The Overnight Report: The Single Step

This story features MCGRATH LIMITED, and other companies. For more info SHARE ANALYSIS: MEA

By Greg Peel

The Dow closed down -27 points or 0.1% while the S&P fell -0.3% to 2265 and the Nasdaq was flat.

Confession Session

Another Monday in January, and another swag of local market participants returning to work for 2017 with a cautious view. On the back of the Trump inauguration rally on Wall Street, and after a soggy week last week, we saw the futures suggesting a 27 point rebound yesterday morning.

We booked 32 points on the open and immediately ran into a wave of selling. By the end of the day, the index was down -43 and every sector closed in the red. This would tend to suggest market-wide selling rather than individual stock/sector divestment, but there were a couple of stand-out individual moves.

Recently listed McGrath Real Estate ((MEA)) must by now be wondering why they ever did, falling another -5% on a profit warning as agents flee the company. The tragedy at Dreamworld last year has cost Village Roadshow ((VRL)) (-9%) on a flow-over basis. And the saga continues for Bellamy’s ((BAL)) (-4%), as a class action is launched accusing the company of a lack of disclosure. One of the law firms is Slater & Gordon ((SGH)).

I’ll leave you to ponder the irony.

But the whale on the day was ASX Top 20 member Brambles ((BXB)), who issued a profit warning and copped a -15% hammering as a result. The fact there are as good as no short positions on Brambles suggests (a) it is considered a low volatility plodder of a stock and (b) there was no safety net of short-covering yesterday. Hence a big plunge into the void.

Brambles sent the industrials sector down -4% and alone accounted for about a quarter of the ASX200 fall. The next worst sector was healthcare, down -1.7% as traders finally took profits on CSL ((CSL)). Otherwise, it was a Sell Australia session.

With the February earnings result season looming, we have clearly now entered the traditional Confession Session, in which companies admit before their result release they’re not going to hit guidance. Better to get it out there than to wait for a shellacking on reporting day. Rarely will you ever see a positive “confession”. The market likes upside surprises on the day.

There Goes the TPP

It’s official. Trump has signed an executive order killing off the TPP. Turnbull can now stop playing Pollyanna and get on with negotiating the kissing-your-sister ex-US version. Trump now has NAFTA in his sights.

Trump has kept at least one campaign promise of what he said he would do on Day One. But a weaker session on Wall Street, and a very lengthy White House press conference, suggest both the market and the fourth estate have taken Trump’s “Day One” rhetoric rather literally. What about tax reform, what about Dodd-Frank, what about infrastructure, what’s going to replace Obamacare? There’s only so much the man can actually achieve in a day.

Or even in several months. Perhaps Wall Street will soon settle down to realise these things are going to take time, and moreover, just because the Republicans control both houses it doesn’t mean Trump has an imprimatur. Perhaps at this stage it’s just best to concentrate on earnings season and let the political story unfold in its own time.

Earnings season to date has seen 75% of reporting S&P500 companies beating earnings estimates, but so far only 54 have reported. Two themes are emerging, being the impact of the Trump-driven stronger dollar on forward guidance, and the fact the Trump rally to almost Dow 20,000 means any beat has to be significant if profit-taking is to be avoided.

On the latter front, last night saw all of Boeing, Exxon and McDonalds leading the Dow lower.

As it was, Wall Street had given up all of its inauguration day gains by midday, at which stage the Dow was down -95 points, before a graft-back began to a modest fall by the close.

What will Day Two bring? Well, a lot more earnings results, and as the week progresses, a lot of economic data, culminating in the December GDP release on Friday.

Commodities

Trump’s attack on free trade, and a lack of counterbalancing economic stimulus policy so far, sent the greenback tumbling last night. The dollar index is down -0.7% at 100.14.

This should have provided an all-things-being equal boost for commodities but while all base metals were stronger in London, only lead (+2%) posted a move of any significance. At least nickel was spared for a day.

Iron ore rose US60c to US$80.70/t.

Gold rose US$7.80 to US$1215.60/oz.

The dollar had little impact on the oil market, where concern over a rapid restart of idled US rigs is overwhelming the evidence of OPEC production cuts actually being implemented. West Texas crude is down -US45c to US$52.77/bbl.

The weak greenback has the Aussie up 0.3% at US$0.7574.

Today

The SPI Overnight closed up 19 points or 0.3%. Why such optimism? Yesterday’s 27 points up turned into -43 down by the close. Wall Street is mildly weaker. Is it because we’ve now fallen too far, having first risen too far?

Japan, the eurozone and US will post flash estimates of January manufacturing PMIs tonight.

Locally, quarterly production reports are due today from Oil Search ((OSH)), Sandfire Resources ((SFR)) and Orocobre ((ORE)) while ResMed’s ((RMD)) quarterly earnings result has just been released.

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