The Overnight Report: Fifth Month Of Gains

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This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: HVN
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 55 points or 0.3% while the S&P gained 0.6% to 2471 and the Nasdaq rose 1.0%.

Window Dressing

Just when the ASX200 was looking vulnerable, sitting below the longstanding range, we get a bout of end-of-month buying. Yesterday’s 44 point gain took the index comfortably back into the range, and above 5700.

I doubt we can read too much into it. Outside a -1.2% fall for the energy sector, thanks to a lower oil price, every sector finished in the green in a relatively consistent fashion, suggesting market-wide buying. The only sectors not to rise a percent or more were the banks, which are in a risky position at present, and consumer discretionary, dragged down by a plunge for Harvey Norman ((HVN)).

Harvey Norman was the only stock reporting yesterday to find itself on the top ten losers’ board, indeed in first place with a -7.5% drop. It was not the result per se that drove the selling but rather a reduced dividend and announced reassessment of capital management policy to provide a war chest to take on you know who.

Peer JB Hi-Fi ((JBH)) was also amongst the losers with a sympathetic -2.2% fall, no doubt in fear the other major retailer in the space will have to do the same thing.

The leaders’ board featured more of yesterday’s reporters, most notably lithium miner Orocobre ((ORE)), which jumped 14%. Peer Galaxy Resources ((GXY)) reported on Wednesday but it rose another 8%. Note that as of last week Orocobre was the second most shorted stock on the ASX at 18.9%, with Galaxy another major short on 11.4%.

Data centre operator NextDC ((NXT)) reported well and enjoyed an 8% gain, and travel agent Webjet ((WEB)) chimed in with 5.5%.

In terms of individual stock moves, it was a big day for the New World. We had two lithium miners, whose fortunes are linked to the rise of the electric car, a company cashing in on the growth of Big Data, and we also had satellite company Speedcast ((SDA)), which yesterday announced an agreement with a company called Danaos Peripherals to develop a remote and autonomous IT system on board a vessel which, according to the press release, will “leverage technologies such as Big Data analytics, the Internet of Things, and cybersecurity”.

Stop the wold, I want to get off. Speedcast shares jumped 10%. Harvey Norman fell -7.5%. Says it all really.

There was at least some reason to be positive the Australian market yesterday, other than month-end. The June quarter private sector capex release was a welcome surprise.

Capital expenditure growth of 0.8% in the quarter beat expectations, but most importantly non-mining capex surprised with a 2.6% gain. The third estimate of FY18 spending plans represents a big upgrade from the second estimate last quarter. Both mining and non-mining spending plans have been upgraded, implying net 7% growth.

Typically, actual results come in below estimates at the end of the day, but third estimates are unsurprisingly more accurate than first estimates. The numbers suggest not only has the Great Decline in mining investment now apparently run its course, no longer dragging on GDP, the prodigal son that is non-mining appears finally to have returned. Economists will be revising up their estimates for next week’s GDP result.

China also released its August PMIs yesterday. Manufacturing rose to 51.7 from 51.4 and services fell to 53.4 from 54.5.

More Strong Data

US consumer spending rose 0.3% in July on the back of a 0.4% gain in incomes – the biggest in five months. Typically these numbers would imply rising price and wage inflation but the personal consumption and expenditure (PCE) index – the measure of inflation the Fed prefers over the CPI – rose only 0.1% on both the headline and core numbers.

It was a “have your cake and eat it too” result – strengthening economy without an increased threat of higher interest rates.

The result helped all the major US indices finish in the green last night but the standout was again the Nasdaq. It rose 1.0% to the Dow’s 0.3% on a second day of significant moves up in the biotech space, and hit a new all-time high.

For biotech, it’s a case of recovering from an earlier hefty sell-off. Biotech had been riding high in 2016 up until the presidential primaries, in which both candidates spooked investors by pledging to bring drug prices down. More recently biotech companies have been posting solid earnings results, and biotech is a growth sector reliant on a strong economy. Clearly Wall Street now sees the sector as cheap.

The Nasdaq gain helped the S&P up 0.6% and it posted the fifth consecutive month of gains, and while the Dow is struggling to reclaim 22k, month-on-month it has also notched up five wins.

There is much talk of tax reform in the air. And much room for disappointment.

See: health.

Commodities

After its brief moment in the sun, the US dollar index resumed its fall last night with a -0.3% drop to 92.63. Gold jumped US$12.70 to US$1320.80/oz after its little period of consolidation at the new big figure.

Base metal prices responded positively in London to the lift in China’s manufacturing PMI. Copper underperformed on 0.5% but the other metals all rose 1-2%.

Iron ore rose US40c to US$75.80/t.

For the past few sessions we’ve seen the West Texas crude price fall as flooded refineries shut down and demand for crude dries up. Some 30% of US refinery production is currently off-line. But last night gasoline futures leapt 13%, as well they might, and WTI rose US$1.11 to US$47.08//bl.

That seems in contradiction to the trend – more shuttered refineries should mean even less crude demand – but the fact the other 70% of refineries are going to see a huge jump in refiner margins they will thus have more money to spend up big on crude. Or so the explanation goes.

The Aussie has jumped back 0.6% to US$0.7947 on yesterday’s data.

Today

The SPI Overnight closed up 5 points.

The August result season is now over. Given the deluge of the last two weeks, stock analysts will still be wading through the piles on their desks so we can expect a few catch-up assessments into next week.

September is not historically a great month for stocks. It’s also a big month of ex-divs.

PMIs from across the globe are due over the next 24 hours, including Caixin’s take on China’s.

Tonight sees the August US jobs report ahead of a long weekend in the States.

Note that today S&P will announce the results of its quarterly ASX index rebalancing, which means promotion and relegation of stocks in and out of everything from the ASX20 to the ASX300. Index trackers will need to buy winners and sell losers.

Rudi will connect with Sky Business via Skype at 11.15am to discuss broker calls.
 

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