The Overnight Report: Don’t Blink

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

By Greg Peel

The Dow closed up 92 points or 0.4% while the S&P gained 0.5% to 2440 and the Nasdaq rose 0.7%.

Shocked Again

One week ago yesterday the ASX200 fell 80-odd points, led down by the banks, and no one was entirely sure why. Yesterday the index rallied 95 points, led by the banks. See above.

Certainly nothing has changed for the banks in the space of a week. We can only therefore look to a couple of factors, one being technical, and the other being the simple fact there is a lot of cash out there looking for a home. For years that cash had been directed towards homes.

Chartists had said that 5680 was the line in the sand which, if meaningfully breached, would suggest a more extended move to the downside. A failure to breach would suggest a short term bottom. Last week’s trading, following that big Tuesday fall, saw the index dropping below 5680 intraday from the open but recovering that ground through the afternoon on more than one occasion. It did appear the technical level was holding.

Assuming no disasters while the market was closed over the weekend – Comey, May etc –support could be validated. The Comey story remains ongoing and May may not be around for much longer but there have been no disasters. So the buyers moved in.

While we were shut, Wall Street was dominated by blow-off selling in Big Tech, the other side of which was buying in sectors that had underperformed of late. One of those was financials. For some reason Australian bank stocks like to follow US bank stocks, so when it was back to work yesterday, banks were in the sights.

And so it was the banks jumped 2.4% in the session, providing 34 points of the 95 point gain. Oil’s failure to break down through the US$45/bbl provided some incentive for energy, up 2.2%. Healthcare was another sector smacked a week ago, and yesterday the buyers returned to old faithful CSL ((CSL)), following that company’s Chinese acquisition. Healthcare rose 1.9%.

Elsewhere sector moves were more around the 1% mark, with the exception of currently unloved telcos (0.1%) and Australia’s own tech sector (a far cry from FANG), info tech (0.3%).

While it’s hard to find good reason why the Australian market should rally to new highs, a la Wall Street, when clearly the economy is struggling and various risks prevail, analysts have long been pointing to the amount of cash “sitting on the sidelines” as they say, providing a potential market floor. Now that investors are starting to shy away from the housing market amidst cries of “bubble” and the regulatory clamp-down, equities must begin to look like a viable alternative once more. Fixed interest is yet to become attractive.

The star of the day was Mineral Resources ((MIN)), a company that mostly processes minerals but also has a sideline in iron ore mining and, as the market had been slow to realise, interest in lithium. For years MinRes was amongst the most shorted stocks in the market based on its iron ore exposure, until the lithium price took off and someone pointed out the company’s other sideline.

Even then, MinRes took a back seat to the likes of Galaxy Resources ((GXY)) and Orocobre ((ORE)), which are closer to lithium pure-plays. Now Orocobre is the most shorted stock on the market, and as MinRes leapt 13% yesterday thanks to an upgrade to Buy from Deutsche Bank, Galaxy fell -5% to provide the worst ASX200 performance on the day. A clear switch in allegiance.

So here we are knocking on the door of 5800 again. Yesterday morning the futures said down -15 and we rose 95. This morning the futures say up 7.

That Was Quick

Did you see the Tech Wreck of 2017? Oh well you’ve missed it now.

There was just too much talk on Wall Street over the prior two sessions of any drop in the prices of FANG & Co providing a more realistic entry level into the sector of now and the future. Last night excited investors could not wait any longer, and Big Tech rebounded.

The US banks had been among the beneficiaries of the money flowing out of Big Tech, but we did not see the reverse last night as Big Tech recovered. The banks remain supported going into tonight’s Fed meeting.

And so it was the Dow and S&P hit fresh all-time highs. The Nasdaq has a bit more to catch back up.

The other focus of the day was on the Attorney General’s testimony before a Congressional committee regarding the whole Russian thing. Jeff Sessions said “I did not have sexual relations with that woman,” or something along those lines, and Wall Street breathed a sigh and got on with it.

The soap opera continues.

Attention now moves to tonight’s Fed policy statement and Janet Yellen’s press conference. With a rate rise already assumed, the question then becomes one of whether Yellen’s rhetoric, or actual Q&A responses, suggests there will be further rate rises in both September and December, or just one more this year. The market is currently backing one more, in December. Despite strong corporate earnings, US economic data have not recently been supportive of a clear tightening path.

Commodities

Despite all the excitement on the local market yesterday, iron ore continues to look vulnerable. It fell US$1.40 to US$53.00/t overnight.

Copper decided to fall -1% in London when all other base metals barely moved.

West Texas crude remains steady at US$45.95/bbl ahead of the weekly US inventory numbers, while gold is also now seemingly stuck at US$1266.10/oz.

The US dollar index is down -0.2% at 96.99 and the Aussie is down -0.1% at US$0.7535.

Today

The SPI Overnight closed up 7 points.

All eyes will be on the Fed tonight but the US will also see May inflation and retail sales numbers.

Ahead of that, China will release its May industrial production, retail sales and fixed asset investment data.

In Australia we’ll see Westpac’s consumer confidence survey, following on from a little changed business confidence survey yesterday.
 

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