The Overnight Report: Taxing Times

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

By Greg Peel

The Dow closed up 118 points or 0.6% while the S&P gained 0.6% to 2307 and the Nasdaq rose 0.6%.

Bag a Bargain

Australian resource stocks have had a spectacular few months on unforeseen commodity price rebounds, having spent most of 2016 being completely unloved. Commodity price strength has begun to flow through to the numbers – for example Rio Tinto’s ((RIO)) earnings turnaround, and Australia’s trade balance. But commodity prices have now consolidated.

The view among analysts is that oil could go a bit higher, but iron ore may dip and coal prices have already started to pull back. Base metals are a bit of a lottery when you take into consideration on again/off again nickel export bans and the current copper mine workers’ strike in Chile. The bottom line is it appears commodity prices have made their adjustment for now. And so, it seems, have resource sector share prices.

The banks have also had a solid run of late, supported by easing fears of further capital raising requirements but also on the back of the Trump-driven US bank sector rally. Is there a direct link between Australian and US banks? Not really. Australian banks can only look forward to subdued earnings growth for the time being.

While the miners, drillers and banks were being bought up last year, many a high flying, high hope, high PE stock had a fall from grace. One by one former stars came crashing back to earth, often on very sharp one day moves. Are they dogs, to use market parlance, or did they just get a bit ahead of themselves?

One can’t call a trend from one day’s trade but yesterday’s session on the ASX was an interesting one. Every sector posted decent gains bar two, yet the index managed only a 0.2% net gain. That’s because the two were materials (-1.2%) and the financials (flat), the latter despite a strong day for AMP ((AMP)).

The winners’ board was composed, aside from a couple of companies posting well received earnings results, of previously beaten-down names. They include SaaS companies iSentia ((ISD)), Aconex ((ACX)), telcos Vocus ((VOC)) and TPG ((TPM)), and even Domino’s Pizza ((DMP)), which despite being a consistent performer has seen some selling of late.

Utilities topped the sector board with a 2.8% gain, thanks to AGL Energy’s result ((AGL)). Investors sold off some of the recent resource sector high flyers such as Fortescue ((FMG)), South32 ((S32)), and back-from-brink contractor Monadelphous ((MND)).

Housing construction was the big theme of 2016 as the miners, until late in the year, wallowed. On the release of tepid December new home sales numbers yesterday, the Housing Industry Association declared it expected the down-cycle to begin in 2017. It will only be mild, said HIA, but yesterday’s biggest loser board included all of James Hardie ((JHX)), Fletcher Building ((FBU)) and CSR ((CSR)).

As I say, one day is not a trend. But if yesterday’s session is any indication, we have hit another period of stock rotation rather than out and out buying or selling. Clearly the earnings season will bring about further big moves in individual names, and news from Trumpland will continue to dominate, but upside will require a change of leadership.

Phenomenal

It’s not often one word is worth a hundred Dow points. But that was the bottom line in last night’s trade on Wall Street.

At a meeting with airline CEOs – never before have so many CEOs beaten a path to the White House in such a short period – the president declared, on camera, that a tax reform policy will be unveiled in the next two to three weeks and that it will be “phenomenal”.

One gets the feeling everything Donald Trump does, in his own mind, is “phenomenal”. But Wall Street has been impatiently holding out for any news on promised tax cuts and now it looks like that news will be not far off.

Buy.

Of course there are those who are arguing that tax reform hopes were a big part of the Trump rally from the beginning, so as Wall Street continues to hit new record highs, why does it have keep going up every time tax is again mentioned? At what point is the market overvalued on buying the same story?

The good news is there are few who see a crash coming – a Trump house of cards falling down in a big way. There are many, nevertheless, who believe the market has to pull back and consolidate at a less exuberant level as the actual process of passing new legislation plays out – slowly.

Aside from the rally in stocks, Trump’s “phenomenal” call was worth a 0.4% jump in the US dollar index and a 4 basis point rally in the US ten-year bond yield to 2.39%.

The jump in yields had US banks back in favour once more, while weekly US oil inventory data showed an unexpected decline in gasoline stockpiles due to strong demand, sending the oil price up and energy stocks along with it.

All the major indices again notched up fresh intra-day highs, with the Dow hitting the 20,200 mark at one point before drifting back a bit at the death and the S&P500 closing above 2300 for the first time.

What will next week bring in Trumpland?

Commodities

West Texas crude is up US62c at US$53.05/bbl.

The 0.4% jump in the dollar index to 100.63 provided a headwind for metals prices, while confirmation that Chilean mine workers will indeed go on strike likely saw a sell-the-fact response given copper has been rallying these past few days in anticipation.

Copper fell -1% in London while nickel fell -1.5%, lead -2% and the others were flat.

Iron ore rose US40c to US$83.20/t.

The victim on night from Trump’s comments was gold, which in the face of the greenback jump is down -$8.90 at US$1230.80/oz.

The Aussie is down -0.1% at US$0.7626.

Today

The SPI Overnight closed up 24 points or 0.4%.

Locally we’ll see housing finance numbers today and the RBA will release its quarterly Statement on Monetary Policy.

China will release January trade data. Watch out for new year holiday distortion.

REA Group ((REA)) is among those companies posting earnings results today.

Rudi will skype-link with Sky Business today, probably around 11.10am, to discuss broker calls.

Plus FNArena is preparing for the launch of a new website over the weekend. Things will look a lot different on Monday…
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms