The Overnight Report: Lack Of Drivers

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            [1] => ((ANZ))
            [2] => ((CBA))
            [3] => ((IPL))
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            [1] => ANZ
            [2] => CBA
            [3] => IPL
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This story features WESTPAC BANKING CORPORATION, and other companies.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 5 points while the S&P was flat at 2399 and the Nasdaq was also flat.

Bounce Back

One might assume yesterday’s strong rally back for the ASX200 was due to the risk-back-on effect of French election relief, but aside from market reaction overnight, including in France, being muted, the 50 point open for the index yesterday was already on the table when the futures closed up 55 on Saturday morning, pre-election.

This would appear thus less of a French story and more of a belief the market became oversold late last week, when investors chased each other down for reasons they probably weren’t quite sure of. There was certainly an element of risk-on nonetheless, given the only sectors not to have a strong session were telcos (-0.9%) and utilities (-0.6%). This despite Telstra having been about the only winner last Friday.

Energy was the big loser on Friday, but it spun around and screamed back 2.4% yesterday as it appeared the oil price had found a bottom. Materials (+1.1%) defied another solid drop in the iron ore price, while the banks (+0.4%) found favour after a decent result from Westpac ((WBC)) and despite the drag of ANZ Bank ((ANZ)) going ex.

Elsewhere it was simply green across the screen.

If the stock market is struggling to push to new highs, it is not due to a lack of confidence among Australian businesses. Current conditions are as positive as they were back in January 2008, just before the wheels fell off, according to NAB’s April survey. The conditions index rose to 14.3 from 12.3 in March while confidence leapt to 12.9 from 6.5. And we’re about to have a Budget.

On the other hand, building approvals fell -13% in March to be -20% lower than a year ago. Houses fell -5% to be down -11%, while apartments fell -22% to be down -28%. It sounds like a housing construction crash in the making, until one notes the actual numbers. In 2015, approvals hit a record 240,000. Last year they were 233,000. CBA economists are forecasting 212,000 in 2017. As they put it, “while the peak is here, it looks like it will be an extended one”.

Yesterday also revealed that after a much better than expected March, China’s trade numbers cooled off somewhat in April. Exports rose 8.0% year on year, down from 16.4% in March, while imports rose 11.9%, down from 20.4%. Lower commodity prices are reflected in the values.

Both numbers fell short of forecasts, but then March numbers far exceeded at the time.

Now What?

Macron’s victory was a relief, but not a surprise. Thus Wall Street shrugged. The French market actually fell -1% on the sell-the-fact, having jumped 4% when Macron came through the first round.

But it’s a geopolitical risk that can now be scratched off. The US earnings season is now all but over, with a very strong scorecard of around 12% growth in earnings and 7% in revenues despite the US economy growing only 0.7% in the period. But the Fed sees that as transitory, so when it hikes in June, there’ll be no surprise.

So what will be the driver from here? Barring anything out of left field, it will be all about the fiscal side. Can Trump deliver a 15% corporate tax rate? Can he deliver something this side of Christmas? Wall Street is waiting with baited breath for any snippet of news on what remains a very vague tax plan at present.

In the meantime, post earnings season lulls are typical, and last night’s trade is testament.

All the talk on Wall Street last night was of the VIX volatility index, which having fallen -7.5% in the session, is now in single digits for the first time since 1993. It worries traders that this implies the market is as complacent about the future as it has been in decades and from a contrarian perspective, such complacency is unsettling. Pride comes before a fall.

They call it the “fear index” but what the VIX measures is the level of demand for options positions on the S&P500, as indicated by implied volatility. Given historical volatility (the now) is particularly low – how often has Wall Street closed flat in recent sessions? – the demand for options is also low given there’s little money to be made in option trading.

Of course, when you make a low in any price measure one assumes there is little downside and a lot of upside. But the VIX is a following, not a leading, indicator.

Commodities

The euro was also sold on the fact last night, pushing the US dollar index up 0.6% to 99.14. There was little impact on commodity prices.

Base metals were flat to weaker on the Chinese data, with aluminium, copper and lead all down -1%.

Iron ore is unchanged at US$59.50/t.

Gold is little changed at US$1226.00/oz.

West Texas crude is little changed at US$46.48/bbl.

The only real mover is the Aussie, down -0.4% at US$0.7383.

Today

The SPI Overnight closed up 5 points.

Commonwealth Bank ((CBA)) will wrap up bank reporting season today with a quarterly update, while Incitec Pivot ((IPL)) will release half-year earnings.

Local retail sales numbers for March are due today, and tonight ScoMo will attempt to clear the funk still lingering from JoHo as he struts his stuff in Canberra.
 

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