Daily Market Reports | Sep 23 2016
By Greg Peel
The Dow closed up 98 points or 0.5% while the S&P gained 0.7% to 2177 and the Nasdaq rose 0.8%.
Well Resourced
In the footsteps of the BoJ, the Fed was next to give the Australian market cause to recover yesterday. But buying was by no means evenly spread.
Finally we did see the beaten down junior telcos catch a bid, sending that sector up 1.0%, but while yield stocks had been the biggest victim of Fed rate rise fears leading into the September meeting, they did not recover any ground yesterday. The banks and consumer staples were both flat, and utilities fell 0.7%.
While industrials and healthcare put in decent performances, it was left to the resource sectors to drive the index higher. Energy rose 2.1% and materials 2.6%.
If yield stocks and resources were sold down ahead a Fed meeting that might have brought a rate hike, why have only resources recovered on no rate hike? Perhaps it’s because yield stocks were being called overvalued two weeks ago and resource stocks were not.
The odds of a December Fed rate hike have now firmed to over 60%. Is it worth pushing the PEs of yield stocks back up again over the next three months just to go through the same Fed hike sell-off? What we’ve likely seen is a rebasing to more realistic valuations.
Resource stocks were never called overvalued, rather there was only concern among analysts that rallies in the prices of iron ore, coal and oil would not prove sustainable. But those analysts have quietly begun to change their tune. There may yet be some price pullback, but more and more commentators have decided the trough in commodity prices is now in place, and the outlook for resource companies is much brighter following cost cuts and debt reductions. Cash is flowing in abundance.
A stronger US dollar is still the enemy of commodity prices, and a Fed rate hike would push the greenback higher, but at the end of the day demand and supply rule the commodity space.
That said, I noted yesterday that we’d have to wait until this morning to see how base metal prices responded to the no Fed rate hike given the LME was closed when the action started on Wall Street. Well, base metal prices all soared last night.
Gold has stalled following Wednesday night’s rally while oil is higher again and iron ore is up. It should be another good day for the resource stocks on the local bourse, with the futures suggesting up 27.
That would take the ASX200 up to 5400 once more.
Now What?
Suddenly there was a vacuum of anticipation, debate and argument last night on Wall Street given the central bank race has now been run and, as far as equity markets are concerned, won. So it’s back to TINA.
Given more than half of the market now believes a December Fed rate hike is inevitable, and that it will have to happen either way for the Fed to avoid losing whatever skerrick of credibility it has left, that reality is not much of a threat. One 25 basis point hike over the space of twelve months, with the prospect of another one not being for yet another twelve months, is little impediment to buying into the one market offering any sort of return.
It’s dangerous of course – buying stocks simply because there is no alternative, and at some point overvaluation calls must begin to strengthen if Wall Street just keeps on keeping on. Each move up in the Nasdaq at the moment is a new all-time high, but there are some themes running behind the scenes that are actually based on reality.
The aforementioned call of a trough in commodity prices is one. The undeniable advance of technology is another.
There’s a lot of data out in the US next week but we have three months to worry about any trends (no one believes the Fed would hike in November ahead of one of the most critical presidential elections in memory). The greatest focus will be on the OPEC meeting next week, which apparently has now been declared “formal” rather than “informal” as previously suggested.
Why? Is there a big announcement coming?
Next week will be the last in the historically worst trading month of the year, before we enter the historically scariest trading month of the year – October.
Commodities
There was no mucking around on the LME, and maybe a few short positions ahead of the Fed meeting. Lead rose 1%, zinc 1.5%, copper 2% and aluminium and nickel 3%.
Iron ore is up US90c at US$56.30/t.
West Texas crude is up US48c at US$46.10/bbl.
After its twenty dollar jump on Wednesday night, gold is just a tad higher at US$1336.70/oz.
The US dollar index is another 0.1% lower at 95.37 and the Aussie is 0.1% higher at US$0.7643.
Today
The SPI Overnight closed up 27 points or 0.5%.
Japan, the eurozone and US will all see flash estimates of September manufacturing PMIs today/night.
The calendar for Australian stocks is blank today. Not even an ex-div (among broker-covered stocks).
Rudi will link up with Sky Business through Skype at around 11.05am to discuss broker calls.
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