The Overnight Report: Oil Tanks

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            [5] => ((TAH))
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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down -69 points or -0.3% while the S&P lost -0.2% to 2362 and the Nasdaq rose 0.1%.

Torpor

Yesterday’s Chinese trade data for February revealed the first trade deficit for the country since February 2014. It was only a small deficit, but the result of a 38.1% year on year surge in imports, against a -1.3% fall in exports. Forecasts had suggested a 20% jump in imports and a 12.3% rise in exports.

A jump in import value was anticipated as the rebound in commodity prices flows through to supply contracts. But why were forecasters so far off the mark? Probably because China’s Lunar New Year week-long break fell at the end of January this year and not in February as it did last year. With no seasonal adjustment to the data, distortions of this magnitude are run of the mill every year around the holiday period.

Realistically China-watchers need to aggregate January, February and March data before arriving at any trend conclusion. Certainly the Australian stock market was unmoved by the Chinese data yesterday – but then again the Australian market at the moment is unmoved period.

The materials sector was not excited by Chinese imports after the iron ore price had fallen -4% overnight. With many an analyst suggesting prices in the nineties are a bit lofty, there must be some fear a swift reversal might be in train. Iron ore fell another -2.6% last night. The materials sector was the worst performer yesterday, down -0.8%.

Having risen on Tuesday, utilities fell -0.5%. Having done nothing on Tuesday, telcos rose 0.5%. The other leading sector on the day, with a 0.5% gain, was energy. Not so today, one assumes.

Otherwise the Australian market continues to bungle along sideways, waiting for someone to tell it what to do.

Losing Energy

The ADP private sector jobs report published in the US at the open last night showed 298,000 jobs were added when 183,000 was forecast. The US ten-year yield immediately spiked 7 basis points to 2.58%.

Bond market guru Bill Gross has suggested that if the ten-year rises through 2.6%, the decades-long bull market in bonds is over, and a bear market has begun (in price terms – bear market means rising yields). As markets more emphatically price in a Fed rate hike next week, there is a risk this level will be broken.

But the jump in yields didn’t last too long, in the wake of weekly US crude inventory data.

A reminder that each week there are two inventory reports issued in the US – one from the American Petroleum Institute and one from the Energy Information Agency. While both reports have the power to move oil markets, the latter seems to be considered the benchmark, and the two are quite often completely at odds.

Not this week. The API report earlier in the week suggested record crude inventories, and last night’s EIA report backed that up. While news from abroad continues to suggest a high level of compliance among OPEC members to production cut quotas, no such quotas exist for US shale. The WTI price has been sitting around in the low fifties now for weeks, torn between OPEC cuts and the reignition of US shale production. The patience of long positions must surely have been tested.

West Texas crude is down -US$2.73 or -5% at US$50.39/bbl. Traders warn that a breach of the psychological 50 mark could set off another stampede.

Suffice to say, the US energy sector was the biggest loser on Wall Street last night. The Dow opened flat, with the strong ADP jobs number only cementing the assumption a rate hike next week is a given. But the oil price drop set of weakness in the afternoon.

The US ten-yield fell back again to be up 4 basis points at 2.55%.

There was nothing Mr Trump could pull out of his hat last night to stave off creeping weakness on Wall Street. The sixteen-week winning streak looks set to end this week. Early signs are that Trump’s proposed healthcare bill has a long way to go before being ratified by Congress.

Commodities

Last night’s ADP number only added to gold’s recent pain, on anticipation of a rate rise. With the US dollar index up 0.3% at 102.09, gold is down another -US$5.30 at US$1209.30/oz.

Base metal price moves in London were smallish and mixed last night with one exception. Volatile nickel, which rallied strongly earlier in the week, closed down -4%.

Iron ore fell -US$2.30 to US$85.30/t.

Weaker commodity prices are likely behind the Aussie’s drop of -0.7% to US$0.7535.

Today

Oil down -5% and iron ore down -2%; one might have expected more than a -12 point drop for the SPI Overnight. But there has already been a pullback for the miners.

Note, nevertheless, that BHP Billiton ((BHP)) goes ex today, along with South32 ((S32)), OZ Minerals ((OZL)) and Independence Group ((IGO)), providing quite a starting handicap for the sector.

The ACCC is due to announce its decision on the Tatts ((TTS))/Tabcorp ((TAH)) merger today.

China will release February inflation numbers.

The ECB will hold a policy meeting tonight.

Rudi will not appear for his weekly slot on Sky Business at 12.30pm today (already did that yesterday) but he will still appear on Switzer TV between 7-8pm tonight.

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