The Overnight Report: Fed Back In Focus

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

By Greg Peel

The Dow fell -24 points or 0.1% while the S&P rose 0.1% to 2270 and the Nasdaq gained 0.2%.

Consolidation

The ASX200 opened -42 points lower yesterday, and marked the low for the session. There followed a modest but steady graft back to a close of down -20 points.

I suggested yesterday that having jumped from 5000 to 5500 on initial Trump election euphoria, and then again to 5800 on commodity price strength in thin summer holiday trade, the index was likely now settling back to a new mid-ground level ahead of Trump’s inauguration that represents a level of caution as to just what Trump policies will now actually became reality.

Yesterday saw the banks losing further ground (-0.9%) along with healthcare (-0.9%), mimicking moves overnight on Wall Street. On the flipside, energy jumped 1.1% despite little change in the oil price. The suggestion here is that it is in Santos’ ((STO)) interest to push the price up ahead of next week when the benchmark price for the company’s discounted share purchase plan will be set. Santos rose 2%.

Yesterday also saw the consumer discretionary sector (-0.6%) responding poorly to the monthly Westpac consumer confidence survey, despite a 6% jump for Treasury Wine Estates ((TWE)) following Morgan Stanley’s rating and target price upgrade.

Confidence dropped in November and again in December following the negative GDP result. Data since the result release have confirmed assurances at the time the next GDP result would be much better, particularly as stronger commodity prices flowed through to the numbers. On that basis, a better confidence reading was expected for January.

A rise of only 0.1% for the index was thus a disappointment.

And Back to the Fed

Trump, Trump, Trump…that’s all we’ve heard since late last year. For all of 2016 however, what we heard was Fed, Fed, Fed. And there is no reason why 2017 is shaping up to be any different.

Oh joy.

Last night’s US data releases showed the headline CPI rising 0.3% in December to mark a 2.1% increase for 2016 – the fastest rate since 2011. Industrial production rose 0.8% — the largest monthly gain in two years.

As a result, US bond yields, which have been waning this month following the initial Trump spike, rebounded. The benchmark ten-year yield is up 6 basis points at 2.39%.

As Wall Street headed into the last hour of trade this morning, the text of the speech Janet Yellen was set to give over that time hit the wires. In the speech, Yellen suggested the US economy was now close to reaching the Fed’s dual goals of maximum employment and price stability (healthy inflation).

All last year the Fed was at pains to suggest the tightening cycle begun in December 2015 will be very gradual, and indeed we’ve only seen two rate hikes all up. But no one saw Trump coming. To that end, it is of no surprise Yellen said this morning she cannot say when the next hike will be. But what she did say is that there is a risk in being too slow to move.

Between inflation data, the bond yield rebound and Yellen’s comments, US banks staged a bit of a comeback last night. Goldman Sachs (Dow) also posted a strong earnings result but in so doing triggered a “sell the fact” after a strong post-election rally. Healthcare stocks were again under pressure, with the fate of Obamacare unknown and no word on what policy might replace it. Energy stocks fell on a lower oil price.

One disappointment for Wall Street this month has been the realisation US Christmas sales were tepid at best, and below expectation. Last night Target joined the chorus in issuing a December quarter profit warning for that reason. Shares in Target and peer US retailers suffered as a result.

Meanwhile, the world continues to await Trump’s inauguration.

Commodities

It should come as no surprise to anyone that US oil companies are planning to step up their production and development in the onshore shale basins now the oil price has recovered somewhat and stabilised and the cost of production has fallen lower still. But it was last night that the Nymex decided to respond.

West Texas crude initially fell 3% before recovering to be down US$1.27 or -2.4% this morning, following a report from OPEC that members are showing initial signs of compliance with the new production restrictions.

Just as the US CPI number pushed bonds higher, so too did the US dollar follow. It’s up 0.9% at 101.25 on its index. But the impact was not felt in London, where Aluminium and zinc both rose 2% and the other base metals posted small gains.

Iron ore fell -US50c to US$81.20/t.

The greenback rally has gold off -US$10.80 at US$1204.50/oz and the Aussie off -0.6% at US$0.7515.

Today

The SPI Overnight was mildly weaker this morning heading into Yellen’s speech has since turned around to close up 8 points.

Today brings the local monthly jobs lottery and tonight the focus will be on the ECB policy meeting.

South32 ((S32)) and Woodside Petroleum ((WPL)) release production reports today.
 

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