The Overnight Report: Moving Forward

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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 up 255 points or 1.1% while the S&P gained 1.0% to 2627 and the Nasdaq rose 0.5%.

Second Attempt

Once again the ASX200 shot directly up to 6000 yesterday morning from the opening bell. It dipped and tried again, and dipped and tried again. Attempts to push through a resistance level are typically only allowed three chances by the market. When the third attempt failed, the troops retreated back to their line.

It is commonly assumed that the Australian market cannot rally meaningfully without the support of the banks. It’s just maths – together the Big Four represent around 25% of the ASX200. The wider financials sector boasts nine members of the ASX Top 20, including banks, insurers and wealth managers, and eleven when REITs are included. Throw those in and we get close to 40% of the index.

The remaining nine Top 20 members include the big miners, one big energy company, one big telco and the two supermarkets, along with a couple of industrials. Yesterday financials closed down -0.4% on parliamentary inquiry fears, materials closed down -0.7% on lower metal prices, energy closed down -0.2% on a lower oil price and telcos closed down -1.3% as a big line of Telstra ((TLS)) was traded at the lows.

It was not the day the index was going to break through resistance.

It was left to consumer staples (+0.6%) and consumer discretionary (+0.5%) to provide the balance, as investors note the sky hasn’t actually fallen in since Amazon “launched”.

It was another strong session for utilities (+1.5%), but realistically this sector is as much of a proxy for the dominant market cap of AGL Energy ((AGL)) as Telstra is in telcos or Computershare ((CPU)) is in IT (+1.0%).

But what happened yesterday is not much worth dwelling on given Wall Street’s performance overnight. The bank inquiry will likely still go ahead, Telstra fortunes are not about to change, base metal prices are all down -1% or more overnight, iron ore is down, and oil is down again.

The futures are up 40 points this morning

Monetary, Fiscal and Military

The session began on a positive note on Wall Street as traders tuned in to incoming Fed chairman Jerome Powell’s testimony at his Senate confirmation hearing. The bottom line is Powell said nothing to suggest that anything would change, policy-wise as he slips into Janet Yellen’s position next year.

On the subject of the assumed December rate hike, Powell pointed out that it is FOMC policy not to reveal voting intentions ahead of listening to the points of view of colleagues in the meeting. In other words, Powell will vote to hike. Thereafter, he is in the “gradual” camp.

While this is hardly new news, Wall Street will grasp onto anything these days to justify pushing the market to further new highs. But when news came through the Senate was ready to put its tax reform bill to a vote, Wall Street took off.

The Dow was up almost 200 points when another piece of news came through. North Korea had launched another missile. Where would it land? Suddenly, it was “risk-off”.

The Sea of Japan, was the answer. It was “risk back on”.

That the Senate tax reform committee should be ready to put its bill to a vote implies that with a bit of tweaking, those Republican senators initially voicing their concerns have been appeased. The bill should thus pass with full Republican support, it is assumed.

This would mean both the House and the Senate have passed their respective tax reform bills. It’s a milestone, no doubt, but there remains the issue of the two bills being at odds. The next step is to find out where compromises can be made on either side to formulate a bill supported in both houses.

Again we recall that it was this divide that to date has meant no success on a new healthcare bill.

But Wall Street was happy to take it, sending all four major indices yet again to new all-time highs. The biggest mover was the Russell small cap, up 1.5%, as smaller companies stand to gain more from tax cuts. The US banks were the best performers on the day, which explains why the Dow and S&P rose 1.0% and the Nasdaq only 0.5%.

America is closer to tax reform, yet still a distance away. As every milestone is passed, Wall Street surges higher in anticipation. Strong earnings notwithstanding, Wall Street has been pricing in Trump tax cuts ever since the day after the election in November. Each new surge represents another repricing. At what point do we decide the positives have been priced in?

What happens if tax reform, like healthcare, fails?

Commodities

The British pound shot up 1% last night on news the UK and EU may have agreed on a divorce settlement. This impeded the US dollar, which was otherwise strong on the tax reform news. The net result is a 0.4% gain for the dollar index to 93.27.

The stronger greenback weighed on base metal prices, which remain under pressure since Beijing’s clampdown on lending and indications Chinese stainless steel demand is waning. Last night all base metals fell -1-2% in London. Copper fell -2% despite BHP ((BHP)) talking up the prospects for the metal at its investor briefing yesterday.

Iron ore fell -US90c to US$67.00/t.

Gold is down only slightly at US$1293.10/oz, trading off greenback strength and refreshed geopolitics.

West Texas crude is down -US25c at US$57.89/bbl as traders continue to square up ahead of tomorrow night’s OPEC meeting.

The Aussie is down -0.1% at US$0.7600.

Today

The SPI Overnight closed up 40 points or 0.7%. That would put the ASX200 well above 6000.

It’s Janet Yellen’s turn to front the Senate committee tonight, although one doubts she’s got anything new to say.

The final revision of US September GDP is due tonight, with an increase to 3.2% growth from 3.0% expected.

On the local stock front, today is the final day of BHP’s investor briefing.

Collins Foods ((CKF)) reports earnings.

Cromwell Property ((CMW)), Seek ((SEK)) and Sandfire Resources ((SFR)) are among those companies holding AGMs today.

Rudi will be interviewed on Switzer TV tonight, Sky Business, between 7-8pm.

****

The Australian share market over the past thirty days…

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