Daily Market Reports | Dec 02 2016
By Greg Peel
The Dow closed up 68 points or 0.4% while the S&P fell 0.4% to 2191 as the Nasdaq dropped 1.4%.
Energised
OPEC announces production cuts, the oil price jumps 8% and the Australian energy sector jumps 7.2%. That about sums up yesterday’s trade on the ASX. We recall that only the day before, growing scepticism of OPEC reaching any sort of deal had the energy sector down 1.9%.
Wednesday also saw the local materials sector diving 2.8% on big falls in iron ore and base metal prices. On Wednesday night iron ore fell further, base metals bounced modestly and gold fell sharply, but yesterday the materials sector rose 2.9%. What’s good for oil is good for all commodities, it seems.
The materials sector would have taken some heart from yesterday’s Chinese PMI data. Beijing’s official manufacturing PMI rose to 51.7 in November from 51.2 in October, beating expectations. Caixin’s independent measure of smaller entities went the other way, dipping to 50.9 from 51.2, but this, too, was better than expected.
Beijing’s official service sector PMI showed a rise to 54.7 from 54.0.
While resources dominated yesterday’s local trade, other sectors made a contribution to the 1.1% gain for the index. Most influential was a 1.3% gain for the banks which, now that commodity prices have rebounded and diminished the potential of mining/oil company loan defaults, appear to be trading on the basis of rising interest rates are good for bank margins.
Only a few months ago the banks were being sold on exactly the same basis, given concern over bad debts and the possible impact of rising mortgage rates meeting rising unemployment.
Consumer discretionary also rose 1.3% yesterday, which is interesting given a stronger oil price means a higher petrol cost. The offset, presumably, is higher commodity prices are good for the so-called “mining states” of WA and Queensland and thus good for the workers and consumers therein.
The losers on the day were once again the yield sectors, on higher interest rates and the rotation out of defensives and into cyclicals, as has been the theme of the second half of this year.
As the index rumbled its way up to a 1.1% gain yesterday there was one stumble along the way, late morning, following the release of Australia’s September quarter capex data. The numbers were a little disappointing.
Total capital expenditure fell 4.0% in the quarter to be down 13.7% year on year. That number continues to be dominated by the resource sector, which saw a 7.2% fall to be down 35.1%. Most disappointing is that while non-mining capex is up 4.8% year on year, the September quarter saw a 2.3% dip.
It was also disappointing that capex intentions – plans to invest in the year ahead, also fell from the previous quarter’s survey.
Australia is undergoing a very slow economic transition. As the last of the big LNG facilities reaches the end of the construction phase in the next couple of years, the mining investment slide will finally end. But we are already seeing signs of the housing construction boom – which to date has provided the bulk of the offset – soon coming to an end. Non-mining, non-housing investment wherefore art thou? Tourism can’t carry all of the can.
Rotation Continues
The WTI oil price was up another 3.7% last night, surpassing the US$50/bbl mark. Presumably those traders who were still in shock on Wednesday night were prompted into action. We must remember that the oil market had set itself short ahead of what most believed would be yet another lack of OPEC agreement. Those shorts will need to be flushed out.
What’s good for oil is good for America, and subsequently US bond yields. The ten-year is up another 7 basis points overnight to 2.44% and all talk now is of 3% by year-end.
Interestingly, the US dollar index dropped 0.5% last night – possibly suggesting squaring up ahead of tonight’s US jobs numbers – but either way the dollar has run a long way since the election and thus is offering up a drag on US export earnings. Hardest hit are those companies in the Big Tech space.
Thus last night on Wall Street was a bit of a repeat performance of the night before, which, I noted yesterday, seemed a return to the days immediately following Trump’s victory. Resource and infrastructure-related stocks are being bought, FANG and biotech stocks are being sold, as are defensives and yield plays. Thus we saw the Dow up 0.4% last night but the Nasdaq down a solid 1.4%. The S&P500 split the difference with a 0.4% fall.
The US manufacturing PMI rose to 53.2 from 51.9. Yet another solid piece of data to underscore Fed rate rise expectations, if a 2.44% ten-year yield (now up over one full percentage point from the 2016 low) is not enough on its own. Tonight sees the last non-farm payrolls report before the December Fed meeting.
Commodities
West Texas crude is up US$1.79 at US$50.84/bbl.
Base metal prices eased back again in London last night, but not spectacularly. Aluminium fell 1% while the others all fell around 0.5%.
Iron ore – what can we say – up US$5.90 or 8.2% to US$78.10/oz. There must be some very dizzy traders in Singapore.
Despite the US dollar index falling 0.5% to 101.01, gold is a tick lower at US$1171.20/oz.
The Aussie is up 0.3% at US$0.7413.
Today
The SPI Overnight closed down 10 points or 0.2%. While we can point to the S&P500 being down 0.4%, another 4% jump for oil and 8% jump for iron ore would on any other day be big news, but perhaps we priced this in yesterday.
Australian October retail sales numbers are due today.
Tonight sees the US jobs numbers.
Sunday sees the Italian referendum on constitutional reform. The polls are suggesting a “no” vote, which would see the Italian prime minister resign and the EU once again face another possible crisis, a la Brexit. Given the polls said “no” to both Brexit and Trump, we might expect a “yes” vote. But that would be inconsistent with the way the world is now headed.
Rudi will connect with Sky Business via Skype this morning to discuss broker calls. Probably around 11.05am.
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