeared.
Wall Street’s rally of the past two sessions has come without any economic data releases of note and just the one earnings report from a major cap company. Alcoa posted a beat. JP Morgan will report on Thursday night.
What will derail the rally? Well, that’s the scary part. It’s being driven by central bank smoke and mirrors. To justify the surge in global PEs we’ll need to see supportive, hard fundamental evidence. This particular US earnings season will be an important one.
Commodities
West Texas crude is up US$1.87 or 4% at US$46.62.
Aluminium closed up 1.5% on the LME, copper, lead and zinc 2.5% and nickel 4%.
Iron ore closed up US$3.40 or 6% at US$58.80/t.
Gold is down US$21.60 at US$1332.70/oz.
All commodity price movements occurred on a flat US dollar index, unmoved at 96.52.
Far from unmoved is the Aussie, which is up another 1.2% at US$0.7623. Over to you Glenn.
Today
The SPI Overnight closed up 30 points or 0.6%. 5400 is 57 points away.
China’s trade numbers for June are out today.
Westpac will release its June consumer confidence survey result.
The Fed will publish its Beige Book tonight.
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