The Overnight Report: Then Suddenly, Nothing Happened

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This story features RETAIL FOOD GROUP LIMITED.
For more info SHARE ANALYSIS: RFG

By Greg Peel

The Dow closed down -28 points or -0.1% while the S&P lost -0.1% to 2679 and the Nasdaq was flat.

Secret Santa

Having broken up on Tuesday, it looked like the ASX200 was in for some profit-taking yesterday with the futures pointing lower following Wall Street’s lead. But the index managed to open down only -14 points before spending the rest of the session steadily grafting back.

December is typically a positive month for the local market, and it appears this is how traders want to play it. Fed rate hikes in December has become de rigeur but it’s not every December the US overhauls its tax system. The last time was in 1986. With an aggressive “sell the fact” pullback so many had thought may be the case failing to materialise, the way is clear.

Having said that, the futures are down -22 again this morning with Wall Street steady.

Yesterday’s sector moves suggested “risk on”, with defensives being sold for cyclicals. Telcos (-0.9%), utilities (-0.7%) and healthcare (-0.3%) all fell as gains were made in materials (+0.5%), IT (+0.6%) and consumer discretionary (+0.6%).

The consumer discretionary stock of the day was Ardent Leisure ((AAD)), which has received a bid for its Bowling & Entertainment division. No, it wasn’t from the English cricket team. Having sold off its Marinas previously, Ardent will be left to concentrate on Theme Parks and Main Event with a much heathier balance sheet. The stock jumped 12% yesterday.

In the same sector, however, lies Retail Food Group ((RFG)), down another -18% yesterday. It’s become an exodus.

Speaking of exoduses, that’s pretty much what’s going on in the local market now as this week winds to a close. Brokers are beginning to shut up shop, half the market’s already on holidays and by tomorrow lunchtime, the tumbleweeds will roll down Bridge Street.

It is often in this thin trading environment that Santa does his best work.

Now What?

There was always a possibility Wall Street would rally once more on the sheer euphoria of the tax bill being passed, but it has rallied so far to date it seemed further upside would be limited. The more likely scenario, many thought, would be sell-the-fact profit-taking ahead of Christmas.

Neither scenario has played out. Over the past two sessions, as the bill has passed the House and then the Senate, Wall Street has stood still, doing a very good impression of someone who’s really got no idea what to do next.

What is expected from here is a lot of arithmetic. Aside from trying to sort out one’s own personal tax situation under the new rules (there’s been a lot of eye-rolling over this bill providing “simplification”), investors are now tasked with working out exactly which sectors and companies stand to gain from the tax bill and which stand to lose. This theme will inform Wall Street as the calendar ticks over to 2018.

Bear in mind that the US financial year ends in December. Typically those investors looking to take profits and square up positions for year-end would be doing so now. But why take profits and pay 2017 tax? Why not wait a bit and keep more of the profits under 2018 tax brackets?

Perhaps once the new tax regime kicks in officially, then we’ll see “sell the fact”.

But as we move into January it will be US earnings season once more, and at the end of the day earnings are what really matter. And while forward guidance is always as important as the quarter’s result, if not more important, this time around guidance will be even more critical after companies have recalculated their expectations at a lower tax rate and perhaps outline what they plan to do with the windfall.

If it’s another good season, there may not be a pullback at all.

The only other news of note, on a day featuring another saccharine Trump love-in on the White House lawn, was a 1% jump in the WTI oil price thanks to the weekly US inventory lottery, which came up with a greater drawdown than had been forecast.

It’s also notable that with another 3 basis point gain, the US ten-year bond yield is now at 2.50% and appears the only market to be responding to the tax bill post-fact. The US dollar index is down again, by -0.1% to 93.31.

Commodities

West Texas crude is up US54c at US$58.10/bbl for the new January delivery front-month.

The weaker greenback is allowing metals prices to rise on the prospect of stronger US growth, without being hamstrung by what, in isolation, one would have expected to be a rising greenback. Last night saw aluminium up 0.5%, copper 1.5% and nickel 2.5%, while lead bucked the trend with a -1% fall.

Iron ore fell -US30c to US$73.20/t.

Gold is up a bit at US$1264.30/oz.

The Aussie is a tad stronger at US$0.7666.

Today

The SPI Overnight closed down -22 points or -0.4%.

It’s derivatives expiry day on the local market today which has in the past, most notably the last September round, sparked volatility that is not indicative of market sentiment.

New Zealand releases its September quarter GDP result today.

The Bank of Japan holds a policy meeting.

The US GDP will be revised once more tonight, with no change from 3.3% forecast.

DuluxGroup ((DLX)) and Incitec Pivot ((IPL)) hold AGMs today.

****

The Australian share market over the past thirty days…

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