The Overnight Report: Bring It On

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            [1] => ((MYR))
            [2] => ((PMV))
            [3] => ((AIZ))
            [4] => ((CAB))
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            [0] => AGL
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            [3] => AIZ
            [4] => CAB
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This story features AGL ENERGY LIMITED, and other companies.
For more info SHARE ANALYSIS: AGL
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 56 points or 0.3% while the S&P gained 0.4% to 2507 and the Nasdaq rose 1.2%.

No Interest

On Monday morning the local futures said up 7 and the ASX200 finished flat. On Tuesday morning they said up 14 and we finished down -11. Yesterday they said up 16 and we finished down -6. Is there a pattern here? This morning the futures are up 20.

The reality is there is not really a lot of selling going on, just a lack of buying. Volumes have been low. Before we look to sentiment, we can first look at some exogenous factors, such as the fact stock analysts tend to take their breaks after gruelling earnings seasons, it’s currently school holidays in NSW and elsewhere, we’re leading into a long weekend, and each day the index is being initially handicapped by ex-divs.

It’s not that there hasn’t been any news about, it’s just that none of it is “market-moving” as opposed to just sector/stock moving.

Could today be different? Otherwise it is still looking like this index wants to go back to 5500 rather than back to 5800. Maybe it should, to reset sentiment.

That 20 point rally in the futures is as a result of strength on Wall Street, which is as a result of Trump’s tax plan being unveiled, to some extent. This time maybe we might see some market movement.

Meanwhile, I suggested yesterday that this time resources sectors would not be providing for the 16 point rally the futures had predicted given commodity prices were not overly supportive. I could not have been more wrong. The only two sectors to post rallies yesterday were energy (+0.3%) and materials (+0.5%).

In energy’s case, an apparent resolution to the domestic gas shortage issue, which for now at least keeps the government at bay, provided relief. And AGL Energy ((AGL)) announced a quite bizarre and very interesting response to the whole problem. Rather than quarantine the gas we have an abundance of, which we sell to Japan and China, import gas from elsewhere to provide for a competitive domestic market.

Somewhere one sees a revolving door and a lot of expense that would otherwise be avoided, but AGL supposedly knows what it's doing.

In retail land, the market has been wondering for some time what Solly Lew had planned for the 11% stake in Myer ((MYR)) acquired by Premier Investments ((PMV)) back in March. Lew has requested a list of Myer’s shareholders so he can write to them. The market smells a takeover, hence Myer jumped 10% yesterday. Throw in the fact it was also ex-div, that’s more like 13%-plus. Myer was the third most shorted stock on the ASX as of last week, at 15.3%.

But consumer discretionary still closed lower yesterday, as did all other sectors bar the resources. Telcos was the worst performer at -1.2%. Came up tails.

Jury Out

Trump’s tax package primarily consists of a cut in the corporate rate to 20% from 35% and a reduction in the number of personal tax brackets from five to three, of four if you count zero at the low end. On the other side of the ledger is a swathe of changes to deductions, mostly foreign stuff to Australian tax payers.

In isolation, the changes are estimated to cost the US budget US$5.8trn dollars. But when incorporated into Trump’s recent budget, that number is greatly reduced – not offset, but reduced. Importantly, and surprisingly to many, the ferociously anti-debt Freedom Caucus, aka Tea Party, is prepared to accept a higher debt level in order to achieve tax reform.

This removes what many perceived as one of the greatest barriers to any tax reform plan. Yet as we have seen from the healthcare bill fiasco, it only takes a couple of Republicans to dissent and tax reform will be dead in the water to begin with. So, it would be good to get some support from the Democrats.

On the matter of corporate tax cuts, last night’s movements in US indices said it all – Dow up 0.3%, S&P 0.4%, Nasdaq 1.2% and Russell small cap 1.9%. From left to right, we move from mega-caps to small caps, from big business to small business. As is the case in Australia, mega-caps never pay the full tax rate. Most small businesses do. Therefore the bigger the business, the lower the benefit of a reduced tax rate. The smaller the business, vice versa.

This is not anathema to Democratic policy. What is anathema is “tax cuts to big business” and to “the rich”. To the latter point, Trump says this is a package that will support Middle America. The Democrats have had a look and said, no, this package benefits the rich at the expense of the poor.

A lot of the aforementioned budget offset involved reduced spending in services that benefit lower and middle income earners.

So it is not a given that Trump’s attempts to woo centre-leaning Democrats will pay off. Indeed, the Democrats may just vote no in unison as to do otherwise would imply tacit support for Trump, and already there’s talk the Republicans are going to be in trouble in next year’s mid-terms.

So, add it all up and we can see why at least one respected commentator has suggested that not only will there be no tax reform bill passed in 2017, there won’t be one in 2018 either.

Let the games begin.

Commodities

Tax talk was a more prominent mover of sentiment in other markets. The US ten-year yield jumped 8 basis points to 2.31%. The US dollar index jumped 0.5% to 93.44. Subsequently, gold is down another -US$11.20 at US$1282.40/oz.

It was another mixed session on the LME, with a -2.5% fall in nickel the standout.

After a couple of days of clawback, iron ore fell -US$1.20 to US$62.80/t.

West Texas crude is again steady at US$52.04/bbl.

The Aussie is down -0.5% at US$0.7850 thanks to the greenback.

Today

The SPI Overnight closed up 20 points or 0.4%.

So, do I say it again? Those 20 points won’t involve the resource sectors given commodity price moves? Or is the greater influence the Aussie dollar, which is now down a cent and a half from the peak at US80c?

The US will see a final revision of June quarter GDP tonight, but it’s very old news.

Air New Zealand ((AIZ)) will hold its AGM today and Cabcharge ((CAB)) is the larger name among today’s list of ex-divs.

Rudi will travel to Macquarie Park twice today to appear on Sky Business at noon (midday-2pm) and again after 9pm.

****

The Australian share market over the past thirty days…

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