The Overnight Report: World Games

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By Greg Peel

The Dow closed down 58 points or 0.3% while the S&P lost 0.3% to 2267 and the Nasdaq fell 0.6%.

Back from Holidays

I suggested earlier in the week, as I returned from my own annual leave, that there may be many a market participant who has similarly returned to see the ASX200 at 5800, up from 5500 before Christmas, and wonder why, exactly.

The Dow failed to breach 20,000 in the meantime as Wall Street stalled. Sure, commodity prices were holding up there, and still are, so perhaps there was some justification to play catch-up in resource stocks. But commodity prices (ex-gold) did not rally over the period. And the Aussie did rally, acting as a headwind.

There appeared to be some element of simply returning to the Big Caps that had such a tough 2016, but to that end it almost seemed like a delayed catch-up rally to match Wall Street’s initial Trump euphoria. Wall Street commentators were warning of a blow-off in the euphoria once reality set in, being actual policies and the time it actually takes to implement them.

The ASX200 has now seen three sessions of 40-50 point drops over the past week, including -49 points yesterday. One might argue there was some squaring up ahead of Theresa May’s Brexit speech, and squaring up ahead of Trump’s inauguration speech. But the general selling began from the opening bell, and no sector was spared. This smacks of investors simply selling a market they consider to have become overvalued.

Materials (-0.5%) is a case in point. The iron ore price was up 4% on the open and Rio Tinto ((RIO)) posted a satisfactory production report. It might have been a tad disappointing on the realised iron ore price but did it justify selling, other than on the basis of having already run too far?

The banks (-1.0%) were also beneficiaries of Trump euphoria, but they, too, are coming in for valuation scrutiny. The local banks followed up the US banks, which were leaders in the Trump rally, and now the US banks are on the wane as US interest rates retreat and a general feeling of unease permeates pre-inauguration.

The bottom line is the local market is appearing to be resetting, perhaps establishing a middle ground between what Trump has promised and what Trump may well fail to deliver.

Compromise

Brexit will be “hard” – not a term Theresa May endorses, but one that cannot be shaken. The plan is to sever trade ties with the EU completely, thus restoring control over immigration. But it will be a “phasing out” process, so not to immediately and dangerously jolt the UK economy. And parliament will get to vote on the final details.

Is it a good result? The FTSE100 fell -1.5% and the pound rebounded a whopping 3%. But then the UK stock market has had a good run since the Brexit vote and the pound has collapsed, so the clarity finally provided re the actual Brexit plan has basically triggered profit-taking. The plan is not quite as “hard” as forex markets feared, and not as “soft” as the stock market would have liked.

Dollar Dilemma

President Xi Jinping was in Davos last night playing Mr Nice Guy, talking up globalisation and talking down trade wars. He insisted that there is no plan to force the renminbi lower (indeed, currently the government is trying to prop the renminbi up). It was an interesting response, commentators suggest, to what Mr Trump had to say over the US long weekend.

Trump again accused China, in an interview, of “keeping the yuan weaker”. Note that for the purpose, the renminbi and yuan are the same thing. “Our companies can’t compete with them now because our currency is too strong,” said Mr Trump, “and it’s killing us”.

But hang on. The US dollar has rallied strongly post-election on Trump’s campaign promises for a stronger US economy. Before any policy is actually announced or implemented, the President-elect is bemoaning the greenback’s strength. What does this mean for the actual policies that may emerge?

This is what Wall Street, and the world, is currently worried about. Or at the least, what is prompting a retreat from the initial euphoria. The 35% border tax? Looks like that one’s going to be too hard, Trump’s transition team has admitted. What else is too hard?

The US dollar index has been drifting lower this month and last night fell -1.2% on its index to 100.39, thanks to both Trump’s comment and the surging pound. The US ten-year yield, which had hit 2.60% and looked for all the world like it would hit 3% by now, has also been drifting lower. Last night it dropped another -5 basis points to 2.33%.

The US banks led the market up post-election, and now they are leading the pullback. Last night’s weakness on Wall Street was to a large extent attributable to the banks which, despite solid earnings reports, are now looking at a less promising interest rate scenario.

Three more sessions to inauguration.

Commodities

The drop in the greenback has given gold another kicker. It’s up US$12.70 at US$1215.30/oz. The Aussie has matched the dollar index’s -1.2% drop with a 1.2% gain to US$0.7562.

Copper fell -2% in London and nickel and zinc each fell -1% while aluminium and lead were stronger.

After jumping on Monday 4%, iron ore fell -2% or US$1.80 yesterday to US$81.70/t.

West Texas crude was a tad higher on Monday night and a tad lower last night, at US$52.48/bbl.

Today

The SPI Overnight closed down -9 points.

We’ll be hearing from Janet Yellen tonight, just to add to the fun, but she’s no doubt just as much in the dark as everyone else.

The US will also see industrial production and housing sentiment numbers.

Locally, Westpac will release its monthly consumer confidence survey.

Paladin Energy ((PDN)) and St Barbara ((SBM)) will release production reports and Aurizon ((AZJ)) will report on quarterly rail volumes.

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