The Overnight Report: A Matter Of Minutes

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This story features HARVEY NORMAN HOLDINGS LIMITED.
For more info SHARE ANALYSIS: HVN
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down -41 points or -0.2% while the S&P lost -0.3% to 2352 and the Nasdaq fell -0.6%.

Resource Rebound

The Australian resource sectors had been the major driver of the rally in the ASX200 through staunch resistance at 5500 and on to new resistance at 5800 thanks to a spectacular recovery in commodity prices, aided by a Wall Street tail wind, right up to the February result season. On solid earnings reports, and calls of commodity prices having run too far, investors took profits.

The resource sectors have since pulled back, leaving it to the banks to take the index through 5800 and towards 5900 largely on the back of mortgage repricing. But with 5900 now providing resistance, tighter regulatory measures and ongoing calls to do more to address Australia’s house price bubble, investors have again become nervous over their bank holdings.

So perhaps it was time to reconsider the resource sectors, after a period of underperformance. Yesterday the materials sector rallied 2.2% and energy 1.5% while the banks fell -0.2%. It may have been a day to retest the 5900 level but it appears traders funded renewed resource sector purchases by selling out of telcos (-0.7%) and consumer staples (-0.5%).

The trigger for the resource rebound was China. The trigger for China was Debbie. Having returned from a short break, over which time the impact of the cyclone on Australian coal exports became clearer, the Chinese sent coal prices surging once again. Iron ore was not left behind, and it’s up 3% overnight, while copper is up over 1.5%.

These price moves may have suggested another positive session on the local bourse today, but the other driving factor is, of course, Wall Street.

Tipping the Balance

Wall Street began its session last night with the news 263,000 private sector jobs were added in the US in March when 170,000 was forecast. While this ADP number and the non-farm payrolls result do not always correlate distinctly, it is a sufficient enough indicator to prompt upgrades to forecasts for Friday’s result.

Never mind that the spectacular February ADP result of 298,000 was revised down to 245,000 last night. Wall Street saw jobs growth as a major positive – not as a negative as it used to on the basis it implied Fed tightening – and from the open the Dow was up almost 200 points.

Then the minutes of the last Fed meeting were released. Gradually Wall Street started tipping over, before accelerating downward to the close. The 240 point Dow turnaround was the biggest one-day swing in over a year.

There were three elements in the minutes that had Wall Street suddenly nervous.

Firstly, the FOMC made reference to the US stock market looking overvalued. This is hardly a revelation, given many a commentator has been making the same argument for most of the year, but the Fed rarely deigns to comment on the stock market so when it does, Wall Street takes heed.

Secondly, the minutes suggested that despite all the hype around the Trump agenda, the Fed does not see any real boost to the economy from the fiscal side occurring until 2018. If fiscal policies are stimulatory, the central bank needs to maintain a balance on the monetary side. But the Fed believes it’s still on its own in 2017, meaning it does not expect any swift changes to legislation, such as in tax reform, this year.

Interestingly, later in the day House Speaker Paul Ryan said at a regular press conference that the way it looks at present, tax reform is going take longer to get through Congress than healthcare. The three houses – lower, upper and White – are not even on the same page yet, he bemoaned. His comments only help accelerate late stock selling.

The third, and most influential, element of the Fed minutes was talk among members of beginning to wind back the Fed’s massive balance sheet.

From 2009 to 2013, the Fed conducted three rounds of quantitative easing, meaning it bought US Treasury bonds in order to affect a quasi rate cut when the cash rate was already zero. As early purchases reached maturity, they were replaced, such that balance sheet size was maintained. In 2014, the Fed began to taper the level of its bond purchases. In late 2015, it finally raised its cash rate from zero.

In 2016 it went again, and again in March, to which the minutes released last night refer. But all along it has been assumed the winding back of a balance sheet that had reached an unprecedented US$4.5trn would be something for out in the future, some time. For to wind back the balance sheet is to stop replacing bonds, and if buying the bonds in the first place is quasi rate cut, letting them mature and not replacing them is a quasi rate hike.

Wall Street is currently comfortable with the thought of three Fed rate hikes in 2017 but started to wobble when there was talk of four. The Fed seems pretty set on three but if balance sheet tapering begins, there’s your fourth by default.

So the US stock indices went all the way back down again, and more.

Commodities

Earlier in the week the API weekly US crude inventory data showed an unexpected drawdown following a couple of weeks of record levels. This turned the oil price around. On expectation last night’s EIA data would confirm the drawdown, the WTI price surged again early in last night’s session.

The EIA data showed a new record level of inventories. WTI is down US27c at US$50.82/bbl following a sharp turnaround.

When the LME closed last night, traders were only aware that China was in buying again and the US had just released a stellar jobs report. Aluminium, copper and zinc all closed up 1-1.5% and nickel 3%. Then Wall Street rolled over.

Iron ore rose US$2.20 to US$81.00/t.

Gold was down around ten dollars before it, too, reversed, and is currently flat at US$1255.40/oz. The US dollar index is also flat at 100.58.

And the Aussie is also flattish at US$0.7569.

Today

The SPI Overnight closed down -16 points or -0.3%.

There’s not much of note on the calendar today but there is a small group of stocks going ex-div, including embattled Harvey Norman ((HVN)).

Rudi will travel to Macquarie Park twice today to appear on Sky Business as guest from noon-2pm and to be interviewed by Peter Switzer, around 7.15pm.
 

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