The Overnight Report: Greenback Worries

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By Greg Peel

The Dow closed up 25 points or 0.1% while the S&P lost 0.1% to 2163 as the Nasdaq fell 0.4%.

Not the Whole Nine

The minutes of the July RBA board meeting revealed the board’s opinion that “the transition of economic activity to the non-resources sector was now well advanced and recent data suggested that growth had continued at a moderate pace in the June quarter”. However, recent data has also suggested that the labour market has been “more mixed of late”, inflation is expected to remain “quite low for some time”, the housing market has become “somewhat mixed” and the stronger Aussie continues to “complicate” policy.

The board now awaits upcoming data on inflation, labour and housing due before the August meeting. “This information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”.

In other words, economists are still expecting an August rate cut.

It was around the time of the release of the minutes yesterday the ASX200 began to slide into the negative, not that they likely had any influence, killing off hopes of a ninth straight day of gains. At the index level, a fall of 7 points is hardly momentous nonetheless. The higher markets rise in a single run the bigger the inevitable pullback is going to be.

A minimal move for the index nevertheless belied some largish sector moves. The loser on the day was materials, down 1.8% on a lower iron ore price and otherwise profit-taking after a solid run. Materials was the negative that cancelled out decent moves up for energy and the consumer sectors but the star on the day was utilities, up 1.7%.

How crowded can the yield trade become?

Having broken up through 5400 resistance, the index is now looking a little hesitant at 5450. Once again there has been no lead from Wall Street overnight, and the futures are again up just the one point this morning.

The good news is the Aussie has dropped a percent to US$0.7504 on a combination of yesterday’s RBA minutes and a further surge in the greenback overnight. Attention is now firmly back on the Fed, which meets next week. The US dollar is adjusting for Brexit-related pound and euro weakness and assumed policy action from the BoJ to cap the yen on the one hand, and improving US data on the other.

In other words, rate hike talk is back. It would be interesting if the Fed were to hike next week as that might act as a proxy for an RBA cut, at least in terms of the currency. But September is considered more likely for the Fed, if at all, hence the RBA will have to make its decision first.

Stalled

Wall Street continued to go nowhere last night although the Dow did manage to notch up a sixth straight gain into further blue sky. The offset for the broad market S&P500 can be seen in the Nasdaq, which was dragged down by a 14% fall for Netflix following its disappointing result and a subsequent market reassessment of streaming businesses.

On the other side of the coin, plodding old consumer staple Johnson & Johnson (Dow) posted an earnings beat and provided upbeat September quarter guidance. Goldman Sachs (Dow) matched its bank peers with an earnings beat but its shares were off on the day, likely because the market repriced the banks last week following JP Morgan’s strong result.

On the data front, US housing starts rose a better than expected 4.8% in June. It was this release that helped the US dollar index rise to a four-month high, up half a percent to 97.03.

The greenback was the big talking point of the day on Wall Street. Much was made last year of the currency drag on US multinational earnings as the dollar surged in the December quarter ahead of the Fed rate hike. At that time the index just pipped 100, before the early 2016 commodity slide brought it back to earth once more and killed off further Fed rate hike expectations.

When the index crossed back over 97 last night it was a trigger for renewed concern. The age-old Catch-22 for any market is that a strengthening economy is good, but a strengthening currency is not so good if you are an exporter.

Commodities

Materials and energy were among the sectors in the red on Wall Street last night as a result of the stronger greenback. West Texas crude fell US63c to US$44.57 to drop below the low end of the recent range at 45.

For base metals it was not necessarily a case of blindly responding to the US dollar, nonetheless. Trading was relatively quiet on the LME ahead of Thursday night’s ECB meeting but there was a nod to the strong US housing starts number, which was the cause of dollar strength. Copper and zinc rose 1%, aluminium fell 0.5% and the others were flat.

Iron ore fell by another US$1.10 to US$55.10/t.

Gold is not blindly responding to the dollar either, but if the dollar continues to rise the headwinds will blow stronger. Immediate Brexit fears may now have passed but there is no reason to assume there will be no fallout whatsoever, which is likely what’s keeping investors in the safe haven for the time being. Gold is up US$3.20 to US$1331.70/oz.

Today

The SPI Overnight closed up one point.

Yesterday’s production report from Rio Tinto ((RIO)) was more “okay” than great but on a weaker iron ore price, profit-taking in the sector was always on the cards. The iron ore price is down again, and BHP Billiton ((BHP)) has just reported today.

Woodside Petroleum ((WPL)) also posts its production report today, Cimic ((CIM)) already jumped the gun with a pre-season earnings result yesterday, and yield lovers will be glued to Sydney Airports’ ((SYD)) June traffic stats.
 

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