The Overnight Report: Apple Sauce

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

By Greg Peel

The Dow closed up 52 points or 0.2% at 22,016. The S&P rose one point to 2477 and the Nasdaq was flat.

Reversal

While earnings season is now slowly having an impact on daily market moves, yesterday’s drop for the ASX200 largely represented a reversal of everything that led the market up on Tuesday, on an apparent no-rate-hike play. Utilities, telcos, banks and staples were all sold back down again.

Miners were also hit on some lower commodity prices but energy did manage to hold up quite well in falling only -0.6% on a near -2% drop in the oil price, given a 2%+ sector gain on Tuesday when WTI hit US$50/bbl.

In the last drop towards the bottom end of the range, the index only fell as far as 5700. In the latest rally back towards the top, the index only managed 5770 before the sellers moved in. A wedge is forming as the range becomes narrower. A break of such a wedge is typically followed by a sharp move in whichever direction the wedge is broken.

And that will likely come down to the local earnings season, assuming nothing from left field globally. Despite the index failing to make any ground for the past few months, there is a suggestion the big caps are already well priced on earnings expectations. This would make them more vulnerable on the downside.

Take Rio Tinto ((RIO)) as a case in point. Rio’s earnings result, released after the close yesterday, was a bottom line miss. The stock fell -2.8% in London. Yet Rio is returning US$3bn to shareholders, in the form of the company’s highest ever dividend at US$1.10 and an additional US$1bn buyback of London-listed shares. Gearing is down to 15% when a range of 20-30% has been guided. Cash keeps flooding in.

There should be more returns to look forward to. But Rio missed on earnings.

In other matters, if the Australian housing market is to collapse it will do so gradually, if yesterday’s June building approvals are any guide. Total approvals rose 10.9% when a 1.0% rise was forecast, and are only -2.3% lower than a year ago. Apartment approvals – the major source of angst – rose 20.0%, and houses rose 3.4%.

Apartment approvals are lumpy, given their scale, and June’s surge has come amidst the odd large monthly fall. NSW, unsurprisingly, was the biggest contributor.

Despite what will potentially be a week day locally for Rio, the futures are up 11 points this morning. Wall Street has hit another record milestone, or at least the Dow has.

One Good Apple

The Dow has closed over 22,000 for the first time. It hit 21,000 in March, 20,000 in January and 19,000 on Trump’s election. Yet despite all the immediate policy promises that won Trump the election, seven months have seen nothing achieved.

Nor has US economic growth been particularly strong. Corporate earnings have been strong, monetary policy remains supportive and may do so yet for some time, and technology is very much a driver underscoring a twenty-first century Wall Street. It’s interesting to note, however, that the last 250 points of the Dow rally to 22k was matched by a move in the S&P500 of minus one point.

The final push to 22k last night required 50 Dow points. Apple rose 5%, following its strong result, and that was worth 60 Dow points.

The S&P is up 10% year to date. Of that move, 25% can be attributed to just five of five hundred stocks – Facebook, Apple, Amazon, Netflix and Google (Alphabet). The tech sector as a whole has accounted for 42%. Last night, as the Dow clocked its record, the Russell small cap index fell a percent. As US earnings season now heads into its tail end, it’s only the big caps that are moving the market. Breadth is absent.

Last night’s ADP private sector jobs report for July showed 178,000 jobs added, a little shy of 185,000 expectations. Friday sees non-farm payrolls, and there will be one more payrolls release before the Fed meeting in September, at which it is not now expected a rate hike will be delivered.

Commodities

West Texas crude has bounced back US80c to US$49.59/bbl on the weekly US inventory data.

Aluminium rose 1% in London, lead, nickel and zinc added 0.5%, and copper stood still.

Iron ore lost -US80c to US$72.10/t.

The US dollar index is down -0.2% on the slightly weak jobs report at 92.89. Gold is slightly weaker at US$1266.20/oz.

The Aussie is dead flat at US$0.7966, ahead of today’s June trade data.

Today

The SPI Overnight closed up 11 points or 0.2%.

It’s services PMI day across the globe today, and the Bank of England will hold a policy meeting.

Locally, the June trade balance is due.

Today’s local earnings season highlight comes from Suncorp ((SUN)).

Rudi will travel to Macquarie Park to appear on Sky Business from 1pm till 2pm.
 

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