The Overnight Report: A Bout Of Nerves

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: ERA

By Greg Peel

The Dow closed down 200 points or 1.1% while the S&P fell 1.2% to 2136 and the Nasdaq dropped 1.5%.

Erratum

In yesterday’s report I suggested Energy Resources of Australia ((ERA)) is no longer “producing” uranium. I said so in the knowledge the company was drawing upon stockpiles. It was a poor choice of words on my part.

ERA is indeed producing uranium via the processing of stockpiled ore. It is not currently mining uranium ore, which is really what I meant and should have said.

My apologies to ERA, Rio Tinto, and anyone who may have been misled by my semantical error.

Meeting Resistance

Yet again we saw a sharp move in the opening rotation of the local market yesterday and an immediate reversal at 10.30am. The ASX200 hit 5497 before pulling back sharply. But this time investors were keen to have another crack.

At midday the index had pushed back up to 5498, led by the resource sectors, which in turn were led by strong gains overnight in the prices of oil, bulks and metals. But clearly traders have set 5500 as the level to take profits on the rally we have seen from 5200 a month ago. By 3pm we were back to square.

In the final sector breakdown, resources were still the clear winners on the day. Indeed, of the top ten ASX200 up-movers on the day, all ten were either miners, oil & gas producers or companies servicing those sectors. Materials rose 0.9% and energy rose 2.3%.

The flipside saw a mixed bag of down-movers, mostly stocks that not so long ago had been high-flyers, including gold miners. The rout in the residential aged care sector continues, and indeed healthcare proved the worst performing sector on the day with a 0.9% drop.

There will be a few traders breathing a sigh of relief this morning that they had considered 5500 as a good level to take profits.

One theme popular among analysts at present, albeit drawing some level of disagreement on timing, is expectations of a cooling housing market. Housing is very important to the Australian economy given (a) it drives construction earnings, (b) it drives flow-on earnings in household goods and appliances, (c) it underpins bank earnings, and (d), higher house prices imply greater wealth and this makes consumers more confident.

The housing market has recently been the primary driver of the “non-mining” economy, allowing for positive GDP growth despite the ongoing decline in mining investment. That is why analysts are concerned – housing booms don’t last forever.

Yesterday’s data showed the volume of loans to owner-occupiers fell a greater than expected -3.0% in August. Since APRA clamped down on loans to investors, O-Os have picked up the ball and run with it. But now it seems they, too, are starting to back off. Loans to O-Os are -4.2% lower than they were a year ago.

Loans for housing construction rose 3.7% in August but are -1.7% lower than a year ago. We can conclude that the housing boom is indeed cooling, but slowly. Low interest rates continue to underpin.

Australian businesses remain confident, nonetheless. NAB’s survey for September showed a rise in the conditions index to 7.7 from 6.8 and a rise in the confidence index to 5.9 from 5.6. Slightly worrying, however, is a fall in capacity utilisation to 80.6% from 81.0%. After rising steadily over past months, utilisation appears to have peaked out. This does not bode well for ongoing business investment.

Potpourri

Why did Wall Street tumble last night? Take your pick.

Firstly, the rally over the past week has been led by the energy sector thanks to the price of WTI rising back over US$50/bbl, in turn due to talk of an OPEC/non-OPEC production freeze agreement. Last night WTI pulled back a bit. Hardly sinister nor any great surprise, but inevitably the energy sector saw selling.

Secondly, Alcoa reported a September quarter miss on both earnings and revenue and its shares fell 11%. Alcoa is always the first large cap company to report in every earnings season. Once upon a time the Alcoa result was considered an early indicator of how the season as a whole would play out.

Since the end of the commodity super-cycle, this is no longer the case. And Alcoa is not even a Dow component anymore. But with Wall Street heartened by the fact forecasts are for a net S&P500 decline of “only” -2% for the September quarter compared to -6% or more numbers of past quarters, such a weak start is just a little ominous.

Thirdly, Clinton is deemed to have won the second debate. Outside of oil, the swing towards Clinton has been cited as a reason for Wall Street strength given she represents the less dangerous status quo and Trump represents…well…who knows what Trump represents. But for Wall Street, “status quo” includes the Republicans retaining their majority in Congress so as to block anything fiscally unpalatable.

But now, as the Trump campaign quietly disintegrates, Wall Street has begun to fear the train crash may reflect on the Republican party in general, to the point the Democrats could win control of Congress. This has Wall Street worried.

While all of the above are contributing factors, perhaps the underlying macro reason for last night’s sell-off is the most influential.

Central banks across the globe are backing away from ultra-easy policy experiments. But the Fed is one step ahead, looking at a second tightening. Last night the US dollar index jumped 0.8% to 97.65. A strong dollar is not good for America’s multi-national exporters.

The expectation of a Fed rate rise has also had bond yields on the rise, and last night the US ten-year yield rose 4 basis points to 1.76%. This is the top of the range in place since the Brexit shock. If yields break out of the range, Wall Street fears a long-awaited rush to sell bonds may be triggered, sending the ten-year rapidly towards 2%.

That would not be good for stocks. Last night the VIX volatility index on the S&P500 jumped 16%, suggesting investors have again begun to seek downside protection.

So put it all together, and the fact the market was back to full participation last night following Monday’s holiday, and the Dow dropped 200 points – not quite the low of the day but not far off it.

Commodities

Throw a 0.8% jump in the greenback at commodities and price weakness is not hard to explain.

West Texas crude is down US38c at US$50.82/bbl.

Aluminium, copper and nickel all fell between -0.5 and -1% in London while lead fell -2.5% and zinc fell -3%. So much for China’s return.

But China’s return is clearly impacting on iron ore. It rose another US70c to US$56.50/t.

Gold has already had its big adjustment, but on dollar strength is down -US$6.50 at US$1252.90/oz.

The Aussie is down -0.9% at US$0.7538.

Today

The SPI Overnight closed down -45 points or 0.8%. Notwithstanding iron ore, the leading sectors to the upside yesterday may lead the downside today.

Westpac will release its October consumer confidence survey locally today.

With Wall Street on edge over Fed policy, the minutes of the September FOMC meeting will be released tonight.

CSL ((CSL)) will hold its AGM today.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms