The Overnight Report: Awaiting Jobs

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By Greg Peel

The Dow closed down 2 points while the S&P closed flat at 2164 and the Nasdaq rose 0.1%.

Dead Cat

Yesterday saw yet another session on the local market in which the index took off sharply in one direction on the opening rotation, only to reverse steadily throughout the day. Yesterday the ASX200 shot up 44 points from the open before managing a mere 10 point gain by the close.

It seems the computers decided early that all would be forgiven following Wednesday’s steep falls and we’d be back on track towards the highs once more, but investors had other ideas. It is interesting to note, as revealed in yesterday’s Short Report, that the prior rally up to 5600 featured widespread reductions in short positions across the market, suggesting once the nervous shorters were cleaned out, there was no real reason to be there.

Hence we saw the plunge on Wednesday to more realistic valuations and hence yesterday’s attempts at a rapid reversal were thwarted. The futures are stronger again this morning but it would appear, as results season begins to unfold, the market is where it wants to be.

The bulk of the index gain yesterday came down to a 2% jump for energy following oil’s recovery off the US$40/bbl mark. Volatility ensures energy could just as easily be down by as much in coming sessions. Healthcare was the big underperformer yesterday, falling 1.2% as investors took profits on CSL ((CSL)) in particular. Having been slammed these past few sessions, consumer discretionary managed a 0.4% gain.

Which was counter to the data released yesterday. Consumer staples also rose 0.5% despite June retail sales managing only a 0.1% gain to take annual growth down to a tepid 2.8%.

The result provides justification for the RBA’s rate cut decision but there is nevertheless a misleading element to the low number. Low dollar value of sales is a result of two main factors – very low wages growth and discounting. But given low wages growth, consumers are benefitting from discount wars as an offset, particularly in supermarkets.

There was also good news among the data yesterday, with figures showing inbound tourism to Australia is up a significant 12% year to date. The number of Chinese tourists reached an all-time high. Presumably the number of Poms amidst that total will start to decline given the drop in the pound but hey, who are we to complain?

Fight them on the beaches

Markets were set for an expected rate cut from the Bank of England last night but there was still some nervousness that guvna Mark Carney would not act, having declined to do so at the last meeting immediately after the Brexit vote. As it was, the opposite proved true.

Not only did Carney cut the BoE cash rate for the first time in seven years, to 0.25% from 0.50%, representing the lowest level since 1694, he expanded the bank’s government bond purchase program (QE) and introduced corporate bond purchases as well. And he also introduced an exemption for banks on a long criticised reserve requirement that effectively amounts to double-counting of safe assets.

The extent of the package surprised markets. The FTSE jumped 1.6%, the pound fell once more, and the UK ten-year yield fell to an historically low 0.6%. The German equivalent fell further into the negative and the US equivalent fell 4 basis points to 1.50%.

Wall Street rose from the open on the news but quickly fell again, before posting a very typical pre jobs reports, middle of summer session. Ostensibly no one was quite inspired to do anything much.

Commentators agree that if tonight’s jobs number comes in close to expected, around about 160-180,000, not a lot will happen then either. The number will have to be either as shockingly low as the May number or as surprisingly high as the June number to spark a reaction, and even then, another wild number is going to leave Wall Street doubting the veracity of the data.

Commodities

The drop in the pound saw the US dollar index up 0.3% to 95.81 but unfortunately on the cross-rates, the Aussie is up 0.5% at US$0.7627. It’s all very well to cut the cash rate, but the impact is lost if everyone else does too.

Strength in the greenback helped base metal prices lower, with all of aluminium, copper and nickel falling over 1%.

Iron ore fell US$1.80 to US$58.90/t.

West Texas crude ignored the dollar, and rose US66c to US$41.81/bbl.

Given QE in any major economy is supportive of gold, it also ignored the dollar in moving slightly higher to US$1360.40/oz.

Today

The SPI Overnight closed up 17 points or 0.3%.

The RBA will issue a quarterly Statement on Monetary Policy today, ahead of tonight’s US jobs report.

Capilano Honey ((CZZ)) may buzz in with an earnings report today although I have conflicting dates from different brokers.

Rudi will link up with Sky Business at around 11.05am, through Skype, to discuss broker calls.
 

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