The Overnight Report: Caution Reigns

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This story features TELSTRA GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: TLS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down -47 points or -0.2% while the S&P fell -0.3% to 2429 and the Nasdaq lost -0.3%.

No Prisoners

Well no one saw that coming. While the local market opened to the downside yesterday, continuing the pattern of Monday, the -1.5% rout that was to follow largely came out of the blue. Startled stockbrokers have suggested a couple of big institutions decided to lighten their exposure to Australia.

For it was certainly a Sell Australia session, with no sector spared. The release of the current account numbers late morning saw a moment’s consolidation, and down we went again. Some stability was found just ahead of the RBA release in the afternoon, and then down we went again to the closing bell.

While selling was reasonably consistent across the market, a couple of sectors stood out. Utilities, which has enjoyed some renewed interest recently as global interest rates once again fall, was slapped -3.7%, and represented a stand-out worst performance. Clearly the sellers were not looking to get defensive. Energy was next-worst with a -2.3% drop, despite the oil price remaining stuck in its range.

Thereafter, every other sector fell around about the market average -1.5%, except for telcos, which suffered only -0.7%. Did Telstra’s ((TLS)) dividend constrain the fall? Well maybe, but utilities were hammered and the banks lost -1.5%, suggesting there was little appreciation for yield in general.

The March quarter current account numbers showed a further contraction in the deficit to -$3.2bn, from -$3.5bn in December. At -0.7% of GDP, the current account deficit is now at its lowest level since 1979 and trending towards surplus, which has not been seen since 1975. The trade surplus has much to do with it, rising to $9.2bn from $6.1bn in December.

That’s all about commodity prices having rebounded off their lows. While Cyclone Debbie will have made her mark in today’s overall GDP result, we may recall the sharp spike in coal prices at the time. Yet the volume, as opposed to the dollar value, of exports fell -3% in the quarter, while imports rose 0.2%. This had economists once again scrambling to revise down their forecasts for today’s GDP result, given the difference is worth around -0.7 percentage points.

It is unlikely the current account numbers made much difference to whoever was selling, and nor would the RBA’s decision have steeled any existing resolve. Maybe a shock leap into surplus or a shock rate cut might have had an impact, but they were not to be.

The RBA does not want to cut its cash rate any further for fear of further fuelling the housing bubble. The central bank will cut if necessary, and still many are assuming it will have to before too long, but in the meantime, Philip Lowe remains ever the optimist.

“Domestically, the transition to lower levels of mining investment following the mining investment boom is almost complete,” noted the governor, in his statement. “Year-ended GDP growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures. Looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent”.  

Philip Lowe’s seems to be about the only forecaster who thinks so at this stage.

Meanwhile, investors locally and offshore have decided that Australia is not the place to park one’s money at present. Europe’s return-to-growth story is a popular one right now, and hopes are being maintained the US will be ultimately boosted by tax reform. China is taking a backseat, and Australia is the China proxy.

Yet the Aussie is back above US75c. This is somewhat of an enigma. Sure, the US dollar has been drifting lower, but all talk of a weak GDP, debt bubble, cooling housing market and lack of private investment must surely provide a drag. Typically if we see a big sell order(s) in the local market in a session, it is accompanied by a weaker Aussie, and hence we can finger the foreigners. Not so yesterday.

With Wall Street weaker again overnight, the futures are this morning up 15 points. Bargain hunting? Or standing in front of a train? The important technical support level of 5680 has been broken.

Super Thursday

Tomorrow night, a first attempt at a bill reining in the Dodd-Frank banking regulations will be put to Congress. In a public testimony, the former FBI director will tell all, one presumes, about what the president knew.

The ECB will hold a policy meeting. Global interest rates have been declining recently on the assumption Draghi will hold firm on monetary stimulus despite the European resurgence.

The UK will go to the polls. The latest “poll of polls” suggests the Tories are still comfortably in front, but “the only poll that matters is the one on election day”, and history suggests anything could happen.

Thursday is shaping up to be potentially traumatic, or potentially calming. In the interim, Wall Street is remaining cautious, without hitting the panic button.

The US stock indices have drifted off this week following the new all-time highs hit last week. The US ten-year bond yield has been trending down, falling -4 basis points to 2.15% last night, and the US yield curve has been flattening. The gold price has been rising, and is up another US$14 overnight. The US dollar has been trending lower.

Even the surge and likely bubble in Bitcoin has been gaining a lot of attention.

The White House is having a go at deregulation this week, hopes to have healthcare sorted by the summer, and still believes it can have tax reform in place by the fall. These hopes and dreams are what are keeping the US stock market from suffering any major bouts of nervousness, despite the latest rallies being very much concentrated in the one area of Big Tech. PEs are clearly elevated, but then the March quarter proved a very solid one for E.

Rising Middle East tension, in the form of the isolation of Qatar (where, incidentally, the US has a big military base), is providing support for the oil price.

Wall Street is in wait and watch mode, anxious to see how the week plays out.

Commodities

The US dollar index is down -0.3% at 96.55. Gold is up US$14.30 at US$1293.60/oz.

Lead fell -1.5% in London, zinc -1% and nickel -0.5%. Copper was mildly weaker.

Iron ore fell -US30c to US$55.40/t.

West Texas crude is up US59c at US$47.98/bbl.

The Aussie is up 0.3% at US$0.7506.

Today

The SPI Overnight closed up 15 points or 0.3%.

Just how weak was Australia’s GDP growth, if it did grow at all, in the March quarter? We’ll find out today.

Vicinity Centres ((VCX)) will host an investor day today and Wesfarmers ((WES)) will provide a strategy briefing.
 

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