The Overnight Report: Brexit In Focus

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By Greg Peel

Wall Street was closed last night for Martin Luther King Day.

Stocks with Rocks

As we may recall, it was this time last year investors could not dump their resource stocks fast enough on the local market as the prices of oil, iron ore and coal went into freefall and base metals headed south in sympathy. This January looks very different.

The turnaround came in the bulks as China tightened up the supply side with restrictions and boosted the demand side with infrastructure stimulus. In oil, OPEC/non-OPEC production cuts appear to be holding. In base metals, a mix of Chinese demand and on/off export bans from the likes of Indonesia and the Philippines have determined price movements. In the background, lithium, graphite and anything else to do with batteries have been in vogue.

Around August many a market commentator was calling the bottom in the market for commodity prices. They were proven correct, but no one foresaw the extraordinary rallies that followed. It was only late last year that resource sector analysts began to concede that they were wrong to believe the sharp rebounds in the prices of iron ore and coal in particular were no more than speculative blips.

Hence the ASX200 has rallied back from the brink under 5000 to hit 5800 last week. Resource sector stocks have been the driving force. The banks have also made a comeback, despite ongoing uncertainty around potential capital raisings. Australia’s Big Caps – pariahs for the bulk of 2016 – are back in favour. Meanwhile, 2016 was a shocker for many companies in the high growth, and thus high PE, cohort. Small caps have moved sideways of late on a mix of ongoing solid stories balanced by many a disaster.

Yesterday’s trade on the ASX was again mostly about rocks, albeit a 42 point opening gain for the ASX200 reverted to around a 27 point gain by midday. Then the market went to sleep.

The materials sector provided the bulk of the gain in rising 1.3%. Consumer staples provided 0.5% support after Woolworths hired a Pom to revive its ailing supermarkets. Utilities managed a 1% gain on a 5% jump for in-play DUET ((DUE)).

Chances are the market will drift back again today, with the futures suggesting an 8 point drop despite no lead from Wall Street and a 4% jump in the iron ore price. It’s not a week to take big risks. Locally we have the resource sector quarterly reporting season ramping up, in which the miners will need to justify share price rallies with solid production and sales numbers. Next month, earnings reporting season begins.

Earnings reporting season is underway in the US to offer near-term direction for Wall Street, with the slight caveat being Trump’s inauguration on Friday night, what may or may not be revealed policy-wise in his speech, and what madness he may tweet before and after.

And tonight the world will supposedly learn just how Brexit is going to work.

Between a Soft and a Hard Place

Immigration appears to be the determining factor for Brexit. Britons have voted (by a slim majority) to shut the borders and this can only be achieved by exiting what was once known, back when Jim Hacker was PM, as the Common Market. Such an exit from the EU would be considered a “hard” Brexit, and PM Theresa May has said “Brexit means Brexit”.

On the other hand, she has dismissed the labels “hard” and “soft” as being irrelevant. This would imply she is aiming for some sort of middle ground – a bit like a “free trade agreement” in reverse; the word “free” being a major misnomer in any complex global trade agreement.

May has refused to provide any hints up to now. All will be revealed tonight, apparently, in her speech. The UK is holding its breath but forex traders are not prepared to take the risk. “Hard” will not be good for the pound, so last night the pound fell 1% to return to the depths of the initial plunge last year post-vote.

Commodities

The US dollar index is subsequently up 0.4% at 101.59 and the Aussie is down -0.3% at US$0.7474.

Iron ore has jumped US$3.30 to US$83.50/t.

Confusion around the impact of Indonesia’s qualified lifting of its nickel export ban had that metal down -4% in London last night. The other base metals were all around -1% lower.

Oil prices are little changed, with West Texas crude sitting at US$52.66/bbl.

Gold is US$5.10 higher at US$1202.60/oz, despite the stronger greenback. The dollar-gold relationship becomes superfluous every time Trump speaks of dismantling NATO.

Today

The SPI Overnight closed down -8 points.

Wall Street will reopen tonight with a slew of corporate earnings reports after Theresa May has outlined her Brexit plan.

Locally we’ll see housing finance data today.

Rio Tinto ((RIO)), one of the stars of the recent rally, will publish its December quarter production and sales report today.

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