The Overnight Report: Then Suddenly, Nothing Happened

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

By Greg Peel

The Dow closed up 15 points or 0.1% while the S&P rose 0.1% to 2139 and the Nasdaq fell 0.2%.

What Goes Up

Tuesday on the local market saw a rally led entirely by the resource sectors as China came back from holiday to buy up bulks and metals and Russia suggested it would be prepared to join with OPEC in oil production cuts. On Tuesday night the Dow fell 200 points for a number of reasons – one of them being a pullback in the oil price and another being a big miss on earnings from Alcoa.

I thus suggested in yesterday’s Report we would probably see the opposite yesterday, and indeed the only stand-out moves among the sectors yesterday was a 1.1% drop for materials and a 0.9% drop for energy.

But it was a lot worse early in the session. The ASX200 traded down as many as 46 points, led by resources, before the cavalry came over the hill and quickly pushed the index back up again to a fairly benign close. Aside from bargain hunting among resources, the banks managed to close on a slight positive and the early guide to AGM season appears to be one of capital management will buy you a bid.

Telstra’s ((TLS)) seen a bit of a revival since its AGM and yesterday CSL ((CSL)) confirmed its buyback, ensuring telcos and healthcare provided the offset yesterday against weak resources.

Consumer discretionary managed a slight gain. We might have expected more on the back of Westpac’s monthly consumer confidence survey showing a 1.1% index increase to 102.4, to mark three straight months of improvement, at a time the tinsel is going up and the muzak is becoming nauseatingly festive.

I made mention yesterday of general agreement among stock analysts that the housing boom is set to shortly cool and thus act as a drag on the economy, albeit there is disagreement about the timing. Market indicators such as finance, approvals and auction clearances are still positive but starting to now ease off.

Westpac’s survey yesterday nevertheless showed a 1.6% gain in the month in a sub-segment of expectations for rising house prices, to be 12% higher year on year. The proportion of respondents who think now is a good time to be buying a house has also been on the rise in recent months.

If your Uber driver tells you he’s just taken out a one million dollar mortgage to buy bed-sit in Blacktown, sell!

Shalom

Yom Kippur is not a public holiday in the US but it might as well be on Wall Street. That’s one reason why last night saw light volumes and little more than sideways trade all session, despite Tuesday night’s big plunge.

We may otherwise have expected a lack of activity ahead of the release of the Fed minutes at 2pm, but they failed to produce any excitement either. Basically they didn’t tell us anything we didn’t already know.

The case for a rate rise this year has strengthened, the FOMC believes. Indeed, September was a close call and three of twelve members dissented on the decision not to raise, and much has been made of the fact three is a lot. It was also noted that to not raise once by year-end after having talked rate rises all year, the Fed would lose credibility.

If it hasn’t already. It will still come down to the data, of course, but one presumes they would have to take a sharp turn for the worse to prevent the December hike that 70% of the market is predicting. Otherwise something out of left field is always possible, in Britain or Europe for example or even Russia. But these things we can never predict.

Assuming the majority of the market has now accepted a December hike and positioned accordingly, the focus between now and then is on two major issues – OPEC and the election.

Virtually nobody expects a production cut agreement in November will be reached but virtually nobody wants to take the risk. Hence the real risk is of an oil price tumble post meeting triggering another Wall Street sell-off.

There is the risk of the great unknown were Trump to be elected, but Wall Street has now shifted from being relieved Clinton will likely win to being rather concerned the Republicans could lose the House. Such concern was evident in the US healthcare and biotech sectors last night, which weakened on the fear Obamacare might be here to stay and the new administration will be able to clamp down on drug pricing.

As to how the Fed reacts to any such developments is unclear. The central bank is, of course, independent and apolitical. But it didn’t stop the FOMC overtly claiming Brexit risk as a reason to not to hike in June.

Either way, the US dollar continued to strengthen last night and an auction of ten-year bonds was settled at a lower price, such that the yield is up another 2 basis points at 1.78%. The past couple of months has seen the ten-year yield rise over 20 basis points. What does that tell us?

Commodities

West Texas crude is down US61c at US$50.21/bbl. Unless something is said between now and the OPEC meeting, oil is expected to hang around the 50 mark in the interim.

All base metal prices were positive last night despite another 0.3% rise in the US dollar index to 97.92, except lead, which fell 1.5%. Nickel was otherwise the only metal to gain in excess of 1%.

Iron ore was unchanged at US$56.50/t.

Gold is as good as unchanged at US$1254.10/oz.

The Aussie has bounced back 0.4% to US$0.7565.

Today

The SPI Overnight closed down 14 points or 0.3%, probably influenced by another dip in the oil price.

China’s September trade numbers are due today.

Iluka Resources ((ILU)) and South32 ((S32)) release production numbers today while Orora ((ORA)) and Transurban ((TCL)) are among those holding AGMs.

Rudi will travel to Macquarie Park to appear on Sky Business from 12.30 till 2.30pm.
 

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