The Overnight Report: Oil Wakes The Bear

This story features SEVEN WEST MEDIA LIMITED. For more info SHARE ANALYSIS: SWM

By Greg Peel

The Dow closed down 27 points or 0.2% while the S&P fell 0.1% to 2170 as the Nasdaq rose 0.4%.

Pressure on Glenn

The NSW bank holiday yesterday led to light volume and exacerbated volatility as the local market surged through the morning session like a creature possessed. A near 50 point rally to lunchtime took the ASX200 well past the 5600 mark before gravity finally kicked in later in the day.

The sudden burst of enthusiasm was, supposedly, all about heightened expectations for an RBA rate cut today. Having been a 50/50 bet on Friday, yesterday saw the chances of a cut priced in closer to 65%. It was all to do with that weak US GDP result.

US GDP numbers are prone to being revised, often substantially, in subsequent months. But there is no doubting the 1.2% growth result on first estimate for June shocked a market looking for 2.6%. The US dollar plunged by 1.2% on the news, albeit helped by a stronger yen following the BoJ’s lack of action. And as a result, the Aussie shot back up to US76c.

That’s too high for the RBA, the local market decided. If the US economy is indeed weaker than hoped then the chances of a Fed rate hike in 2016 now seem more remote, therefore the US dollar will not rise but possibly weaken further, meaning the Aussie, through no fault of its own, will remain elevated. This provides the RBA with an ongoing “complication”.

On the other hand, a weaker US dollar is supportive of commodity prices. As to whether such support was worth a 2.7% jump in the energy sector yesterday on only a slight tick up in the oil price is a different matter. Materials managed only 0.9%, which seems more considered. The tune may be different today for the energy stocks after WTI traded under 40 last night.

Take out the resource sectors, and the only other sector screaming “rate cut” was the banks, with a 0.5% gain. Utilities were up, but only by 0.4%, while telcos were the worst performer with a 0.7% fall. Consumer discretionary should be the beneficiary of a rate cut, but it fell 0.1%, likely because it had been on a bit of a tear last week.

Whether or not traders decided over lunch yesterday that 50 points was a bit steep, or whether the Chinese PMI numbers were the cause of the afternoon pullback, is unclear. The Chinese numbers were mixed.

Beijing’s official manufacturing PMI for July fell to 49.9 from 50.0 in June, suggesting the impact of stimulus measures has worn off and the sector is back in contraction. However Caixin’s independent measure, more weighted to smaller businesses, saw a jump to 50.6 from 48.8, suggesting the first sign of expansion since February 2015. Beijing’s official service sector PMI rose to 53.9 from 53.7. Caixin will publish its equivalent tomorrow.

Not a lot of clarity in those numbers, nor any confirmation Beijing will be forced into more frantic stimulus. Most likely traders simply decided yesterday that once the index surpassed 5600, it was a good enough level to take profits. Earnings season awaits, and begins to ramp up by week’s end.

The RBA’s statement will be published at 2.30pm. Data yesterday suggested the Australian housing market is indeed cooling slightly, as prices and sales growth eased. This supposedly provides the RBA with more scope to cut if needs be.

Look out if they don’t.

Atlas Shrugged

If you’re into meaningless labelling, oil is now officially in a bear market. Having traded below US$40/bbl last night, WTI has fallen 20% from its prior peak. Yet for Wall Street, it’s no longer a big deal.

The US manufacturing PMI for July showed a fall to 52.6 from 53.2, and construction spending was down 0.6% in June. In the wake of the GDP report, there’s not a lot to be cheery about with regard the US economy. It was a choppy session on Wall Street, featuring a bit of a midday plunge, but when the dust settled it still appears Wall Street has no impetus to meaningfully correct and the S&P500 remains firmly entrenched in a 2165-75 range.

We’re getting towards the end of US earnings season and to date, 71% of S&P500 companies having reported have beaten on earnings and 51% on revenue. The net earnings decline has been in the order of 3.5% when 6.5% had been forecast. But realistically, US earnings seasons have become like those popular US sitcoms of bygone days that endlessly rotate on cable television.

Every quarter for however many now has seen earnings expectations marked down hard before “surprising” to the upside. Beats on earnings in the order of 60-70% are the norm. The fact remains, US earnings are in recession and revenues have failed to show any sign of actual recovery pretty much since the GFC, on a net S&P500 basis. Yet Wall Street keeps posting fresh all-time highs.

As to why, we only need appreciate that in some cases, US companies are offering a higher yield on their dividends than they are on their bonds. We are in a parallel universe that is unrecognisable. And central banks across the globe have no intention of changing that.

Commodities

Oil had a bit of a blip on Friday night when the US dollar plunged 1.2%, but it was back to business as usual last night as the dollar crept back up 0.3% and the realities of building inventories, and in particular building gasoline inventories at the height of US driving season, re-established. As to just how low oil can go, well that’s a matter of debate. Having suffered the shock of early 2016 and recovered to find a threshold of rig restarts at US$50/bbl, one presumes the downside is relatively limited as those rigs can just as swiftly shut down once more.

And at some point, what everyone has been expecting for nigh on two years now, the global economy must see some benefit from lower energy costs.

West Texas crude is this morning at US$40.08/bbl, down US$1.32 or 3%.

Base metals were again mixed last night, with aluminium falling 0.5% and copper 1%, while nickel and zinc each rose 1%.

But look out, iron ore has jumped US$1.70 to US$60.50/t.

Gold is relatively steady at US$1352.40/oz.

The Aussie’s been on a rollercoaster since Friday night, shooting up to 76 on the greenback plunge but falling back 0.8% in the meantime to US$0.7533 as RBA expectations intensify.

Today

The SPI Overnight closed down 21 points or 0.4%. NSW is back.

Locally we’ll see building approvals and trade numbers today ahead of the RBA’s decision.

The US will see the Fed’s preferred measure of inflation tonight as the PCE is released along with income and spending data.

Earnings reports are due today from a handful of companies locally, including Navitas ((NVT)) and Seven West Media ((SWM)).

Rudi will Skype-link with Sky Business today to discuss broker calls at around 11.15am.
 

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