The Overnight Report: The Dollar Debate

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            [3] => ((QBE))
            [4] => ((TLS))
            [5] => ((NST))
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This story features CSL LIMITED, and other companies.
For more info SHARE ANALYSIS: CSL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Welcome to the new look Overnight Report. It’s not much different to the old one, other than the tables which materialised last year have now been repositioned. We open with a summary of overnight moves. Thereafter, read on…

Cautious Gains

The local market managed to kick on with it yesterday following Tuesday’s big rally, despite Wall Street doing not a lot. What is notable is that volumes have begun to pick up, reflecting more players returning from holidays. Once we get past tomorrow’s celebrations, and Monday’s work-at-home-day in Sydney, we should be just about back to a full compliment.

All sectors posted gains yesterday other than materials (-0.2%), which finally succumbed to the lower iron ore price, and telcos (-0.1%), which quite simply no one wants to own.

Healthcare was again the standout winner with another 1.1% gain. Sector heavyweight CSL ((CSL)) just keeps going up and up while peer ResMed ((RMD)) continued to rise yesterday post-result.

A jump in the oil price helped energy up 0.9%, as did a well-received quarterly report from Santos ((STO)), featuring ongoing debt reduction.

Three banks are making a comeback – I’ll leave you to guess which one isn’t – helping financials up 0.2% yesterday but the real driver in that sector was QBE Insurance ((QBE)), which topped the leader board with a 5% gain following a traditional “clearing of the decks” by the new CEO.

Utilities (0.5%) are hanging in there despite rising US interest rates, and possibly because Telstra’s ((TLS)) dividend is no longer the go-to yield play.

All up a reasonable session, taking us back to the middle of what has been the 2018 range at 6050 for the ASX200. Things will probably quieten down this afternoon ahead of the long weekend and this morning the futures are suggesting a -19 loss, or full give-back of yesterday’s gains.

It may be a session in which currency winners and losers are highlighted, given the greenback has tanked overnight and the Aussie is now closing in on US81c – a problem Dr Lowe will no doubt readdress at the year’s first RBA meeting in a couple of weeks.

That Sinking Feeling

US commerce secretary Wilbur Ross took a swing at China last night, specifically its burgeoning technology sector, accusing the Chinese of intellectual property theft and corporate espionage in its push to oust the US as the dominant global force in new technology.

If there is one thing that has Wall Street nervous, other than elevated stock valuations, it’s Trump’s protectionist trade policies and the potential tit-for-tat retaliations that may follow. Just this week Trump imposed big tariffs on imported washing machines and solar panels. NAFTA is hanging in the balance. Eleven Pacific nations have signed the TPP, without the US.

Trade fears are weighing on the US dollar. The European economy is now outgrowing the US hence the euro, which is 47% of the US dollar index, is rallying, as the ECB hints at moves towards normalisation. The Bank of Japan is holding fast, but the yen, too, is rising on the assumption the BOJ can’t hang on forever. Domestically, the US economy is looking good, thanks to tax reform. Globally, it’s on the nose.

The standard mantra of any US administration is that the US dollar must be strong in order to preserve its status as global reserve currency. A strong dollar also benefits America’s substantial consumer economy but it is a headwind for US multinationals – those that dominate the tech sector like Apple, Amazon, Google etc, as well as large industrials and the big banks.

The US dollar index peaked near 102 in March last year on Trump euphoria. Last night it fell -1% to 89.23 – a devaluation of -13% from its peak. Strength in the US stock market reflects strength in the US economy but under normal circumstances that would be accompanied by strength in the currency, acting as a dampener. Yet the opposite has been true – win-win.

So, is a weak dollar actually a bad thing? It is the expected role of the US treasury secretary to say “yes”. Last night Steven Mnuchin said “no”. That’s why the greenback tanked.

The Dow was up over 180 points early in the session last night, and then fell to be down over -100 points. Big Tech copped the biggest beating in the sell-off thanks to those comments from Wilbur Ross, and subsequent fears of technology trade wars. But when Mnuchin suggested a weaker dollar might actually be a good thing in the short term, US indices staged a comeback.

Mnuchin is no fool. Of course it’s a good thing in the short term. Reserve currency status aside, US multinationals are about to begin the process of repatriating offshore funds back into the US at negligible tax rates, offered to them for a short period of time. The weaker the dollar, the bigger the benefit.

When the dust settled, the Dow closed mildly higher, the Nasdaq reflected tech selling and it all netted out to a flat S&P500 in the middle.

Commodities

Saves me rattling off all the prices…

All things being equal, a weaker US dollar translates into stronger US dollar-denominated commodity prices. A -1% move in the dollar index is no small thing. The gains in all commodity prices noted above are therefore easy to explain, including a big jump for gold.

Note that West Texas crude is now back over US$65/bbl for the first time since late 2014.

The Aussie is up 1% to reflect the greenback, at US$0.8074.

Today

The SPI Overnight closed down -19 points or -0.2%.

The ECB will hold a policy meeting tonight.

Northern Star Resources ((NST)) will post its quarterly report today.

No Overnight Report tomorrow due to the holiday, but next week’s Monday Report will include a full wrap of events in the interim.

The Australian share market over the past thirty days…

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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