The Overnight Report: Going Nowhere

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By Greg Peel

The Dow closed down 15 points or 0.1% while the S&P gained 0.2% and the Nasdaq rose 0.3%.

Risk On?

The ASX200 is not exactly shooting the lights out at the moment but the bias clearly remains to the upside. The index has spent the week grafting its way to 5550 from 5500 with the technicals still suggesting higher levels to come.

The Brexit blip notwithstanding, the longer run rally from below 5000 to yesterday had initially been led by defensive stocks, with the big cap banks and miners dipping and recovering at different times. I have made mention often enough of how the utilities sector just kept rising and rising.

Analysts were already struggling with valuations among the defensives, while at the same time conceding the fact global interest rates continue to fall, the Fed continues to stall, and the RBA may yet act again. So throw out your historical PE comparisons – what’s the point when the German government is issuing zero coupon ten-year bonds? We have never been here before.

But on Wednesday we finally saw some selling in the local utilities sector and yesterday that continued. The banks have quietened down now with Commonwealth Bank’s ((CBA)) result, due in a couple of weeks, set to be the next catalyst other than a rate cut next week.  Yesterday’s big movers were materials, up 1.5% consumer discretionary, up 0.8%, and energy, down 1.0%. Everything else was pretty quiet.

Energy fell on the oil price and that currently is looking a bit vulnerable but solid iron ore prices, resilient gold prices and some strength in base metals have seen materials now taking the lead. This is cyclical, not defensive, as is consumer discretionary, which of course would benefit from another rate cut.

Central banks are driving global markets. They are the “free put”. If the defensive yield plays have now stretched about as far as they can, even under the new world order, will it be cyclicals that take us back to 6000? That, supposedly, will depend on result season.

Stalled

And on the subject of earnings, Ford (Dow) shocked all and sundry last night by posting a weak result and disappointing guidance. Its shares fell 8%, and ensured the Dow was down over hundred points early in the session in a dour mood.

The result was a shock because US car sales have been posting record after record every month and providing some hope for the US economy. But on the one hand there are concerns about the growing number “subprime” car loans being issued, and on the other, it turns out Ford has been forced to offer huge money-back incentives in order to post those record sales numbers. Globally, Ford cited the China slowdown as also being a drag.

However, General Motors reported earlier in the season and beat on expectations. So maybe Henry just needs to have a good look at himself. Whatever the case, and as so often has played out these past couple of weeks, Wall Street grafted its way back through the session to a relatively flat close.

The past ten sessions of almost no close-to-close movement is the tightest in a couple of decades.

US earnings season is at the halfway mark, with just over 50% of S&P500 companies having reported. So far, everybody’s pleased. The quarterly decline in earnings to date is closer to 3% than the 6% forecast pre-season.

Just don’t tell anyone the same has been happening every quarter for some time now. Forecasts are marked down and down and down until most companies can’t help but beat.

Wall Street may be pleased, but it’s still not going anywhere.

This mornings after-the-bell results have included a beat from Amazon which has its shares up 2%, and a strong beat from Google parent Alphabet, which has its shares up 4%.

One obvious drag on Wall Street at the moment is oil. Following another 2% fall last night, WTI is close to its 200-day moving average. If that breaks, commentators assume the oil-stocks correlation of early 2016 will reassert itself.

Commodities

West Texas crude is down US81c at US$41.10/bbl.

The US dollar index is only down 0.1% at 96.68 but base metals had a strong session last night following a couple of weaker ones. There is likely positioning going on ahead of today’s BoJ meeting for which great expectations are held, and in between there’s the Filipino nickel industry story.

Nickel rose 3% in London last night, zinc 1.5%, aluminium 1% and copper 0.5%.

Iron ore rose another US$1.20 to US$59.20/t.

After jumping sharply post-Fed on Wednesday night, despite the Fed remaining as inconclusive as ever, gold is back down US$5.10 at US$1334.60/oz this morning.

The Aussie is 0.2% higher at US$0.7504.

Today

The SPI Overnight closed up 8 points.

As I have noted before, whenever the world is expecting shock & awe from the BoJ the central bank usually does nothing, but often catches everyone out another time when expectations are negligible. Expectations are very high that today the BoJ will do something significant on the monetary front, to be followed up next week by something significant from the government on the fiscal front.

Stay tuned.

Locally we’ll follow up Wednesday’s June quarter CPI result with the PPI today, along with month of June private sector credit.  Japan will dump a lot of monthly data and the BoJ meets, and tonight sees first estimates for June quarter GDP in both the eurozone and US.

Origin Energy ((ORG)) is among those posting the last of the production reports today.

Rudi will Skype-link with Sky Business around 11.05am today to discuss broker calls.
 

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