The Overnight Report: Backing Off

Array
(
    [0] => Array
        (
            [0] => ((BHP))
            [1] => ((JHX))
            [2] => ((TLS))
        )

    [1] => Array
        (
            [0] => BHP
            [1] => JHX
            [2] => TLS
        )

)

This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down 54 points or 0.3% while the S&P fell 0.2% to 2176 and the Nasdaq rose 0.3%.

Rate Expectations

The ASX200 jumped 20 points from the open yesterday and then chopped its way to a flat close. It may have looked like a quiet day on a close-to-close basis but behind the scenes there was a lot going on.

From the opening bell it was a battle of the resource sectors. Overnight we had oil up 5% but iron down 9% and coal and base metals again easing off. Subsequently, the energy sector was the winner on the day with a 2.3% gain and materials was one of bigger losers with a 1.1% fall, offset by a bit of buying in sold-off gold stocks.

The other story of the day was the September quarter wage price index. Wages grew by 0.4% in the quarter, below expectation. The annual rate of wage growth was 1.9%, down from 2.1% in the June quarter, and the lowest rate since records began being kept in 1998. With inflation running at 1.7%, real wages growth is near zero.

On Tuesday we had the minutes of the RBA meeting noting a “marked change” in Australia’s terms of trade, as a the impact of sudden commodity price rebounds flowed through to economic growth prospects. The implication was of a central bank on hold.

The Aussie had already priced in the commodity price rebound, and subsequently dipped on the Trump-led US dollar rally, but this morning it is down 1% over 24 hours at US$0.7478. The greenback is again a tad higher, but the Aussie's fall came yesterday on the wage data release.

Ahead of today’s October jobs numbers, we are again reminded that the official unemployment rate is a redundant indicator. Recent jobs growth has all been in part-time work, meaning that while wages per hour might grow, wages per month will not, given fewer hours worked. This means less money in consumer pockets as might otherwise be implied by the unemployment rate.

What do we spend money on? Yesterday the consumer discretionary sector fell 1.2% and healthcare fell 1.4%. Economists have continued to call an eventual RBA rate cut even as commodity prices have soared and low inflation is the primary reason. Wages are a fundamental driver of inflation. A rate cut is good for yield paying stocks and hence the utilities sector finally managed to rally yesterday, up 1.6%.

Overreaction

Since the Trump victory speech, the US financials sector had risen 14% up to Tuesday night. No one denies Trump’s touted policies are good for US banks, and if all goes to plan there’s probably more upside to come. But that’s a bit of a too far-too fast response.

So last night Wall Street saw profit-taking in the banks. On the other side of the coin, the Nasdaq continued to outperform, having been left behind in the Trump rally as traders bailed out of FANG and friends, seen as enemies of The Donald. But is there any real reason why Facebook, Apple, Netflix, Google, Amazon, Microsoft and company should “lose” in a Trump-driven economy?

Those stocks have found buying support these past couple of sessions.

The oil price retreated only slightly last night and while there was a raft of US economic data releases, there was nothing there to move the dial. Industrial production was flat, as was housing sentiment, and the PPI remains low but has stopped falling.

No reasons there to upset the near 100% chance of a Fed rate hike currently expressed by the futures market.

Commentators are warning there may be some volatility before Christmas. “Volatility” is code for “market falling in a hurry”. If there is volatility one presumes it would centre around a market that has run very hard in a blink, two months before the new president is even sworn in, and the short-term vacuum ahead will see a lot of squaring up. There is also the potential for Wall Street to be spooked by Trump’s appointments to key cabinet roles.

Or maybe we just settle back a bit and then bungle sideways through to the new year. One thing we can likely count on is there won’t be a “Santa rally” for the sake of a Santa rally. Santa rallies begin from market lows, often set in November, not all-time highs. And there won’t be any buy-the-fact rally when the Fed hikes. Everyone has now priced in a hike.

Commodities

As noted, oil quietened down last night following the 5% jump on Tuesday night. West Texas crude is down US33c at US$45.49/bbl. The OPEC meeting is just under two weeks away.

Metals prices have not much settled down though. A mixed bag on the LME saw copper falling 0.5%, aluminium and lead 2% and zinc 3%, while nickel rallied 1%.

Iron ore is down another US60c at US$72.20/t and thermal coal took another 6% dive last night.

The US dollar index has now ticked up to its November 2015 high in rising 0.1% to 100.37. March that year also marked a high just above 100. The US dollar is at risk of technically breaking out.

Gold is nevertheless flat at US$1225.80/oz.

Today

The SPI Overnight closed down 13 points or 0.2%.

As noted, the local jobs lottery is drawn today.

It’s a very busy day for AGMs, including that of BHP Billiton ((BHP)). James Hardie ((JHX)) will release its quarterly result and Telstra ((TLS)) will host an investor day.

Rudi will appear twice on Sky Business today. First from 12.30-2.30pm and later on Switzer TV, between 7-8pm.
 

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