The Overnight Report: Oil Pressure

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

The Dow closed down 37 points or 0.2% while the S&P lost 0.3% to 2175 and the Nasdaq fell 0.4%.

More Alpha

Once again no lead from offshore, so once again the opportunity for the local market to focus solely on earnings results yesterday. The biggie was of course Commonwealth Bank ((CBA)).

CBA was always at risk of a sell-off on any result that was not a clear beat given bank stocks had been bought up in prior sessions thanks to positive numbers out of Bendigo & Adelaide and ANZ. As it was, CBA’s result was solid enough but the shares copped a 1.3% drop. The bank sector as a whole nevertheless fell only 0.2%.

The big sector mover on the day was little info tech, which rose 3.7% thanks to a good result from its dominant component Computershare ((CPU)). Its shares jumped 9%. And it was clear the market was ready to buy up healthcare favourite Cochlear ((COH)) on any dip in price. Having initially dropped on its result the day before, Cochlear rose 7.6% and the healthcare sector gained 1.4%.

These two sectors balanced out falls across the board otherwise, although the index did manage to turn around from an ominous 30 point loss late morning to post a fairly benign close.

With Australia’s economic transition currently hinged very much on the housing market, yesterday’s June housing finance numbers were a positive influence. Total lending rose 2.3% in the month, reflecting the impact of the May RBA rate cut. The balance retained the prevailing trend nonetheless – loans to owner occupiers rose and are higher over a year and loans to investors rose but are 13% lower over a year.

Glenn Stevens was likely comfortable with the figures, but was probably polishing his nine iron as the data hit the screen. The outgoing RBA governor took the opportunity of his final public speech yesterday to drop the usual vague central bank rhetoric and tell it like it is.

The more central banks throw stimulus at an economy, the less effective each incremental action becomes, Stevens said (I’m paraphrasing). Don’t think the Australian economy can simply be supported by further rate cuts. It is time (indeed it’s long been time) for the government to play its fiscal part.

The government, or any Australian government, is terrified of increasing the budget deficit, so Glenn is of course talking to a brick wall. Borrowing rates have never been so low in history. But heaven forbid, Australia might lose its AAA rating were it to borrow further to provide economic stimulus. And we can’t afford to do that, because then it would cost more to borrow. The confounded logic of this argument I find exquisite.

Defiant Saudis

Venezuela – an OPEC member currently on its economic knees – has called for oil production cuts. Saudi Arabia, the world’s biggest producer, posted record production in July. OPEC will be meeting shortly for the usual charade of talking production cuts, but it is unlikely Saudi Arabia will do anything other than stay the course.

Weekly US oil inventories also came in higher than expected last night so the WTI crude price is down 2.9%. The US energy sector was a leader on the downside last night. The other downside leader was financials.

Prior to the release of the weak US June quarter GDP number, a regular auction of US Treasuries saw surprisingly little demand. The market, globally, had decided a Fed rate hike was not too far off. Last night’s auction of US ten-years, on the other hand, saw a stampede of demand, mostly from offshore, being central banks, sovereign wealth funds and and big pension funds.

The world has now decided there won’t be a Fed rate hike anytime soon. US markets knew that already, but it didn’t stop the US ten-year yield falling 4 basis points to 1.51 and the US dollar index dropping 0.5% to 95.60. No rate hikes means no joy for US banks, so they were sold off.

Otherwise Wall Street remained resilient once more. Discretionary retailers were in the frame on the earnings front last night, but results were both good and bad among them.

Prior to the strong US jobs number for July, the S&P500 had been stuck in a range of 2165-75 for an historical length of time. The jobs number sparked a step-jump before Wall Street stalled once more. Last night’s selling took the S&P back to 2175, which now becomes the bottom of the range.

Commodities

West Texas crude is down US$1.22 at US$41.53/bbl, defying the support otherwise offered by the drop in the greenback, suggesting the fall could have been even more significant.

The dollar drop provided some support for base metal prices in London but while all moves were positive, none exceeded 1%.

Iron ore fell US70c to US$60.70/t.

A half percent drop in the dollar is positive for gold, which rose US$5.20 to US$1345.80/oz.

The dollar fall was matched by a 0.5% rise in the Aussie to US$0.7709.

Today

The SPI Overnight closed down 5 points.

The RBNZ this morning again cut its cash rate, by 25bps to 2.00%. No surprises there.

Another benign offering from offshore suggests another day of concentrating on earnings results in the local market today, with the exception of the weaker oil price and the impact that will have on the local energy sector.

Today’s reporters include Telstra ((TLS)) and Goodman Group ((GMG)) among some smaller names. James Hardie ((JHX)) will hold its AGM.

And note Rio Tinto ((RIO)) goes ex-dividend today, which will impact the materials sector’s apparent move.

Rudi will be interviewed on Switzer TV between 7-8pm tonight, on Sky Business.
 

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