The Overnight Report: Rush To Realign

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            [6] => ((WSA))
            [7] => ((ORI))
            [8] => ((MND))
            [9] => ((RIO))
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This story features COMPUTERSHARE LIMITED, and other companies.
For more info SHARE ANALYSIS: CPU
The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

By Greg Peel

The Dow closed up 218 points or 1.2% while the S&P gained 0.4% to 2170 and the Nasdaq fell 0.6%.

Risk On

What does Trump bring to the world? Well the assumption at this early stage is increased US spending, particularly in infrastructure which boosts the demand for raw materials, and inflation, which raises interest rates. How does this translate for the Australian market?

Yesterday we saw the materials sector up 5.8% and energy up 3.3% on the infrastructure theme, supported by solid commodity price jumps (ex-gold). We saw healthcare up 4.3% given that sector’s substantial US exposure.

We saw information technology the winner with a 7.1% gain but only because this tiny sector includes dominant component Computershare ((CPU)), which benefits from higher US rates.

We saw the consumer sectors up 2.5% (staples) and 2.0% (discretionary) as they benefit from an end to price disinflation. The losers on the day were telcos, up only 0.3%, and utilities, down 0.3%, because they suffer from higher rates.

We saw industrials underperforming with a 1.8% gain because this diverse sector of odds and sods features both winners and losers. The interesting one was financials.

Financials were up 4.3%, providing a good chunk of the ASX200’s 3.3% gain. Here within we have QBE Insurance ((QBE)), which lives and dies on US rates, but also the banks. Only a couple of months ago, the banks were being sold off on the threat of a Fed rate hike.

Higher rates are typically good for banks because they increase net interest margins. But in Australia’s climate of subdued business credit demand and a runaway housing market, higher rates reduce the demand for loans, increases the potential for bad debts, increase offshore funding costs and reduce dividend yield appeal. The boost in the resource sectors does, nevertheless, reduce the potential for bad debts in that particular space and higher rates provide for mortgage repricing, which is positive as long as defaults remain contained.

Whatever the case, the banks were included in the biggest up-day for the local market since 2011 yesterday. But it was not simply “Buy Australia”, as there was clear disparity among the big cap moves. The banks were up 3-4% but BHP Billiton ((BHP)) was up an extraordinary 8%. Woolworths ((WOW)) managed only 2% and Telstra ((TLS)) basically missed out.

What’s even more extraordinary about BHP’s jump is that 8% could still not get the stock into the Top Ten ASX gainers list on the day. You needed at least 10% to join that club.

We need to give a nod, with regard yesterday’s biggest movers, to some of the biggest short positions previously held. In this club we see Sims Metal Management ((SGM)), up 14%, Western Areas ((WSA)), up 12%, Orica ((ORI)), up 11%, Monadelphous ((MND)), up 11%, and yes, Rio Tinto ((RIO)), up 8%.

It was a scramble. At some point the dust will settle. To that end we note the Dow is up 200 points and the SPI Overnight is down 4.

But there’s no denying – the game has changed.

Disparity

If a clear divide between winning and losing sectors was apparent in the Australian market yesterday, it was glaringly visible on Wall Street last night. The theme that began on Wednesday night carried through.

It so happens that some of the biggest companies in America and thus components of the Dow Jones Industrial Index are exposed to infrastructure spending. Stocks like 3M, Caterpillar, General Electric and United Technologies. A Trump administration will be pro-Big Oil, which is promising for Exxon and Chevron.

Higher US rates are good for JP Morgan, Goldman Sachs and Travelers. The US ten-year yield was up another 5 basis points to 2.12% last night. The diminished threat of drug price regulation is good for Pfizer and Merck. All these names were among the big winners last night.

There were also losers – notably consumer staple stocks that had been so, so popular prior to the election, such as J&J, P&G and Coke. These likely suffered mostly from providing funds to buy other sectors. And other losers were the multinational iconic brands that Trump will go after to repatriate taxes – Apple, Microsoft and Nike.

The Dow is not all of Wall Street, and its arcane price average is not a particularly helpful benchmark. But the distribution of America’s largest companies across the various sectors provides us with a snapshot of the presumed winners and losers under The Donald.

Expand that to a wider market, and we see names like Facebook, Amazon and Netflix being added to the Microsofts and Apples to ensure a 0.6% drop for the Nasdaq.

Put it all together and the result is a 0.4% gain for the broad market S&P500. Not a notably big move. That was the day before.

That the S&P should be up only 0.4% the night after the ASX200 is up 3.3% likely explains why the SPI futures are down 4 points this morning, despite further very big moves up for commodity prices last night (ex-gold).

Commodities

The US dollar index is up another 0.3% at 98.81. While this provides a headwind for commodity prices, the promise of increased demand …ahem…trumps that issue. Accept for gold, which is not a commodity but a currency.

Gold is down US$13.90 at US$1258.20/oz.

Iron ore is up another US$3.20 at US$74.20/t.

Copper is up another 3.5%, zinc 1.5% and aluminium 1%.

While Trump may be good for Big Oil with regard environmental constraints and other considerations, he can’t do much about oversupply. Oil now has to wait it out until the November 30 OPEC meeting. West Texas crude is down US62c at US$44.56/bbl.

The Aussie has been on one hell of a rollarcoaster ride these past couple of days but the trend remains down. It’s now at US$0.7614.

Today

As noted, the SPI Overnight closed down 4 points.

Tonight in the US is Veterans Day (in line with Armistice Day here) which sees banks and the bond market closed but stocks and commodity markets open. Falling on a Friday, we’ll likely see many take a long weekend anyway to recover from whiplash.

We may also see something similar in the local market today. Some traders will be primed for a big slap-up lunch. Other, former traders will be serving it.

Rudi will connect with Sky Business, through Skype, to chat about broker calls at around 11.05 today.
 

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