The Overnight Report: Dow 24k

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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 331 points or 1.4% while the S&P gained 0.8% to 2647 and the Nasdaq rose 0.7%.

Royally Thumped

Bring it on, said the banks, and bring it on they did, selling the ASX200 down -62 points by 11am with financials the biggest loser. At that point the market rebounded to be down around -40, and basically stayed there for the rest of the session.

The banks have made the politicians look like fools – not that that’s difficult. Tired of the speculation and uncertainty, they collectively told the government let’s just have a Royal Commission and get it over with. What that Commission might achieve in a year’s time is anyone’s guess, but it’s unlikely to be beneficial to the banks. But in fact it may well be, simply by getting it out of the way.

The Commission will take a year, by which time we shall no doubt see further divestments from the majors of insurance and/or wealth management divisions, rather muddying the waters for those trying to find fault.

Financials closed down -0.8% yesterday. It was a lot worse at 11am. On Wednesday the sector rose 0.6% on Wall Street strength. This move formed the bulk of the loss on the index for the day but was not the biggest percentage move. Materials fell -1.4% and energy -0.7% as they finally succumbed to lower commodity prices. The two best performers of the week to date – healthcare and consumer discretionary – fell -1.1% and -1.4% respectively. IT fell -1.6%.

But lo and behold, the sellers had to buy something in return, and they spotted one of the weakest stocks on the market of late – Telstra ((TLS)). Telcos were up 1.1%, while the only other sector to finish in the green was consumer staples, playing the defensive role with a 0.4% gain.

It seems that selling in the banks triggered selling in almost everything. How much of it was to do with end of month?

Lost in the wash yesterday were a lot of economic data.

Private capital expenditure rose 1.1% in the September quarter to mark the third consecutive quarter of growth. The last time three quarters were positive was in 2011-12 in the midst of the mining investment boom.

More surprising was a significant increase in the fourth estimate of FY18 capex. Typically businesses talk up their books in first estimates before paring back expectations in successive quarters, but not this year. The non-mining sector is expecting 13% growth. Mining investment will fall -17%, but that’s less than the -22% drop forecast six months ago.

Mining investment did not fall in the September quarter. It’s the first quarter in four years that hasn’t seen a decline. On any other day, these numbers would have been well-received by the market.

Economists expected dwelling approvals to fall -1% in October as the housing market cools, but they rose 0.9% with Victoria leading the charge. Housing credit rose 0.5% but annual growth has eased back to 6.5%. Business credit rose 0.3% but eased to 4% annual growth, although on the capex numbers is expected to pick up going forward.

China’s manufacturing PMI rose to 51.8 in November, up from 51.6 in October. Economists expected a fall to 51.4. China’s services PMI rose to 54.8 from 54.3.

Everyone breathe out.

It will be an interesting session today given the Dow just posted its best day of the year to date. As late as Wednesday the local market jumped up on US tax reform progress. On Wednesday morning the SPI futures suggested a gain of over 40 points. This morning they’re showing up 22. A little less enthusiastic it seems, perhaps anticipating more bank selling from the slower movers.

Euphoria?

From the opening bell, the Dow pushed through 24,000. It has taken about a quarter of the time for the Dow to get to 24k from 20k as it did to get to 20k from 16k. It’s mostly about Trump, and thus mostly about tax reform.

Mid-morning, Republican senator John McCain suggested he would vote for the Senate’s tax reform proposal. The Dow soared to be up 387 points. We recall that McCain almost single-handedly killed off attempts at a healthcare bill.

The Dow did eventually give back around a hundred of those points before picking up again at the death, and as many a commentator has pointed out this morning, it’s a bit misleading to focus on a price average rather than a cap-weighted index. But the Dow is the traditional stock market indicator for the masses, and the masses are becoming increasingly more excited with every 1000 point record.

Carl Icahn has therefore called it euphoria. The “euphoria” stage of a stock market is typically the last stage before the crash. Few agree with Icahn nonetheless, pointing instead to synchronised global growth and strong US earnings. Never mind that those earnings have to a great extent been supported by share buybacks, funded by historically low interest rates that won’t remain historically low for much longer.

And never mind that even if the Senate does pass its version of a tax bill, the process of reconciling with a differing House bill is yet to begin. The road to tax reform requires several steps. Wall Street shot up on the promise of tax reform when Trump was elected, and at every step along the way has added a greater and greater tax cut premium to valuations.

How much premium is left? If – and it’s still a sizeable “if” – one tax bill can be agreed upon by both houses of Congress and if – and it’s another significant “if” – it passes and then signed by the president, can Wall Street still rally further?

These are the questions Wall Street observers are currently pondering. But they were pondering the same questions at Dow 23k, and 22k…

In other news, OPEC members agreed last night to extend current production cut quotas for another twelve months (nine additional months post expiry of current agreement in March). There will, however, be a review in six months’ time, as was suggested yesterday.

The WTI price rallied up towards US$60/bbl on expectation of an extension, then fell back this week on concerns that a mid-term review implies a bit of wavering creeping in. As the outcome balances good and bad – extension and review – WTI barely moved last night. US energy stocks nevertheless joined in the tax euphoria.

As did US banks. Australia’s banks typically rally when US banks provide such a lead. Will they rally today?

Commodities

West Texas crude is down -US12c at US$57.29/bbl.

The Chinese PMIs should be good news for commodities but base metal prices were mixed in London last night on metal-specific issues. Aluminium fell -1%, nickel fell -3% and lead rose 1.5%. Copper and zinc watched on.

Iron ore rose US60c to US$67.80/t.

The US dollar index continues to slip, down another -0.2% to 93.04. It’s all about what’s going on elsewhere, given tax reform should be dollar-positive. Gold has seen it that way – it’s down -US$9.70 at US$1274.60/oz, with the US ten-year yield up another 4 basis points at 2.42%.

The Aussie is down -0.1% at US$0.7570.

Today

The SPI Overnight closed up 22 points or 0.4%.

Manufacturing PMIs are due across the globe today, including Caixin’s take on China’s number.

With November now over, the local AGM season drops off to a trickle. Premier Investments ((PMV)) is on the calendar today.

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

****

The Australian share market over the past thirty days…

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