The Overnight Report: Comey Calm

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This story features WESFARMERS LIMITED.
For more info SHARE ANALYSIS: WES
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 37 points or 0.2% while the S&P rose 0.2% to 2433 and the Nasdaq gained 0.4%.

Holding Fast

The local market opened to the downside yet again yesterday despite the futures market suggesting at least some rebound from Tuesday’s sudden rout. No doubt the break of 5680 in the ASX200 triggered technical selling.

But once the opening rotation was complete buyers ultimately did emerge, and the slightly better than expected GDP result helped push the index back to flat by midday. The sellers had another go early in the afternoon, but again were thwarted.

While several sectors closed as flat as the index on the day, there were otherwise some trade-offs. Investors apparently were not pleased with Wesfarmers’ ((WES)) strategy briefing, sending that stock down almost -3%, and the consumer staples sector down a stand-out -1.6%. On the flipside, the private equity bid for Vocus Group ((VOC)) had that stock up 21%, and subsequently telcos up 0.9%.

The banks were leaders in the recovery back to the flatline, rising 0.3% on the back of attractive yields. Healthcare rose 0.6% as investors jumped into companies that likely didn’t deserve to be hammered on Tuesday, while industrials countered with a -0.4% fall. Other sectors closed flat.

Relief was felt when the March quarter GDP result came in a 0.3% growth, for 1.7% annual growth. While strictly the number was in line with consensus forecasts, all the talk in the lead-up about a possible negative result meant “in line” was as good as a “beat”.

Cyclone Debbie made an impact, just as Yasi had done back in 2016. But while the following quarter that year saw a strong post-Yasi rebound, economists fear the same will not be true this time around. Australia’s growth rate is slowing as the global economic backdrop improves.

Household consumption, business investment, public spending and inventories made positive contributions. Net exports and housing investment were a drag. Of the positives, public investment (infrastructure) is about all the economy can really rely on going forward. Household spending rose on reduced household savings at a time of record household debt. That cannot last. Business investment, while positive, remains sluggish, and insufficient to take the baton from declining mining investment.

Inventories are always a two-edged sword, as inventory builds can either imply (a) a rush to meet growing demand or (b), a potential backlog of unsold goods. Net exports dragged on lower export volumes despite higher commodity prices, and that segment is a bit of a dartboard. Chinese restocking-destocking cycles play a big part, but future prices are far from predictable.

Then there’s housing. Whatever happens from here, the boom is over.

At 1.7% growth with not a lot of upside in sight, the RBA’s 3% forecast in a year or two is a challenge. A rate cut would help, and would sort that petulant Aussie dollar, but would only add fuel to the housing debt fire.

No Fireworks

Speaking of dartboards, the matter of weekly US oil inventory data is becoming a bit of a joke. Two organisations post their inventory assessments during the week, and quite often they are wildly different. Some variation can be expected, but earlier in the week the American Petroleum Institute suggested a 3.25m barrel draw on crude inventories for the week, and last night the Energy Information Agency delivered the same result, but as a build.

Go figure.

The EIA also noted OPEC production has actually risen, mainly due to pumped up production from quota-exempted Libya, while the US rig count has continued to grow. Suffice to say, WTI fell -5%.

Wall Street had begun the day with a rally but when the oil price tanked, that and more was given back. Then along came James Comey.

Ahead of his public testimony tonight, the former FBI director released a pre-emptive written testimony. The bottom line is it contained nothing explosive. Trump asked Comey for his loyalty, Comey pointed out the FBI must remain independent. Trump suggested former advisor Mike Flynn, who had resigned over the whole Russian thing, was a good guy and had done nothing wrong.

While Comey must still face a Q&A grilling tonight, Wall Street decided impeachment is not a likely outcome. Stock indices thus recovered to close the day modestly higher ahead of tonight’s other major events, being the ECB meeting and the UK election.

Those events, and next week’s Fed meeting, are keeping Wall Street in a tight range.

Commodities

The US dollar index has recovered 0.2% to 96.69. Gold has fallen back -US$6.80 to US$1286.80/oz.

It was a very flat session for base metals in London.

Iron ore fell -US70c to US$54.70/t.

West Texas crude is trading down -US$2.20 or -4.6% at US$45.78/bbl.

The “better than expected” GDP result had the Aussie surging yet again, up 0.6% to US$0.7548 despite the stronger greenback. Soon it will again be a “complication” for the RBA.

Today

The SPI Overnight closed down -10 points or -0.2%, with oil likely the main driver.

Australia’s high-tech computers have now managed to crunch trade data for April, and will tell all today. Chinese abacuses have similarly been working overtime, so Beijing will release the same trade data, but for May.

Polling opens in the UK late in our session today and a result should be known sometime tomorrow afternoon our time. In between, the ECB holds its policy meeting.

Rudi will appear on Sky Business today, noon-2pm.
 

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