The Overnight Report: Struggling

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

By Greg Peel

The Dow closed up 39 points or 0.2% while the S&P fell 0.1% to 2256 and the Nasdaq dropped 0.6%.

Oiled Up

The ASX200 jumped 20-odd points from the open yesterday, as the futures had predicted, and then did nothing much up to lunchtime. After lunch it swiftly fell back to the flat line, suggesting perhaps a large sell order hit the market.

In the wash-up, we saw another session lacking any market-wide theme. Rather, it was all about individual sectors and stocks.

Anticipation of Russia and other non-OPEC producers joining the OPEC production cut plan had the big energy names leading the way, sending the energy sector surging 2.9%. Santos ((STO)) topped the board with a 5% gain. On the other side of the ledger, healthcare suffered the biggest fall of the session, dropping 1.7% as sector leader Ramsay Health Care ((RHC)) fell out of favour.

Elsewhere, sector moves were mixed and fairly negligible. The banks stood still, materials rose slightly despite a dip in the iron ore price, and utilities and telcos swapped 0.7% up-down moves respectively.

Among individual stocks, there’d be some nervous cows out there this morning after Bellamy’s Australia ((BAL)) went into a trading halt, following a “please explain” from the ASX regarding disclosure. It may be another bad session for the infant formula exporter today, as suggested by yesterday’s 6.5% drop for peer a2 Milk ((A2M)) and 3.5% for Bega Cheese ((BGA)).

Another stock in focus of late has been residential aged care provider Estia Health ((EHE)), thanks to a wild ride in 2016. It also went into a trading halt yesterday, but in this case pending a capital raising announcement.

The biggest loser on the day was old world travel agent Flight Centre ((FLT)), which dropped 7% after Morgan Stanley slashed its target price on the stock and downgraded to Sell equivalent.

Chartists have been keeping an eye on the 5550 level as the pivot point for a rally towards 6000. The index is now consolidating just above that level, and this morning the futures are suggesting a pullback below. There is now hot debate as to whether Wall Street’s Trump rally will run out of puff, and tomorrow night we have the Fed meeting.

Tenuous

The Fed meeting has provided Wall Street with pause for thought, and questions over the duration of the Trump rally are constantly being asked. Oil helped the Dow up slightly last night, but in a return to selling of the FANG stocks, the Nasdaq dipped.

Interestingly, last night saw a bit of a jump in the VIX volatility index on the S&P500. It rose 8% to 12.7 having last week dipped down to 11. As a general rule of thumb, anything above 30 suggests fear and anything below 20 suggests complacency. At 11, history suggests the market has become over-complacent. Many a correction has begun with the VIX at 11.

Last night’s buying of option protection may simply be Fed-related, or it may suggest there is a growing cohort believing the rally has now run too far. Yet all talk is of Dow 20,000, and this may yet become a self-fulfilling prophecy.

At the same time, the US ten-year bond yield continues to rise, ticking up another 2 basis points last night to 2.48%. While a 25 point hike from the Fed is assumed, will the FOMC suddenly change its tune and become hawkish? The problem for the Fed is the US dollar. It dipped last night, but has run hard post-election and the trend remains up.

Commodities

Last month OPEC agreed to cut production by 1.2m barrels per day, with Saudi Arabia copping the bulk of 500,000bpd. Last night a group of non-OPEC producers, led by Russia, agreed to cut production between them by 558,000bpd.

Aside from the amount of reduction itself, the agreement is seen as significant given Russia and Iran are closely allied. Iran had all year been the sticking point for OPEC, thus Russia’s production cut sends a message to its ally.

Last night West Texas crude jumped 6% on the Nymex open to US$54.50/bbl, before drifting back for the rest of the session. This morning it is up US$1.10 or 2% at US$52.57/bbl. The production cut agreements raise two specific questions.

One: Will OPEC members stick to their quotas? They never have before.

Two: Assuming the oil price does hold above US$50/bbl, will US shale production simply fire up again to fill the supply gap? Last week the US rig count rose 21 to 498, representing the biggest weekly jump since July last year.

The overriding question is thus one of whether the oil price can remain supported for any length of time. At present, consensus suggests 2017 can see oil averaging above 50 but given the time lag for oil rigs coming back on line, it could all fall apart again in 2018.

It was another mixed session for base metals last night and it’s all becoming a bit tedious. Aluminium, copper and nickel down, lead and zinc up.

Also rather tedious is iron ore price volatility. Iron ore has jumped back US$3.20 to US$82.80/t.

The US dollar index is down 0.5% at 101.04 but has not provided much of a lift for gold, which is up slightly at US$1161.50/oz.

The Aussie has matched the greenback in rising 0.5% to US$7489.

Today

The SPI Overnight closed down 21 points or 0.4%. There is an implication within we had our oil stock rally yesterday.

NAB will publish its monthly business confidence survey today.

China will release industrial production, retail sales and fixed asset investment numbers for November.

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

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