The Overnight Report: Risk Back On

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

By Greg Peel

The Dow closed up 134 point or 0.7% while the S&P rose 0.5% to 2163 and the Nasdaq gained 0.6%.

Hit for Six

I suggested in yesterday’s report that it may not be the day in which the ASX200 manages to breach the brick wall of resistance at 5400. Ultimately I was proven wrong, but it was no simple feat. On my count, the index rose above that level before pulling back to or below that level six times in choppy trading yesterday before the final assault.

At 2pm, just when it looked like the sellers may just win on the day, we turned and rallied to a close of 5411. With Wall Street up again last night, we may cement that breach today, although it’s interesting to note the S&P500 closed up half a percent in the US but the futures are only suggesting 0.1% for the local index today.

Bridge Street has seen its sixth consecutive up-day. But aside from Monday’s big surge, it’s been a grafting, somewhat cautious climb. On the other side of 5400, there’s a bit of a “Now what?” feel.

We actually saw a positive jobs number yesterday. On face value the net 7,900 jobs added fell short of 10,000 expectations but the big surprise was the mix – 38,400 full-time jobs were added and 30,600 part-time jobs were lost. For the past several months, apparently strong employment results have been misleading, given growth has been almost entirely led by the addition of part-time jobs. A job is a job on the ABS count, be it full or part-time. But part-time jobs mean fewer hours worked, thus lower net wages, thus limited positive economic impact.

So to see this sudden and sharp turnaround is heartening. We also saw the unemployment rate tick up to 5.8% because of increased participation – more people trying to find work – which again is an encouraging sign.

It’s not yet enough to suggest inflation is about to pick up again, so there is no reason yesterday’s jobs numbers would prevent the RBA from cutting in August once the June quarter CPI result is known.

After a very strong run this week, the resources sectors finally saw some profit-taking yesterday. Materials fell 1.3% and energy 0.6% to be the only sectors to finish in the red. The banks have also been a significant driver of the rally to 5400, but they had another positive session yesterday with a 0.8% gain. Elsewhere, gains were roughly even, but the defensive sectors continue to remain just as popular, indeed if not more popular, than cyclicals overall.

The new buzz word on acronym-obsessed Wall Street is STUB – staples, telcos, utilities and bonds. With Wall Street at new all-time highs, the outperformers in 2016 to date have been the people who make toothpaste, the people to whom one pays one’s phone, electricity and gas bills each month, and government-issued fixed interest. Investments that quietly yield while carrying limited risk.

In Australia, the picture is not dissimilar, if we substitute the likes of a pizza chain in for staples and toll roads for utilities, for example. The question is: how high can we continue to go on defensives? To get cyclicals up and running again – meaningfully — we need some central bank stimulus.

Some days are Dimon’s

The Bank of England did not cut its cash rate last night, defying an 80% chance priced into the futures market. While this sounds like a trigger for major volatility, it wasn’t.

It wasn’t, because between the time BoE guvna Mark Carney suggested he would likely cut the cash rate and now markets have moved from Brexit panic to Brexit complacency, and from a collapse in the pound to…well…a still-collapsed pound. In other words, the BoE does not need to cut the cash rate to stop a market crash, nor to try to force currency devaluation. Markets have recovered and the pound has re-based, which alone should provide the additional economic stimulus the UK needs through this ongoing period of uncertainty.

The response on the UK stock market was a 0.2% fall. The response on Wall Street was…hey did you see JP Morgan’s result!

Right up to the last minute, analysts were marking down their forecasts for JP Morgan’s (Dow) June quarter earnings. We could thus say it was always going to be easier to post a “beat”, but as it was the bank’s result was very impressive not just in its EPS, but in the breakdown of where it made money and where it didn’t lose it. Most notable was a solid performance in consumer-related banking, and most comforting was no attempt to use Brexit as any sort of excuse.

The US banks have been enjoying a rally back from initial Brexit lows, just as Australian banks have been doing, and as such have been leaders in the push to new all-time highs. The banks themselves are nevertheless a very long way from all-time highs. JPM’s result helped float all US banks last night and thus lead this latest move into blue sky. Tonight sees results from Wells Fargo and Citigroup.

The other talking point on Wall Street last night was the June producer price index release. It posted the biggest jump in more than a year in rising 0.5% on the headline against 0.3% expectation. It was all about the oil price rebound nonetheless, and the core PPI remains in the doldrums.

Wednesday night on Wall Street saw a bit of a pause, as stock indices steadied and a bit of money flowed back into bonds and gold. It was as if Chris Froome had come off his bike and had to jog for a bit. Last night saw the stock rally kick back in, gold fall back again and the US ten-year yield rise 6 basis points to 1.53%, as Froome got back on a bike.

Commodities

The US dollar index is down 0.3% at 96.09 following a mild bounce in the pound on no rate cut. But gold is down US$7.70 at US$1334.60/oz.

Copper took a breather last night in a session which saw all other base metals mildly higher.

Iron ore fell US70c to US$58.00/t.

West Texas crude rose US39c to US$45.50/bbl.

The Aussie is 0.4% higher at US$0.7633.

Today

The SPI Overnight closed up 6 points. It’s a Friday, we’ve had six up-days in a row and we’re sitting just above what was major resistance. A bit of profit-taking today?

Beijing may have something to say about that. China’s June quarter GDP result is out today, alongside June industrial production, retail sales and fixed asset investment numbers.

Retail sales will also be in focus in the US tonight, amidst the big earnings reports.

On the local stock front, Whitehaven Coal ((WHC)) and Mt Gibson Iron ((MGX)) post quarterly production reports today.
 

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