The Overnight Report: And Pause

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By Greg Peel

The Dow closed down 14 points or 0.1% while the S&P fell 0.1% to 2180 and the Nasdaq lost 0.2%.

Step-Jump

It was actually a very dull day on the local bourse yesterday. The index opened up 40-odd points and that was the end of that. Among the sectors, yesterday’s 40 point rally for the ASX200 looked very similar to Friday’s 20 point gain. Again we saw cyclicals in favour and defensives not so.

Energy was again the winner on the day with a 1.5% gain despite only a slight tick up in the oil price, while materials traded off a big jump in the iron ore price against a big drop in the gold price to rise 0.7%. Telcos were again sold off and utilities slightly, while consumer staples managed only a minimal gain as consumer discretionary jumped a further 0.9%.

The most notable sector on the day was financials, which as I have oft suggested straddle the line between defensive (yield) and cyclical (economic growth). A 1.1% jump was largely due to a surprisingly good result from Bendigo & Adelaide Bank ((BEN)) despite a further squeeze on margins. Bendelaide rose 4% and provided impetus for gains amongst the Big Four as well.

ANZ Bank ((ANZ)) will provide a trading update today and Commonwealth Bank ((CBA)) will publish its profit result tomorrow.

We can put the rally on the day down to the solid US jobs number, and its implications for an improving US economy. But does China’s economy not matter to us anymore? Yesterday Beijing published weak trade data for July and the Australian market shrugged.

Imports to China fell 4.4% year on year in July when a 3% fall was forecast, marking 21 consecutive months of declines. Exports from China fell 12.5% when a 7% fall was forecast, marking twelve months of declines in thirteen.

The data suggest China’s economy continues to slow. Once upon a time the Australian market would have reacted poorly to such numbers, but now we seem to take it in our stride. Why? Well, central banks again. Weaker data simply reinforce the assumption the PBoC and the Chinese government will up the ante on monetary and fiscal stimulus.

At 5537, the ASX200 is still 50 points shy of the end-July high which was followed by a sudden plunge at the start of August when, among other things, the oil price looked to have broken down. Another 2% jump for oil overnight suggests that was just a mirage, and the futures are suggesting further gains for the index today.

Summer Returns

Having recovered from the Brexit scare, Wall Street proceeded to spend a long period in the doldrums just under fresh highs as it traded sideways for a couple of weeks. While the extent of the tight range broke records, traders were not too surprised given it is the height of summer in the US and participation is at a low ebb.

We then saw the brief oil scare followed by Friday night’s rally on strong jobs numbers. Having set new highs, last night Wall Street went back to the beach.

With the earnings season now tailing off and another month’s job numbers in the bag, Wall Street is bereft of further impetus. Traders continue to point to a historically long period without any decent sized pullback which suggests, given new highs, that one must soon be nigh, but this is now a long held assumption with so far no result.

Traders thus concede it is the TINA factor preventing meaningful downside. Yes, stocks might be on the expensive side, particularly where yield is the attraction, but in the unprecedented low interest rate world there is no alternative investment and historical comparisons of PE have to be rethought.

So the general feeling is the market will probably finish the year higher than it is now. We have to get through the historically volatile months of September and October nonetheless, and maybe, just maybe, that’s when the pullback will finally materialise. But there is still plenty of cash on the sidelines, and traders are only praying for a pullback so they can pick up favoured stocks at more attractive prices.

Another constant talking point is the VIX volatility index, the one month benchmark measure for which is sitting at the very low end of its range. This suggests complacency via a lack of demand for put option protection. The contrarian trade is to sell when the market reaches its greatest level of complacency. The VIX is currently at 11.5 and a level of 10.5 is considered the trigger point for this play.

Commodities

If they were yawning on Wall Street they were seriously nodding off on the LME last night. Base metal price movements were all positive but minimal.

There was more excitement on the Nymex as West Texas crude rose US88c to US$42.85/bbl.

Iron ore rose US70c to US$61.40/t.

The US dollar index ticked up 0.1% to 96.34 and gold is steady, after Friday’s night’s drop, at US$1335.00/oz.

Forex was another market to ignore weak Chinese data yesterday given the Aussie is up another 0.5% at US$0.7654. Glenn must be looking forward to passing the baton on that little “complication”.

Today

The SPI Overnight closed up 11 points or 0.2%.

China will release July inflation data today and locally, NAB’s monthly business confidence survey is due – the first to really have taken in the new gridlock parliament.

ANZ will provide an update today as noted and on the earnings front, we have reports due today from Cochlear ((COH)), Carsales.com ((CAR)), REA Group ((REA)), IOOF Holdings ((IFL)) and Transurban ((TCL)) among others.
 

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