The Overnight Report: Risk Off

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            [1] => ((KMD))
            [2] => ((NUF))
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            [1] => KMD
            [2] => NUF
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This story features TELSTRA GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: TLS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down -53 points or -0.2% while the S&P fell -0.2% to 2496 and the Nasdaq fell -0.9%.

Failure

The local market opened with a flurry yesterday, ignoring the ongoing war of words between the Mad Men and kicking on from the bargain hunting of Friday with a 30 point initial gain. The banks were a primary driver, ignoring any impact of announced ATM fee cuts.

But that’s where it all ended. The index then proceeded to track a choppy downward path to close flat on the session. The financials sector finished unchanged.

Beyond that, it was a complete mix of sector moves. The coin came up tails on Telstra ((TLS)), so telcos fell -0.9%. This was balanced by a 0.6% gain in healthcare and a 0.4% gain for industrials. The consumer sectors traded off buying in discretionary and selling in staples.

Technically it was a very weak session. Having jumped back above 5700 on the open the ASX200 fell back to sit on range support near 5680.

Likely not helping sentiment was news from China regarding housing. Beijing had previously attempted to cool China’s surging property market by restricting the opportunity for short term “flipping” of property in certain cities. When the latest property price data showed a slowing in the pace of price rises, Chinese developers hoped Beijing might now look to ease those restrictions.

Instead, they were tightened. Eight further cities introduced the flipping rules over the weekend and six more are expected to follow. Suffice to say it was not a good session for Chinese property developers listed in Hong Kong.

It has been somewhat confounding chartists recently that every time the index looks like it must, this time, break down through support, it never does. A session like yesterday’s would be enough for breakdown expectations to rise once more. But we have Wall Street down overnight and the local futures showing up 14 points this morning.

This no doubt reflects commodity prices. After several days of steep falls, iron ore has recovered some ground. Gold has popped back over US$1300/oz and oil has jumped 3%.

We may need to look to the resources sectors to get the index back over 5700 once more but it is unclear from day to day which way the banks will go and the big telco is always now a coin toss.

War Stories

Trump’s declaration over the weekend that Little Rocket Man’s regime won’t be around for much longer has been taken by North Korea as a “declaration of war” and thus an excuse to shoot down US bombers. The White House was quick to point out there has been no actual declaration of war.

One can’t help but wonder where we’d all be if someone would just take away Trump’s phone. And wonder if North Korea is simply baiting Trump into acting given he’s such an easy mark – something they did not appear to bother trying with Obama. If there is a war, I’d blame Twitter.

Wall Street opened to the downside last night in what was taken as an uneasy response to the election in Germany, where Angela Merkel will have a difficult time in assembling a coalition. But when the North Korea statement hit the wires, the Dow fell -130 points.

The risk-off rotation was on. Growth stocks that have been riding high on momentum were sold off and value laggards were picked up. This amounted to the likes of selling Facebook and Amazon and buying IBM and General Electric. FANG stocks were the hardest hit, which is why the Nasdaq underperformed.

Gold jumped over ten dollars and the US ten-year yield fell -4 basis points to 2.22%. The VIX jumped 6.5%. Money flowed into the yen although on euro weakness, related to the German election, the US dollar index jumped 0.6%.

Energy stocks had a strong session. While oil is typically supported by talk of war, last night’s data release confirmed what no one initially thought possible – that OPEC/Non-OPEC is sticking to its production cut quotas. What’s more, the cartel is now suggesting the cuts could be extended when most assumed they would cease at the next deadline. And exemptions for Libya and Nigeria would be dropped.

Over in the Middle East, the independence referendum in the Kurdistan region of Northern Iraq has prompted the Turkish prime minister to threaten to cut off the pipeline that carries oil from northern Iraq through Turkey to Mediterranean ports.

Add it all up and WTI crude is up 3% and Brent up 4% to a two-year high.

Last night’s session on Wall Street was all about rotation, rather than market-wide panic. It was not as weak a session as we saw last time Wall Street sold on North Korea concerns.

An interesting point was raised on CNBC this morning regarding the rotation out of FANG and into value stocks. Were the US corporate tax rate to fall to 20% from 35% then US-centric businesses would be exceptional beneficiaries. Multinational tech stocks, and others, who have to date parked their profits in low tax jurisdictions, would actually end up paying a lot more tax than they do now.

A reason to consider rotation other than just in “risk off” situations.

Commodities

West Texas crude is up US$1.48 at US$52.13/bbl and Brent is up US$2.38 at US$59.17/bbl.

Gold is up US$13.20 at US$1310.30/oz despite the US dollar index being up 0.6% at 92.65.

Aluminium, copper and lead were slightly weaker in London but rebounds were enjoyed by nickel (+1.5%) and zinc (+2.5%).

Iron ore rose US50c to US$63.40/t.

The Aussie is down -0.3% at US$0.7936 with the stronger greenback offsetting stronger commodity prices.

Today

The SPI Overnight closed up 14 points or 0.3%.

Kathmandu ((KMD)) and Nufarm ((NUF)) release earnings results today.

Rudi will connect with Sky Business, through Skype, to discuss broker calls at around 11.15am.
 

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