The Overnight Report: Gravitational Pull

This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

By Greg Peel

The Dow closed up 114 points or 0.6% while the S&P gained 0.7% to 2271 as the Nasdaq jumped 1.0%.

Consolidation

Share price moves in two stocks yesterday pretty much sum up the action on the local market over the last few sessions. Fortescue Metals ((FMG)) fell 6% to be the second worst ASX200 performer on the day, and CSL ((CSL)) rose 3% to be the best performer. Neither company issued any new news.

In Fortescue’s case, we saw another jump in the iron ore price overnight.

The bottom line is Fortescue has been on a tear this past few months and CSL has been slumping. The US election gave the former an added boost and the latter fell further as investors weighed up the winners and losers of a Trump presidency. But now that we’ve rallied this far, investors are rotating out of the winners and back into the losers.

It’s not a smooth rotation – sector moves have been pretty choppy these past few sessions – but the theme is clear. The ASX200 is consolidating around the 5550 level as the market tidies up after the party that has been the Trump rally and positions for what might next transpire.

The materials sector dominated the index downside yesterday with a 1.7% fall, countered by a 1.3% gain for healthcare. The banks, which have also had a good run, fell 0.6% and no other sector much troubled the scorer. Energy went nowhere despite the big move up in the oil price overnight because it had already made its big move up on Monday.

Things can only get better, it would seem. The local stock market has enjoyed a strong rally despite the Australian economy going backwards last quarter and despite business conditions softening notably over the second half of the year. Yesterday’s NAB business survey for November saw a fall in the business conditions index – measuring the “what is” – to 5.3, down from 6.6 in October and 8.1 in September.

Yet business confidence – the “what will be” — recovered to 5.0, having fallen to 4.3 in October form 6.3 in September.

If the Australian economy is flagging, the Chinese economy is showing signs of improvement.

Chinese industrial production rose 6.2% year to date in November, a tick better than the expectations, and retail sales rose 10.8%, much better than expected. Fixed asset investment came in as expected at 8.3% year to date, in line with the prior month.

The numbers tie in with earlier reading on the Chinese PMIs and trade data for November, suggesting the Chinese economy is moderately improving.

Suck it up

Last night the Dow rose another hundred points to cross the 19,900 mark. Once again there was no particular incentive for the sudden renewed boost of confidence, after recent sessions had shown signs of the rally running out of puff. And having sold Big Tech on Monday night, suddenly last night Big Tech was highly sought after.

Hence the Nasdaq turned around to outperform, led by FANG and co, while in the Dow, the two biggest winners on the day were tech dinosaurs IBM and Intel. How come?

It appears that Dow 20k will indeed be a self-fulfilling prophecy. The assumption after last night’s session is that confirmation from the Fed tonight of a rate hike will provide the final incentive. The landmark level is providing its own gravitational pull. What is the significance? There is none. It’s just that 20,000 is a nice round number.

As I have noted in previous Reports, those making predictions about “where the Dow will be in three months’ time”, for example, never come up with a number like 19,847. They come up with a round number, like 20,000. That then becomes a goal, and usually a point at which a pullback is triggered given profits are taken once the goal is reached.

As to whether the Dow hits and can push through 20k will probably come down to the Fed, given tonight’s FOMC policy statement represents the last major “event” of the year. A rate hike is assumed, so attention will be focused on the Fed’s thinking for 2017. Now that Trump is set to change the fiscal landscape, and US bonds yields have surged, surely the Fed cannot approach 2017 with the same monetary policy stance it has held throughout 2016.

The push towards Dow 20k continues to be driven by those stocks that missed out or fell back in the initial Trump rally, such as Big Tech. The initial winners, such as infrastructure stocks, aren’t plunging, just stalling for now.

Commodities

Things were a bit quieter on the commodity front last night.

West Texas crude is up US27c at US$52.84/bbl.

Base metal prices all moved within a 0.5-1.5% range, with aluminium and nickel up and copper, lead and zinc down.

Iron ore fell US80c to US$82.00/t.

Gold is down a tad at US$1158.70/oz with the US dollar index steady at 101.07.

The Aussie continues to creep higher, up 0.2% at US$0.7502.

Today

The SPI Overnight closed up 24 points or 0.4%.

Westpac will publish its monthly consumer confidence survey locally today.

Numbers for US industrial production, retail sales and wholesale inflation are due tonight ahead of the release of the Fed statement, “dot plot” forecasts and Janet Yellen’s press conference.

Rudi will participate in the Christmas Special tonight (starts 7pm) with members and guests of the Chatswood Chapter of the Australian Investors Association (AIA). Tomorrow he'll present on stage to members of the Australian Shareholders Association (ASA) in Sydney, at noon. So no Sky Business appearance on Thursday this week.
 

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