The Overnight Report: Some Relief

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            [8] => ((TCL))
            [9] => ((GUD))
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This story features AGL ENERGY LIMITED, and other companies.
For more info SHARE ANALYSIS: AGL
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Finding its Feet

By rights we should be disappointed that Wall Street posted a sharp turnaround on Friday and the Dow closed up over 300 points, while the ASX200 fell -17. But there is a level of relief provided by what was a relatively calm day in the context of last week’s Wall Street-driven mayhem.

It was a fair call to make yesterday morning that we might see some local buying but the energy sector would prove the drag. Energy fell over -2% in each down-day last week and briefly jumped 2% on one respite rally. WTI fell -2.5% on Friday night – its sharpest session fall throughout this period, but yesterday the local energy sector only fell -0.4%.

Exhausted selling, perhaps. Base metal and iron ore prices were also lower, yet the materials sector clearly won the day with a 0.9% gain.

In the end it was the banks that provided most of the drag, falling -0.6% as the Royal Commission kicked off with the commissioner giving the banks quite a serve. Utilities (-2.2%) posted the worst performance, but that was because AGL Energy ((AGL)) fell another -2%, while info tech was the only other sector to finish in the green (+0.6%), with NextDC ((NXT)) gaining 4.5% on the session.

All was not well in the old world, with department store dinosaur Myer ((MYR)), down -6% while watching a meteorite heading its way, JB Hi-Fi ((JBH)), down -8% after posting a rare result disappointment and weak guidance, and Seven West Media ((SWM)), down -5.7% as the Winter Olympics provokes enthusiastic indifference.

There may also have been an element yesterday of shell-shocked investors not yet ready to trust a bounce on Wall Street, looking for further clarification that a bottom may have been found. Last night’s session should therefore provide some more confidence today, alongside some stability in commodity prices.

The futures are up 33 points.

Buyers Prevail

The S&P500 crossed briefly below its 200-day moving average in Friday night’s session on Wall Street before rebounding. Buying picked up steam in the afternoon on better volumes. Was this the turnaround?  

The Dow opened up 300 points last night but by 10.30am was back to square. The fear is the leveraged selling that exacerbated the falls last week is yet to be completed, and every rally will be met with another wave of selling. But this time, the buyers prevailed.

The Dow reached its peak up over 550 points with half an hour to go, before late squaring ensured a lesser close, but still a 400 point rally. Last week the Dow and S&P both hit -10% correction levels at Friday’s intraday low. At last night’s intraday high, they had rebounded 5%.

In the current low interest rate environment, most longer-term investors would be satisfied with a 5% return in a year.

So now what?

It is unknown whether the selling required to clear out the short volatility positions in the leveraged funds, that will be shut down this month, is over. Most likely it’s not. But that specific issue aside, what started the rout was fear of rising inflation. On Wednesday night the US January CPI numbers will be released. They will be critical.

Last night Donald Trump outlined a US$200bn spending plan over ten years, in the form of grants to the states to improve highways, airports, bridges, tunnels and other infrastructure. While few would disagree much of America’s infrastructure is in disarray, the concern is that such a level of fiscal stimulus should be something deployed when the economy is weak and unemployment is high.

Not when the economy is strong and unemployment is near record lows. Such stimulus increases the budget deficit and adds further fuel to the inflation fire. And that brings us back to the higher interest rates Wall Street is fearing.

In the shorter term, aside from the CPI data on Wednesday and PPI on Friday, February equity options expire on Friday ahead of a long weekend. The VIX volatility index jumped from under 10 to an intraday high of 50 last week and remains currently at 25, which is still well into “nervous” territory.

The bottom line is there’s still plenty of scope for more volatility this week. If, however, this week manages to return Wall Street to some level of stability, there remains an expectation that sometime in the next few weeks or so, the lows will need to be retested. Markets do not V-bounce off their lows following a correction. Corrections need to be worked through.

Commodities

Oil prices finally stopped falling last night. A -0.2% drop in the US dollar index to 90.16  helped, but fear of excessive US supply is the fundamental factor weighing on oil markets in the midst of last week’s “risk off” stampede.

Base metals, too, were comparatively stable in London, and gold re-awoke.

At the time of writing I’m having a problem with our iron ore price source, but I believe only a slight fall was registered. I will update when I can.

The dip in the greenback and stability in commodity prices was enough to spark a 0.5% bounce in the Aussie to US$0.7851.

Today

The SPI Overnight closed up 33 points or 0.7%. Note that the best performing sector on Wall Street last night was materials.

NAB will release its January business confidence survey today.

Amongst today’s earnings reporters are Boral ((BLD)), Challenger ((CGF)), Cochlear ((COH)) and Transurban ((TCL)).

Take note that as earnings season unfolds, those companies reporting early in the season will go ex-dividend, before a rush of ex-divs after the season is over. Today GUD Holdings ((GUD)) and Tabcorp ((TAH)) go ex.

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

The Australian share market over the past thirty days…

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