The Overnight Report: Caution At The Top

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By Greg Peel

The Dow closed up 25 points or 0.1% while the S&P was flat at 2152 and the Nasdaq fell 0.3%.

Struggling

On a technical basis, the ASX200 trading at over 5300 since Monday suggests further upside towards 5800 is on the cards. The index still has to get through brick wall resistance at 5400, and thereafter there has to be a fundamental reason to support further gains.

With the world now settling down again following immediate Brexit fears, albeit still wary of further possible bouts of volatility, the local market may need to wait until the reporting season next month to find a new driver. Meanwhile, yesterday’s session may have been positive but there remained an air of caution.

The big movers yesterday were the resource sectors, thanks to big commodity price jumps. Materials was up 2.0% and energy 1.5%. But only three other sectors finished in the green yesterday – the banks, telcos and utilities. All offer yield as their primary attraction, not cyclical growth.

It was not a straight line rally yesterday either. After a spurt up on the opening rotation, interest faded. Late buying then righted the ship. There were also the Chinese trade numbers for June to consider.

Exports fell a slightly worse than expected 4.8% year on year following May’s 4.1% drop. Imports fell 8.4% compared to 0.4% in May, when a 5.0% fall was expected. While the numbers are not very positive there is no great panic, given Beijing is expected to rev up the stimulus any moment now beyond renminbi devaluations.

The index closed yesterday at 5388. Following a flat session on Wall Street and the futures up only 8 points this morning, today is unlikely to be a day to retest 5400. We also had oil falling back last night.

The local June jobs numbers are out today but nothing particularly market-moving is anticipated. There will likely be some caution in the market today ahead of tonight’s Bank of England policy meeting.

For so long, we’ve not been particularly interested in BoE meetings. The UK’s economic surge following the London Olympics brought expectations of a likely rate hike from a post-GFC 0.5%, but that surge soon faded and for the past few years the UK has simply bungled along, stuck on the same cash rate.

Tonight is expected to see a rate cut. BoE guvna Mark Carney has already hinted at one and the local market is pricing in an 80% chance. The risk to global markets, both to the downside and upside, is either no cut or a full 50 basis points to zero. A 25bps cut will no doubt be a non-result.

Let’s see some results

If Australia now needs to wait for results season, the same is true on Wall Street where quarterly results are now trickling through. So far we’ve seen earnings beats from Alcoa and rail company CSX, while fast food conglomerate Yum Brands is up around 5% in the aftermarket as we speak, having reported after the bell.

It’s early days, and as late as last night analysts were still downgrading their expectations for JP Morgan’s result, due tonight. JPM will be the first of the big banks and first Dow stock to report.

Having hit new highs in the S&P and Dow, Wall Street stalled last night. In Tuesday night’s session we saw a rush out of the safe havens of gold and Treasuries but last night gold clawed back ten dollars and the ten-year yield fall back 4 basis points to 1.47%.

This week’s US Treasury auctions of three-years and ten-years struggled to find any buyers. Last night’s thirty-year auction was a different story. Buying interest was the strongest it has been since September last year for a yield of 2.17%. That’s not a lot more than the current inflation rate but if we bear in mind last night Germany issued its first ever ten-year bund with a negative coupon, and that Swiss fifty-year bonds are currently trading negative, a 2% thirty year backed by the US economy looks like manna for pension fund managers at this time.

But that 2.17% settlement rate is still the lowest on record. Welcome to the new normal.

The latest Fed Beige Book was released last night. This anecdotal assessment has had US economic growth fluctuating between “modest” and “moderate” for so long now traders have stopped taking any interest. Never has a publication been so aptly named.

Commodities

It was that time of the week last night when the US weekly oil inventory numbers are released, and as usual they surprised. The drawdown on crude was not as big as expected and persistently high levels of gasoline stocks in the middle of summer have the market concerned.

Having jumped 6% on Tuesday night, West Texas crude is currently down US$1.51 or 3.2% at US$45.11/bbl. Having tried and failed at 50, it looks like 45 will be the pivot level for WTI for the time being.

Copper kicked on with a further 1% gain last night on the LME but nickel and zinc fell back 1%.

Iron ore fell US10c to US$58.70/t.

Gold is up US$9.60 at US$1342.30/oz with the US dollar index down 0.2% at 96.35.

The Aussie is off 0.2% at US$0.7606.

Today

The SPI Overnight closed up 8 points.

As noted, the local jobs numbers are out today but the big drawcard is the BoE meeting tonight.

Iluka Resources ((ILU)) and Transurban ((TCL)) will post quarterly reports today.
 

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