The Overnight Report: Roll Over

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By Greg Peel

The Dow closed down 54 points or 0.3% while the S&P lost 0.5% to 2201 and the Nasdaq fell 0.6%.

Inevitable

Yesterday marked 20 days since Trump was elected and the ASX200 had spent that period tracking a relatively direct trajectory higher, from the 5150 low, hit when we all thought a Trump presidency would be a disaster, to a high just above established resistance at 5500. Since the dust settled, new news out of the Trump camp has been very limited.

There had to be a point at which the election victory itself was priced in ahead of the new administration actually taking office. While most analysts remain bullish in the medium term, there was no surprise yesterday that 5500 ultimately proved a good level from which to take near term profits. Volume was relatively weak, suggesting a lack of fresh buyers rather than aggressive selling explains the acceleration in the afternoon.

The biggest decliners yesterday were the biggest movers from Trump Day One. The energy sector was always set to fall on a 4% drop in the oil price overnight, thus energy was the biggest loser with a 1.9% fall. Commodity prices had been positive overnight, but a 1.3% drop for materials is indicative of just how far that sector has run.

The banks had already stalled late last week and they were a big influence on the ASX200 in falling 1.0%. A positive response to the Metcash ((MTS)) result (one of the most shorted stocks on the market) and more takeover talk in the bookie space meant only small falls for the consumer sectors. On the other side of the coin, the biggest losers in the Trump trade, and previously on Fed rate hike fears, were the winners yesterday. Telcos and utilities bucked the trend with small gains.

Traders who started the selling yesterday were possibly thinking Wall Street must be close to its own rollover, and maybe the four-day holiday in the US would provide time to reflect and think maybe I’ll take some profits on Monday. And so it came to pass. It is thus noteworthy that despite the record run being broken in US indices last night, the SPI Overnight is only down 5 points this morning.

We got there first.

All out, all change

The most notable moves in US markets since the election have been a strong rally in cyclical stocks, particularly transports, infrastructure stocks, banks and small caps, a sell-off in yield stocks, a sell-off in bonds and a sell-off in gold. Last night on Wall Street the aforementioned stock market winners were the losers, yield stocks found some support, the US ten-year bond yield dropped 5 basis points to 2.32% and gold rallied nine dollars.

No one was the least bit surprised. And as was the case in Australia yesterday, volumes were not indicative of aggressive selling, merely a squaring up of positions.

Indications are that the annual Thanksgiving retail spree has gone rather well, but having been big winners since the election, retail stocks were among the biggest losers on Wall Street last night. Somewhat of a “sell the fact”, it would seem. Tonight’s monthly survey of consumer confidence might be interesting, being the first from the Conference Board post-Trump.

The Trump vacuum is likely to continue through to January, notwithstanding any reaction that might follow the President Elect’s major cabinet appointments such as Treasury Secretary. The focus in the meantime can return to the Fed meeting – not that anyone is expecting a surprise – the Italian referendum this weekend, and the OPEC meeting tomorrow night.

What to expect from OPEC?  If anyone tells you they know, they don’t. The underlying feeling in the oil market is that there will be some sort of agreement reached. It would not be too big a sacrifice to freeze production at current levels given current levels from the likes of Saudi Arabia are at record highs. But what the market really wants is a production cut.

On that point the Saudi oil minister has thrown the market into confusion by suggesting that the oil market would manage to rebalance by itself next year if there were no production cuts forthcoming. Is he hinting at no agreement being reached? Last night saw the WTI price chop around as each little rumour and speculative comment impacted. The net result was a rebound from Friday night’s fall, so optimism continues to reign, it appears.

Except that the market has set itself short, as the open positions data suggest. This implies a limit to the downside on no agreement, and more upside on an agreement being reached, if not for the fact WTI is already priced for a good chance of agreement. All very confusing, so we’ll just have to hang on until tomorrow night.

Commodities

West Texas crude is up US87c or 1.9% at US$46.87/bbl.

In yesterday’s Report I highlighted falling Chinese lead inventories and constrained global zinc production as reason why those two metals shot up on Friday night. Last night they kicked on with it – lead is up another 3% and zinc 2%. Other base metal moves were small.

Ring the bell, iron ore is back over 80. It has added another dollar to US$80.20/oz. Does anyone remember when 86 was the critical level to hold when the price dropped out of triple digits? That was over two years ago. We last saw 80 in a blink during iron ore’s spectacular drop from 120 in May 2014 to 40 in August 2015.

The US dollar has been another big winner post-Trump, and the market has been waiting for it to roll over. Last night the index dipped 0.1% to 101.34 and that was enough to see gold recover US$8.70 to US$1192.30/oz.

The Aussie has been a big “loser” on the exchange rate, albeit tempered by the commodity price surge. The Aussie is up 0.5% at US$0.7476.

Today

The SPI Overnight closed down 5 points.

Tonight in the US sees the second revision of the September quarter GDP number. Rather old news, both in time and in respect of subsequent world-changing events. But the expectation is for a tick up to 3.0% from 2.9%.

Locally, ALS Ltd ((ALQ)) will post its earnings report today and there are a handful of AGMs. Perhaps the most interesting will be that of Vocus Communications ((VOC)), which has been having a tough time of it of late. As of last week Vocus was almost 9% shorted, so a positive meeting might elicit a sharp move.

Rudi will connect with Sky Business today via Skype at around 11.15am to discuss broker calls.
 

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