The Overnight Report: Off The Table

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This story features DOMINO'S PIZZA ENTERPRISES LIMITED, and other companies.
For more info SHARE ANALYSIS: DMP
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 97 points or 0.5% while the S&P was flat at 2477 and the Nasdaq rose 0.2%.

Flat Session

How can it be a flat session? The ASX200 was up 50 points. But a glance at the chart shows those 50 points were booked on the opening bell, and thereafter the market never moved again.

The bulk of the gain came simply from a readjustment of resource sector valuations on strong overnight commodity price moves, specifically for the likes of oil, iron ore and copper. Energy jumped 2.9%, having fallen by about the same amount two days prior, and materials jumped 2.1%.

The banks chimed in with a 0.7% gain and all sectors finished in the green bar two, being consumer discretionary (-0.5%) and utilities (-0.2%). One might have expected utilities to enjoy the low inflation reading but they appear to have been a source of funds to buy miners. Among the consumer oriented stocks, Domino’s Pizza ((DMP)), Super Retail ((SUL)) and Aristocrat Leisure ((ALL)) all featured in the worst performers list.

Stars of the day were OZ Minerals ((OZL)), up almost 11% on the copper price move, and Seven Group Holdings ((SVW)), up over 10% on Caterpillar’s US earnings beat (Mr Kohler take note).

There was no apparent stock market reaction to yesterday’s June quarter CPI data, at least in index terms. Headline inflation came in below expectation with a 0.2% rise to mark a 1.9% annual rate, while core inflation rose 0.5% as expected for 1.8%, still below the 2-3% comfort zone.

To that end, Philip Lowe made note in his speech yesterday that the RBA was not obliged to move in lockstep with other central banks on monetary policy, referring to rate hikes from the Fed and constant talk of a move by the ECB, noting that the RBA did not move in lockstep on the way down post GFC.

In other words, don’t expect a rate hike anytime soon. And the low inflation numbers back that up.

If only the Aussie would play ball. It fell to under 79 yesterday thanks to the CPI but alas, the greenback has tanked again overnight and right now we’ve hit the psychological 80 mark. It is perhaps this fact that this morning saw the SPI futures rapidly retreat from initial gains in step with Wall Street, to be flat at the overnight close.

One might have expected more from another hundred point Dow rally but after two solid days of gains (it was only a couple days ago we were discussing whether this time the index might break support), and that ominous Aussie, today may not be the day we’ll see 5800 once again.

What we did see yesterday, nonetheless, was a break of the run of lower highs. At 5776, the index pipped the previous high of 5763. Suddenly we’re looking bullish again.

But give it a couple more days.

Now Boarding

The Dow joined the S&P and Nasdaq in posting a new record high last night. One might believe a 97 point gain is pretty healthy but in fact a sterling result from Boeing, which saw its shares soar 10%, represents 144 Dow points. Take that out and it was a down-day.

It was a mixed bag among the sectors, hence the disparity between the Dow and the S&P. Dow components Coca-Cola and AT&T also saw gains on solid earnings, while despite beating on earnings, Ford was sold. The banks were also sold down, providing a Dow offset, given the policy statement from the Fed.

Inflation is low, Yellen’s statement read. At the last meeting, it was only “somewhat low”. But the Fed will begin winding back its balance sheet “relatively soon”, as opposed to “this year”, as the prior statement suggested.

The nod to low inflation suggests that if there were any chance of a Fed rate hike in September, which had been rated around 20%, there isn’t anymore. And December, which was closer to 50%, looks uncertain as well. But the Fed is apparently keen to push on with the balance sheet unwind, and Wall Street now assumes that will begin in September.

Earlier in the year it appeared the Fed might hike three times and begin unwinding. Now it seems unwinding will be used in lieu of rate hikes. Allowing bond positions to mature without replacement is effectively QE in reverse. QE is a form of rate cut when the rate is already zero, so reverse QE is a rate hike by proxy.

Wall Street is not fazed by the prospect of unwinding, indeed many welcome a reduction of the massive balance sheet position which has so overwhelmed the free market for the past eight years.

So the focus remains on earnings. After a surprisingly good round of March quarter earnings, expectations had been that June would also be good, but perhaps not quite so spectacular. Now traders are starting to believe June might even be better.

But can Wall Street continue to post record highs on earnings alone? Not all forecast-beaters are enjoying share price follow-through.

Facebook posted a solid beat after the closing bell this morning and initially jumped 4% in aftermarket trade, but as I write is back to only a 1.4% gain.

Commodities

Copper continued its solid run last night, rising another 1.7% in London. But that is about where the story ends for commodities trading last night, as opposed to all-round strength the night before.

Aluminium rose 0.5% but zinc fell -1% and other metals were flat.

Iron ore fell -US$1.30 to US$68.40/t.

Wes Texas crude ticked up a little further to US$48.72/bbl.

Copper is enjoying the benefits of current supply-side disruption. Last night the US dollar index tanked -0.7% to 93.44 on the Fed release yet this did not provide any real boost for commodities.

Other than, of course, gold, which is up US$10.50 at US$1260.10/oz.

The Aussie is currently sitting at US$0.8009, up 0.9% over 24 hours and well over 1% from yesterday’s post-CPI low.

Today

The SPI Overnight closed “unch”.

Durable goods will be in the spotlight in the US tonight, particularly in the wake of Boeing’s result.

Locally, Fortescue Metals ((FMG)) and Beach Energy ((BPT)) post quarterly production reports, GUD Holdings ((GUD)) and OceanaGold  ((OGC)) post early earnings reports and Macquarie Group ((MQG)) holds its AGM.

Rudi will travel to Macquarie Park to appear on Sky Business today at 1pm (instead of the usual 12pm) and later on he'll do it again for an interview on Switzer TV, between 7-8pm.
 

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