The Overnight Report: Wild Ride

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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Déjà vu

World weary investors will recall that between May and October of last year, the ASX200 was firmly stuck in a range of 5500-5800. More remarkable than the length of time the index was stuck was the number of times it flew to the top or crashed to the bottom, only to sharply turn and go the other way again.

It was actually a quite volatile period on a day to day basis, and as good as zero volatility on a monthly basis.

On Monday the index peaked at 6090. On Tuesday it plunged -50 points to 6000. On Wednesday it limped back up from 6000, and yesterday it shot up 50 points, to 6090. Have we seen this movie before?

What changed between Tuesday and Thursday? Perhaps we can only point to January month-end squaring ahead of renewed buying interest in the new month. Wall Street closed flat on Wednesday night (S&P). Commodity price moves were nothing special, and economic data releases have not been too flash – weaker Chinese manufacturing, weak Australian inflation, evidence of a cooling housing market.

Yesterday’s data release was that of building approvals, which fell no less than -20% in December. Economists had expected around a -10% fall following November’ surprise 12% gain, so were somewhat taken aback.

There was, nonetheless, some positive news yesterday to spur on the buyers.  

BHP ((BHP)) has talked up its plans to divest of its US shale business, which was worth a 1.5% rally, and 1.0% for the materials sector. An APRA progress report on its Commonwealth Bank ((CBA)) inquiry was well-received, suggesting the worst is now behind. That was also worth 1.5% for CBA and 1.2% for the banks sector, which provided the bulk of yesterday’s index gain.

The early openers of this February result season had posted poor results this week but GUD Holdings ((GUD)) bucked the trend on Wednesday, and yesterday that stock topped the ASX200 leader’s board with a 5.8% gain. Consumer discretionary rose 1.3%.

So it wasn’t all smoke and mirrors. But it wasn’t a market-wide buying session either. Aside from consumer discretionary, buying was concentrated in banks and resources, including energy, up 1.1%. The star sector in January – healthcare – stood still. This week’s comeback story – Telstra ((TLS)) – fell -0.8% to ensure telcos were the only sector to finish in the red.

It was a risk-on session. This might normally suggest selling in utilities, but as AGL Energy ((AGL)) runs with energy despite being in utilities, utilities were up 0.7%.

Where to now? Well, with Wall Street doing a very good impersonation of the death wobbles, the futures are showing -30 this morning. Back down we go?

And Back to Rates

Wall Street commentators dismissed selling on Wall Street early in the week as reflecting month-end pension fund rebalancing between their equity and fixed income weightings. This implied that, perhaps, things would be back to normal on the first of the new month. But hanging over Wall Street, whatever the date, are rising interest rates.

The US ten-year yield rose another 5 basis points last night to 2.77%. I have often noted in this Report that the smart money on Wall Street never trades in the late afternoon following a Fed statement release, as that can be a volatile and misleading short period. Rather, thought is given overnight and trades are implemented the next day.

The Dow opened down around -130 points from the opening bell last night. Janet Yellen’s farewell statement had suggested emerging signs of inflation, implying the Fed might be more aggressive in 2018 as had previously been assumed. So stocks were sold, and bonds were sold.

But when Europe closed last night a big buying program was placed on Wall Street, and the Dow suddenly was up 150 points mid-session. When traders came back from lunch, they started selling all over again. The Dow nevertheless closed up slightly, but the S&P lost -0.3%.

There are three reasons to believe a US ten-year yield of 3% and more is just around the corner.

Firstly, inflation expectations are rising. Secondly, the Fed is winding down its balance sheet, meaning it is no longer sitting as an entrenched buyer in the bond market. Thirdly, in order to cover the initial budget shortfall provided by the tax cuts, the US government has to borrow twice as much this year as last. That means issuing bonds.

Rising US rates should mean a rising US dollar. The dollar index plunged -0.5% last night to 88.64. While an upgrade to forecast for the pound and euro by UBS had an influence, commentators suggest that the blow-out in the US budget deficit due to both tax cuts and as yet unquantified infrastructure spending, and subsequent borrowing by the government, is undermining the value of the greenback.

In earnings news last night, Facebook rose 3.6% on advertising growth while Microsoft fell -0.7% despite a beat on earnings.

After-the-close reporters this morning include Apple, up 0.6% in aftermarket trade, Amazon, up 4.2% as I write, and Alphabet (Google), down -2.8%.

January non-farm payrolls are due tonight in the US. With too-fast rate rise fear now festering, will we be back to the old “good news is bad news” model. Could a strong number tip Wall Street over?

Commodities

Suffice to say, a weak US dollar is positive for commodity prices, although iron ore does tend to march to a different beat.

Last night Goldman Sachs suggested the global oil market has likely now reached a balance between supply and demand, and forecast a Brent price of above US$80/bbl later this year.

Despite the weak greenback, the Aussie is down -0.2% at US$0.8038 on those weak building approval numbers.

Today

The SPI Overnight closed down -14 points or -0.2%.

Australia’s December quarter wholesale (PPI) inflation numbers are out today.

It’s jobs night in the US.

James Hardie ((JHX)) will report quarterly earnings.

The Australian share market over the past thirty days…

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