The Overnight Report: Improving Europe

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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 up 2 points while the S&P gained 0.1% to 2365 and the Nasdaq rose 0.1%.

All About Commodities

The ASX200 closed down a net -18 points yesterday with falls in BHP Billiton ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)) and South32 ((S32)) accounting for 20 points between them. Alongside those names on the top ten losers board were Whitehaven Coal ((WHC)), Western Areas ((WSA)), Independence Group ((IGO)) and Santos ((STO)), with OZ Minerals ((OZL)) not far off.

I think I detect a theme.

The materials sector fell a stand-out -2.6% yesterday, backed up by energy on -1.1%. Aside from an -0.8% fall for telcos, every other sector was flat to up on the day. But we do have to note that of those aforementioned resource stocks, all of BHP, Independence, South32 and OZ Minerals went ex-dividend yesterday, so the sector did start with a handicap.

Share prices nevertheless fell beyond their dividend adjustments. Investors had already started to take profits on the resource sector stocks post results season and will be feeling pretty good about themselves given the iron ore price has since dropped back through US$90/t and, as of last night, the WTI crude price has dropped back through US$50/bbl. Gold has traded lower for seven consecutive sessions on Fed rate hike assumptions and nickel…well, nickel’s been all over the shop.

It is not untypical for funds taken out of the big cap miners to find their way into the big cap banks on a switch play and a 0.4% gain for financials yesterday provided the counterbalance. This despite rising US interest rates implying rising bank wholesale funding costs, although this will provide an excuse for the banks to reprice their mortgage books, one presumes.

Otherwise, consumer discretionary was the winner on the day with a 0.8% gain, aided by the ACCC’s tacit approval of a Tatts/Tabcorp ((TTS))/((TAH)) merger provided Tabcorp offloads its Queensland pokie business and a few other issues are resolved. One broker’s upgrade of Nine Entertainment ((NEC)) on assumed licence fee reductions had it and rival Seven West Media ((SWM)) featuring in the top ten gainers.

We were talking yesterday about Chinese data and the typical distortions that occur around the Lunar New Year break, in the context of a shock jump in imports in February. Yesterday’s Chinese data showed the producer price index, which has only recently turned positive after several years of decline, rising 7.8% year on year while the consumer price fell to a mere 0.8% growth from 2.5% in January.

Go figure that one. A drop in food prices has been blamed for the shock headline CPI result, and Beijing does not provide core (ex food & energy) CPI numbers like everyone else. But let’s wait until the next set of monthly data to draw a conclusion.

Oil Under Fifty

Speaking of inflation, ECB president Mario Draghi declared last night the risk of deflation in the eurozone had now passed and the outlook for inflation and the economy had improved. Indeed, headline inflation has rebounded significantly in Europe but this has been mostly to do with food and energy prices. While the ECB has made no change to its interest rate nor to its bond buying program, the first incremental reduction in which will occur next month, Draghi did suggest there is no longer a “sense of urgency” over the need to support the economy.

This sent the euro and European bond yields higher. We recall that last month European bond yields were falling as French election fears crept in, specifically Frexit fears. That election is yet to be held and the outcome remains just as uncertain but it seems bond investors are now less fearful, despite one of the reasons Draghi cited for not winding back monetary policy measures sooner is political uncertainty.

US bond yields had fallen last month on the differential with European yields, but have since climbed once more on Fed rate hike assumptions. Now that European bonds are rebounding as well, last night saw the US ten-year yield add another 5 basis points to 2.60% — a breach of which is predicted to signal the end of historically low interest rates.

A breach of US$50/bbl was also touted as a likely trigger point for an accelerated exit from oil and West Texas is crude is down another -US88c this morning at US$49.51/bbl. However, there appears to be no panic. Indeed, traders appeared keen to buy energy sector stocks at the cheaper prices offered by oil’s dip, and as such pushed the energy sector back up last night from its lows and subsequently took the Dow back over the line.

Have the nervous longs been shaken out? The US energy sector is down -9% for the year. Given OPEC cannot guarantee the current production quota cuts will be retained beyond their initial December timeframe it will likely be a drawn out story.

Commodities

The rise in the euro helped the US dollar index -0.2% lower to 101.87 but did not provide any comfort for gold, which fell another -US$7.30 to US$1202.00/oz.

Base metal prices were mostly weaker in London, with -1% falls for copper and zinc the standouts.

Iron ore is unchanged at US$85.30/t.

The Aussie is down another 0.4% at US$0.7509.

Today

The SPI Overnight closed up 7 points.

The US job number is out tonight and while there is much anticipation, the feeling is the Fed will raise next week anyway whatever the result.

Locally we’ll see housing finance data today.

Treasury Wine Estates ((TWE)) will hold an investor day. Bet they don’t serve tea.

Rudi will link-up with Sky Business around 11.15am today via Skype to discuss broker calls.

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