The Overnight Report: Conviction Lite

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By Greg Peel

The Dow closed up 36 points or 0.2% while the S&P gained 0.4% to 2173 as the Nasdaq rose 1.1%.

Healthy

Healthcare led the local market up yesterday with a 1.7% rise thanks to a 2% gain for mega-cap CSL ((CSL)) in response to a broker upgrade. Meanwhile, the consumer sectors continue to be the consistent players in the run above 5400 for the index, with both staples and discretionary gaining 1.4%.

One might argue whether staples is truly a “defensive” sector these days amidst the supermarket wars and the sheer size of the major players in the sector, but it seems Woolies is a stock investors find difficult not to hold in a portfolio.

The same could be said for BHP Billiton ((BHP)), which yesterday posted a mixed production report and helped materials down 1.4%, to post the only sector loss. The move down in the big miners was countered by a 1% gain for the banks, for which the story is much the same in terms of “must-haves” of the bygone era.

Were this recent rally to be a cyclical one, we would be seeing a rotation out of some of the defensives many an analyst sees as overbought. But yesterday telcos and utilities continued to rise along with the market.

What we’re likely seeing here is a combination of TINA and FOMO – there is no alternative and fear of missing out. With a central bank safety net under global stocks – and that will likely include another RBA rate cut — there doesn’t seem much risk in holding stocks and there’s no point in suggesting the rally lacks fundamental basis if it’s just going to keep moving higher.

Yesterday’s session represented the ninth gain for the ASX200 in ten.

The Aussie is continuing to go the right way as well, down another 0.6% this morning at US$7463.

Spectators

There may not be too much FOMO going on on Wall Street at the moment given the ongoing graft into new blue sky territory is occurring on very low volumes, even for summer. Commentators make constant reference to historically high levels of US cash on the sidelines but new all-time highs, and bullish talk, has not yet been enough to shift that cash back into play.

Which is interesting considering you basically get no return on your cash in the US.

Microsoft (Dow) was the talk of the Street last night after having posted an earnings beat in Tuesday night’s aftermarket and a 5% gain in last night’s session. Traders were most excited about one particular element of Microsoft’s result, being its suddenly popular cloud business. A successful move into the cloud shifts the tech stalwart more into “new tech” territory from its “old tech” status.

Microsoft’s result spurred a fresh round of tech stock buying on Wall Street last night, as evidenced by Nasdaq outperformance.

Morgan Stanley rounded out the bank sector results with a solid beat, just as each US bank has largely done. MS shares rose 2%.

After the bell this morning, we note Dow stocks Intel and American Express are seeing post-result selling, down 3% and 1.5% respectively as I write. EBay, on the other hand, is up 6%.

We’re still only now getting into the meaty part of the US results season but so far the beats are clearly outweighing the misses. It must be taken into consideration nevertheless – and here the banks are a case in point – that most of the “beats” reflect not-as-bad-as-expected profit declines rather than profit growth.

Yet Wall Street is creating new highs every day.

There is also a growing concern that the VIX volatility index on the S&P500 has fallen to 11, which is typically the bottom of the range and often the contrarian signal for volatility to come. In theory, 11 suggests over-complacency. In practice, it means fewer investors feeling the need to buy downside protection for their portfolios.

While 11 is about as low as it goes, the VIX can hang around the lows for long periods of time. I’d also wager that the current low level is a result of so many investors being burnt on protection they took against a Brexit disaster that lasted all of five minutes, they are wary of making the same mistake twice.

One doesn’t need one’s own put options. The central banks have that covered.

Commodities

It was weekly US oil inventory night last night and for the ninth week in a row, crude inventories fell. Last week’s drop was greater than expected so West Texas is up US37c at US$44.94/bbl.

The US dollar index continues to tick higher, and is up another 0.1% at 97.14 this morning. While the strong dollar is acting as a headwind for commodity prices it’s not yet causing any major dramas. Base metal prices were once again mixed on small moves last night in London, other than a 1.5% fall for aluminium.

Iron ore is unchanged at US$55.10/t.

It’s a different story for gold. Are those assuming EU turmoil, BoJ shock & awe and a timid Fed starting to lose their conviction? Gold is down US$16.40 at US$1315.30/oz.

Today

The SPI Overnight closed up 20 points or 0.4%, matching the S&P500. That would take the ASX200 past the 5500 level.

The ECB holds a policy meeting tonight. There should not be any great surprise if the central bank does nothing, given the world has shaken off Brexit altogether and the euro is lower, which is exactly what the doctor ordered.

It’s a busy night for US data tonight, including existing home sales, house prices, the Philly Fed index, the Chicago Fed national index and leading economic indicators.

NAB will publish a June quarter summary of its business confidence survey today.

Woodside Petroleum ((WPL)), South32 ((S32)) and Evolution Mining ((EVN)) will post production reports today.

Rudi will appear on Sky Business from 12.30pm until 2.30pm today.
 

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