The Overnight Report: Watch And Wait

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This story features SONIC HEALTHCARE LIMITED, and other companies.
For more info SHARE ANALYSIS: SHL
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down -29 points or -0.1% while the S&P lost -0.4% to 2367 and the Nasdaq fell -0.3%.

Repositioning

Yesterday’s action, if you can call it that, on the local market was a bit of a repeat of the day before. The market opened lower and then grafted higher for a slight gain. For the time being the ASX200 appears stuck around the 5750 level.

This is likely representative of Wall Street, too, being stuck, and the fact there’s not a lot coming out of the rest of the world at present to spark any volatility. That may change when the round of European elections begins, starting with France, but meanwhile China seems to be plodding comfortably along, oil prices are barely moving, and globally there’s not much going on.

The materials sector has been the main focus of attention post result season, pulling back following a strong rally and solid results, then bouncing, then pulling back again. Outside of gold, commodity prices have been relatively stable, so such volatility is representative of a market trying to determine just what sort of valuations are appropriate from here.

The materials sector was the only sector to finish in the red yesterday, down -0.4%. Otherwise it was a day to reconsider defensive stocks. This may be indicative of a market starting to worry that Wall Street may be on the brink of a decent pullback of its own, although that never seems to come.

Utilities led the market higher yesterday with a 1.2% gain, supported by consumer staples (0.9%) and healthcare (0.7%). One might normally expect telcos to be in there too but that’s quite an uncertain market these days, with Telstra soon to lose its status as a quasi-government dividend payer and other players getting in a tangle trying to adjust to the new world order. Telcos rose only 0.2%.

The banks also had a positive session, rising 0.4%, despite their CEOs currently being grilled by parliament. The banks are about to suffer from increased funding costs as US rates rise, and can no longer look forward to another RBA rate cut, it appears, to provide for sly mortgage repricing opportunities. Any repricing will have to be overtly out-of-cycle.

“Interest rates are expected to increase further in the United States and there is no longer an expectation of additional monetary easing in other major economies,” noted Philip Lowe in his policy statement yesterday. Weighing up all the domestic pros and cons outlined by the governor, which add up to a fairly benign monetary landscape, it seems interest rates could be on hold for some time. Parts of the economy could use a cut, but that would only add more fuel to the housing bubble. And offshore influences suggest the next move will be up.

Fully Sick

The Trump administration released its draft proposal for the healthcare policy with which it intends to replace Obamacare last night, to a lot of blank looks. Apparently it’s very complicated and no one can quite understand it. Given the US health system is a domestic issue with no connection to Australia, I’m not going to attempt to understand it either.

What would be familiar to Australia, however, were immediate cries of “but how are you going to pay for it?”

The administration was quick to point out this is a draft, and all suggestions for improvement would be welcome. Prior to Trump’s inauguration it was suggested the policy promise that would take the most time to be sorted out in Congress was “getting rid of Obamacare”. And that’s before we get to major tax reform.

At least we have evidence of the Trump team turning words into action. Wall Street is currently stalled on the basis of awaiting such policy announcements, and also stalled as it anticipates Friday night’s jobs number and next week’s Fed decision.

Until such time it is unlikely anything will send US stocks on another leg up. But then try as it might, Wall Street can’t go down either. At the risk of trotting out the old hackneyed “cash on the sidelines”, it is simply the case there is plenty of money “underinvested” since the whole Trump phenomenon took off.

Perhaps the most notable move in last night’s markets was that of gold, which fell another -US$11.30 to US$1214.60/oz. Wall Street believes a Fed rate hike next week is baked in, and will not trouble the market. The market would more likely be more troubled by uncertainty if the Fed didn’t hike. A rate hike should lift the US dollar, which is also barely moving anywhere at the moment, and therefore weigh on gold.

If a hike is baked in, then Friday’s jobs number is not really that important. But Wall Street is in pause mode anyway.

Commodities

The prospect of higher US rates and thus a stronger greenback is weighing on all commodities at the moment, with last night’s LME inventory data providing base metal traders with another reason to sell. Copper dropped -1.5%, zinc -2% and nickel, which has enjoyed a few days of strength, fell almost -4%.

Iron ore also fell -4%, down -US$4.00 to US$87.60/t.

Oil prices were again little changed.

The US dollar index is up 0.2% at 101.81 and the Aussie is up 0.1% at US$0.7591.

Today

There are few who believe iron ore is set to remain in the nineties for any period of time. Was last night a sign? The SPI Overnight closed down -19 points or 0.4%.

On that subject, China’s trade numbers for February are due out today.

Tonight’s private sector jobs report in the US will provide some hint for Friday’s result.

Sonic Health Care ((SHL)) will hold an investor day today while Brambles ((BXB)) is among today’s bunch of stocks going ex.

Rudi swapped his weekly Thursday appearance and will thus appear from 12.30-2.30pm on Sky Business today.

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