The Overnight Report: Wall Of Worry

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

By Greg Peel

The Dow closed down -87 points or -0.4% while the S&P lost -0.4% to 2444 and the Nasdaq fell -0.3%.

Reality Bites

We were all set for a strong day on the local market yesterday – Wall Street posted a good rally, the futures suggested up 32 points, and the top of the range for the ASX200 loomed once again. From the opening bell the index did actually run up 31 points, by 10.08am, but then that was the end of that.

The average reporting season beat-to-miss ratio over the past four years (eight seasons) is about 1.4 to 1. We have just passed the halfway mark in the current season, in terms of number of stocks, and beats and misses are running neck and neck. Typically misses always suffer greater punishment in stock price than beats enjoy boosts, and that has very much been the case this season.

Yesterday was another example.

The ASX200 top ten winners and losers board was completely dominated yesterday by companies that either reported on the day or the day before. Most notable were the losers, both in terms of extent of drops but also because of a couple of bigger names among them.

Healthscope ((HSO)) fell -15%, Sirtex Medical ((SRX)) fell -11%, Insurance Australia Group ((IAG)) fell -8% and iSentia ((ISD)) and Steadfast ((SDA)) fell -5%.  Not quite making the top ten was another biggie, Coca-Cola Amatil ((CCL)), which lost -2.6%.

On the flipside, a2 Milk ((A2M)) rose 7%, WorleyParsons ((WOR)) and Star Entertainment ((SGR)) 5%, McMillan Shakespeare ((MMS)) 4% and Qube ((QUB)) and Tassal Group ((TGR)) 3%.

Virtus Health ((VRT)) posted a miss on Tuesday and fell -3% but yesterday rallied 5%, while Monadelphous posted in line on Tuesday and rallied 5%, plus another 8% yesterday. This despite five of the six brokers in the FNArena database covering the stock reiterating Sell ratings on valuation. We might note the stock is over 5% shorted, and Virtus is over 7% shorted.

Put it all together, along with all of yesterday’s other reporters that didn’t make the top ten board, and a 31 point opening rally reverted to a -12 point loss on the close. Sector moves were all over the place, reflecting earnings-related responses, and there was no macro trend evident whatsoever.

We might also give a nod to the class action being brought against Commonwealth Bank ((CBA)), although at -0.6% the market reaction was nothing extraordinary.

Wall Street is down overnight but the SPI futures are up 8 points this morning. It’s a tough time to trade a futures contract which represents an index being solely driven by its constituent parts at present, such that every day is a complete coin toss.

Today is the biggest day in the whole reporting season calendar. By a considerable margin. There’s another week to go, but nothing will top this session in sheer number of companies reporting.

Put up or shut down

The US budget must be passed through Congress by the end of next month or the government will be shut down, as last occurred due to congressional gridlock in 2011. The Trump administration can back down on budget elements in order to avoid a shutdown, just as Australian governments often have to back down, although here we otherwise go to an election.

The sticking point in the Trump budget is the The Wall. Last night Trump railed that if he does not get his wall, he’ll have no qualms in shutting down the government. Having rallied on Tuesday night on the exciting prospect of tax reform progressing, last night Wall Street fell on the possibility of a shutdown. Wall Street suffered a major correction in the 2011 episode.

It’s funny that Trump directed his threat to the Democrats. He also blamed the Democrats for blocking his various attempts at a new healthcare bill. The Democrats don’t have the numbers to call the shots. If the budget fails to pass, it will be because it was supported by an insufficient number of Republicans.

Later in the day, the more sensible Paul Ryan, House speaker, suggested a shutdown would not be necessary and no one wanted to see a shutdown, including Republicans. Around the same time, Senate leader Mitch McConnell was forced to declare that he was fully supportive of the President, after a report last week revealed the two had been involved in a phone call that included a lot of screaming, yelling and swearing.

We all know what happens in Australia when a politician must declare he or she is fully supportive of the prime minister.

Another day, and another session on Wall Street dominated by White House shenanigans. There were some late season earnings reports to consider, largely from home furnishings and DIY companies, and they weren’t great, otherwise energy had a solid session on an oil price rally.

Otherwise, it was yet another light volume summer day. Aside from weakness in stocks, the shutdown threat ensured the US dollar index is down -0.3% to 93.21, gold is up six bucks, and the US ten-year bond yield is down -4 basis points to 2.17%. The year low is 2.13%.

Jackson Hole begins tonight.

Commodities

The latest weekly US crude inventory numbers showed the eighth successive week of falls, sending West Texas crude up US78c to US$48.38/bbl. The rally might have been more pronounced if the same report did not note US production has now risen to its highest level since July 2015, which was just before the bottom fell out of the market.

Gold is up US$5.90 at US$1290.30/oz.

Nickel rose 2.5% in London in an otherwise quieter session.

Iron ore fell -US$1.40 to US$77.40/t.

The Aussie is flat at US$0.7907.

Today

The SPI Overnight closed up 8 points.

The Jackson Hole central banker’s symposium begins tonight, with both Draghi and Yellen in the frame.

You have been warned about earnings reports.

Note also that the ex-dividends are beginning to flow more freely now, although they will be more prevalent after the season ends. Woodside ((WPL)) is one stock going ex today, JB Hi-Fi ((JBH)) another.

Rudi will appear twice on Sky Business today. Once via Skype, estimated at around 1.30pm and again for an interview by Peter Switzer between 7-8pm.
 

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