The Overnight Report: All The Way To 20k

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By Greg Peel

Wednesday

Australia’s headline CPI rose 0.5% in the December quarter to a 1.5% annual rate. Underlying inflation rose 0.4%, slightly below expectation, to 1.6%. While the numbers suggest inflation remains subdued – we remain a long way from the RBA’s 2-3% target band – the fact the headline dropped to 1.0% in the June quarter indicates a healthy rebound.

Economists therefore do not expect any change in RBA policy at the first meeting of the year.

The Aussie dollar fell to US75.4c from around 75.8c on the news but recovered that ground on Wednesday night thanks to a dip in the greenback.

Wednesday’s 0.4% rally for the ASX200 was all about the resources sector. Materials gained 2.0%, with BHP Billiton ((BHP)), Rio Tinto ((RIO)), South32 ((S32)) and Alumina Ltd ((AWC)) alone providing 16.5 points to the net 21 point increase. BHP posted a better than expected production report, Rio was still enjoying momentum from its Coal & Allied sale, and Alumina proved the biggest mover on the day (+11%) after a strong earnings result was posted by Alcoa in the US.

Second biggest mover on the day was Western Areas ((WSA)), which finally found some support when the nickel price didn’t drop for once.

The banks were also back in favour after having been sold off from their peaks following a raft of overvaluation warnings from brokers. Financials rose 0.6% and provided 8 index points. The main drags on the day were the defensives – telcos, utilities and consumer staples.

To recap, we have seen the local market rally alongside Wall Street in the initial Trump euphoria, and then rally again post-Christmas while Wall Street took a breather. As many a market participant returned from their holidays, it appears they saw a market looking a bit overdone, particularly in the banks and big miners. A pullback ensued.

That appears now to be over, and as the Trump rally is reignited in the US, more upside is on the cards. The futures closed up 39 points on Thursday morning. But for any rally to be sustained, more breadth is required. We can’t just keep pushing the mega-cap banks and miners into overbought territory.

Wednesday Night

Round numbers provide psychological barriers for markets, for no more reason than they are round numbers. And numbers don’t come much rounder than 20,000.

Late in December, all were convinced the Dow was set to hit 20,000 before Christmas. It reached 19,999, and then proceeded to pullback as Wall Street fell into a vacuum between Trump’s election and inauguration.

Trump has hit the ground running. While the market was uneasy about the wider protectionist implications of the axing of the TPP, the next day’s orders to expedite the construction of oil pipelines were met with enthusiasm. On Wednesday night, Trump signed the order to begin construction on his infamous wall. What Wall Street is really looking for is news on much vaunted tax reforms, deregulation and infrastructure stimulus. Pipelines and walls are stimulus. The other two will take time.

But not as long as feared, it would seem. On Wednesday night House Speaker Paul Ryan suggested tax reform was part of a 200-day agenda. Many had been assuming nothing could really be achieved before 2018. This was good news for a Wall Street concerned Trump would prove all campaign promise and no action.

And thus it was enough to take the Dow through 20,000 on the opening bell.

The Dow closed up 155 points or 0.8% at 20,068. The S&P gained 0.8% to 2298 and the Nasdaq jumped 1.0%. All three indices hit new all-time highs. The only absentee is the Russell small cap index, which remains a tad shy of its high. If that, too, can hit the mark, then it’s on for young and old, traders suggest. The Dow 20k psychological barrier has been breached.

But it’s not all just about Mr Trump, although clearly the promise of a brighter future for the US economy is a primary driver. In the background, the US earnings season continues to prove a positive one, and on-trend. Since bottoming out in the March quarter 2016, US earnings have risen 20% (S&P500). That’s not a policy promise, that’s real money.

Further into the background, the global economy as a whole is quietly improving. The confluence of these three factors is providing Wall Street momentum, symbolised by conquering of Dow 20,000.

The blue chip average has doubled since 2010, when the Dow recovered the 10,000 mark. The average halved from 14,000 in the GFC. The Dow first hit 10,000 in the 1999 tech bubble.

Thursday Night

Having reached the magic milestone on Wednesday night, Wall Street largely stalled for a breather last night. The Dow managed to gain another 32 points or 0.2% to 20,100, but the S&P fell -0.1% to 2296. The Nasdaq was flat.

The focus was again on earnings reports. Last night’s results were mixed, but the trend remains positive. To date, 120 S&P500 companies have reported and 78% have beaten earnings forecasts. But more pleasingly, 57% have beaten revenue forecasts.

In the period from the GFC to now, US companies have managed to return to earnings growth but not by growing revenues. Earnings growth has been achieved by cutting costs, and earnings per share growth has been enhanced by share buybacks. These are not the signs of a growing economy.

As late as last year, analysts were still bemoaning a lack of revenue growth after all this time. So to see more than half of S&P companies reporting to date beating revenue estimates is a positive sign, made more positive by the expectation of Trump-led economic growth providing a revenue boost.

This may be the case domestically, but there remains concern among multinational companies and exporters as to just what the impact of Trump’s protectionist trade agenda might be.

Commodities

Despite the US dollar index falling -0.4% to 99.98 on Wednesday night, gold dropped -US$7.90 to US$1199.60/oz. The US dollar rebounded 0.4% last night to 100.44 and gold fell another -US$10.30 to US$1189.30/oz.

On Wednesday night, base metal prices were all modestly weaker but last night suffered more substantial falls. As China heads into its week-long New Year holiday break from today, traders squared up ahead of the lack of activity the annual holiday ensures.

Copper was down -1%, aluminium and zinc -1.5%, and lead and nickel -3%.

Iron ore fell -US60c on Wednesday night to US$82.20/t and rebounded US20c last night to US$82.40/t.

Oil prices were slightly weaker on Wednesday night. Last night, industry data showing a faster than expected fall in global inventory in the December quarter of 24 million barrels to 5.7 billion barrels sparked a rebound, despite another increase in the weekly US rig count. West Texas crude is up US92c at US$53.79/bbl.

The Aussie was down -0.1% at US$0.7572 on Thursday morning and on greenback strength, is down another -0.3% this morning at US$0.7547.

Today

The SPI Overnight is down -2 points this morning. Take that off Wednesday night’s move and the futures are up 37 points since the ASX last closed.

As noted, Chinese markets are closed today and will be so for the period of a week.

Tonight in the US sees numbers for durable goods and consumer sentiment, but more importantly the first estimate of December quarter GDP – the final quarter, one might suggest, before the new Trump era. Forecasts are for a dip to 2.1% growth from September’s 3.5%.

Australia will see the December quarter export price index and Perseus Mining ((PRU)) will release its production report.

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