The Overnight Report: So Many Ups And Downs

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By Greg Peel

The Dow closed up 57 points or 0.3% while the S&P rose 0.8% as the Nasdaq jumped 1.1%.

Indecision

Following the sharp run-up in commodity prices of late, and subsequent surge in previously beaten-down resource stocks, it has been noted that inside (as opposed to “insider”) trading has emerged, with ASX disclosures showing executives of some mining companies taking the opportunity to cash in by selling blocks of shares.

It is also notable that some brokers who for a long time have stoically defended their commodity price forecasts and subsequent Sell ratings on resource stocks, while consistently admitting spot prices were continuing to run higher and higher, are capitulating and upgrading their ratings.

These are a couple of signals that may explain why the local materials sector was down 1.1% yesterday when most commodity prices were steady or higher. Have we seen the top for now?

Whether or not, it seems unlikely the RBA would contemplate a rate cut anytime soon, despite many economists assuming it eventually will have to when the housing market cools.

“The turn-around in commodity prices since the beginning of 2016 had underpinned an increase in Australia's terms of trade and the outlook for the terms of trade had been revised a little higher,” the minutes of the November policy meeting, released yesterday, explained. “Members noted that this was a marked change from the pattern of downward revisions to the forecast for the terms of trade over the previous few years and implied a more positive outlook for nominal growth in the Australian economy.”

A “marked change”.

If we have seen a short-term top for mining stocks we certain are yet to see a bottom for yield payers. Telstra ((TLS)) seems to find buyers about one day in every three and sellers on the other two while utilities just continue to fall and fall. Yesterday’s weakness in the ASX200 was driven largely by yield stocks as telcos, utilities and consumer staples all fell, while healthcare suffered on a drop in CSL ((CSL)).

The story may have been the same for the energy sector despite a slight tick up in the oil price overnight, but for news that came through during the day.

Unofficial OPEC meetings held over the weekend failed to resolve the issues that are threatening to derail any hopes of a production freeze, leading smaller players Qatar, Algeria and Venezuela to lead a push to bring the major players to agreement. This has been seen as a possible ray of light and the oil market is not one you want to be caught short in.

The local energy sector proved the best performer yesterday in rising 1.0%, helping to halve the opening losses for the index. Overnight, oil prices have leapt 5%.

The Trump rally continues to fizzle overall, having simply been a step-jump recovery from the initial drop. What we are seeing is not a lot of market buying or selling as such, rather ongoing rotation out of sectors popular in the first six months of the year and into sectors that were unpopular.

This rotation began long before Trump, fuelled by Fed rate hike fears and the sudden surge in certain commodity prices. But here we are, and no one’s quite sure what to do next. What is apparent is there has been no sign of all that cash sitting on the sidelines finally entering the market – just a lot of money already in the market being moved around.

The ASX200 ended 2015 at 5295 and with six weeks to go to end-2016, we’re at 5326.

Oiled Up

It’s a different story on Wall Street – the Dow is currently posting new all-time highs every day. Yet still there is no evidence of this being driven by mountains of idle cash re-entering the market. More recently we’ve mostly seen a shift out of bonds and into stocks on the promise of debt-fuelled US economic growth.

And we’re also seeing signs of indecision as to what one might do next. After the initial Trump bounce, the feature of Wall Street trading has been wide disparity among sector moves, most evident by the Dow and Nasdaq often moving in different directions or at least by very different percentages.

This was evident again last night as the Dow rose 0.3% but the Nasdaq jumped 1.1%. Last night Wall Street decided that the FANG stocks and their friends, which have to date been Trump victims for various reasons, had been sold off far enough. They all rallied back.

Within the Dow, traders are looking at the old name industrials that have surged post-Trump and started questioning whether it’s time to ease off. The big energy names could not ignore a 5% rebound in the price of oil last night, however.

Which helped turn Wall Street around from an initial drop to yet another somewhat grafting rally. There was also good news for retailers in the form of the October retail sales, which jumped 0.8%.

But while investors are bailing out of US bonds and into the stock market, the realities of a now almost confirmed Fed rate hike next month and a surging greenback are still sources of concern.

Will the Trump honeymoon shortly end? It’s a good two months before The Donald is even sworn in, let alone begins to put his policy plans into motion.

Commodities

West Texas crude is up $2.31 or 5.3% at US$45.82/bbl. The 45 level, plus or minus a couple of dollars, is considered the pivot point on the will they-won’t they OPEC trade.

Iron ore took a tumble last night, down US$6.90 to US$72.80/t. That’s almost a 9% plunge which, in isolation, would have mining stock investors running screaming today. But given iron ore has run up so fast into the 70s, the panic probably won’t be so noticeable.

All base metal prices fell last night in London, slightly.

Hooray for gold, which finally managed a US$5.80 comeback to US$1224.30/oz despite the US dollar index ploughing on another 0.1% to 100.23.

The Aussie is steady at US$0.7551.

Today

The SPI Overnight closed up 24 points or 0.5%. You would not normally see that the morning after a 9% plunge in the iron ore price.

Australia’s September quarter wage price index is out today, to provide some more grist for the RBA mill.

The US sees industrial production numbers.

Graincorp ((GNC)) will release its earnings results today as a raft of AGMs are hosted.

Rudi will host Your Money, Your Call Equities tonight on Sky Business, 8-9.30pm

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