The Overnight Report: Fear And Tweets

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

By Greg Peel

Not So Blind

There was no pre-market indicator of where the ASX200 might open yesterday morning given the futures were closed for Easter. Wall Street was down -2.2% overnight, which if matched, would have meant a fall of -126 points for the local index. But we don’t usually match Wall Street to the dime, so perhaps we might have seen the futures down around -60 had they been open.

For it is typical of the Australian market to blindly respond to Wall Street on the downside, despite not coming close to matching Wall Street on the upside. The biggest driver of Wall Street over 2017 and into 2018 was tech, now 25% of the S&P500, while Australia’s IT sector represents around 2% of the ASX200. Yet when Facebook sneezes, we catch a cold.

Not so yesterday, however.

The index opened down -34 points, as the computers responded in their typically one dimensional fashion. The index immediately bounced sharply to be into the green by lunchtime. Late selling took some of the edge off.

Admittedly, the announced takeover bid for Santos ((STO)) by Harbour Energy provided a sentiment boost, sending Santos shares up 16%, and the smaller Senex Energy ((SXY)) up 6% in sympathy, while even sector giant Woodside Petroleum ((WPL)) managed to finish in the green despite the oil price falling -3% overnight.

Note that were Santos taken over, fund managers would need to rebalance their energy sector weightings by using the proceeds to buy other energy stocks.

The energy sector was a clear winner on the day with a 2.2% gain but was not the only sector to finish in the green.

While a global trade war would not be good news for Australia, a trade war simply between the US and China may be a different story. Might we benefit? We can note, for one that Treasury Wine Estates ((TWE)) was up by as much as 1% yesterday before late selling kicked in. Australia exports a lot of wine to China, and US wine will now attract a 25% tariff. [Note: a substantial part of the company's assets are located in the USA, so it's not a clear cut proposition].

There are reportedly 120 commodities on the list of 15% tariff victims, and the local materials sector closed up 0.9% yesterday.  We did see a higher iron ore price over the weekend and a jump in the gold price, but the LME base metal market was closed on Monday night. Yet nickel miners Independence Group ((IGO)) rose 4.6% and Western Areas ((WSA)) 3.8% yesterday, beaten only by Santos on the ASX200 leaders’ board.

Our own tech sector fell -1.5%, in sympathy with its US peers, but as noted, the market cap influence is minimal, with the added observation that cap stocks such as Seek are not included in the local IT index. [Note: US tech stocks are cum a sector re-allocation this year, which will move some of today's stalwarts into Consumer Discretionary].

Also falling -1.5% locally was consumer discretionary, which might have been a response to the RBA governor’s comments in yesterday’s monetary policy statement:

“One continuing source of uncertainty is the outlook for household consumption, although consumption growth picked up in late 2017. Household income has been growing slowly and debt levels are high.”

The big negative influence were the banks, which fell -0.5%, and here can only cite weakness overnight for US banks.

All up, it has been frustrating in often times to see the Australian market simply capitulate on a bad session for Wall Street when the correlation is largely questionable. Yesterday it didn’t, which is somewhat heartening.

And Wall Street has rebounded overnight.

Amazonia

On Monday night the S&P500 closed below its 200-day moving average, which in technical terms is very negative. However, it did mean the previous February low had been retested, as many had been looking for, and there are always buyers waiting to get in at better prices.

Wall Street opened to the upside from the bell, following Monday night’s big fall. The rebound was nevertheless short-lived, as Donald Trump again took a swipe at Amazon, insisting he is right in saying the company is costing the US taxpayer millions by using the US Post Office as a below-cost delivery service.

The details of the deal between Amazon and the Post Office is unknown. Commentators question why, despite the PO being a public service and not a for-profit organisation, such a poor deal would be accepted.

Wall Street thereafter stumbled about, unable to find direction, until the early afternoon. It was then the White House commented that despite the president’s rants against Amazon, there was no actual plan to do anything about it.

Amazon shares took off. Everything took off. Amazon is not in the Dow, yet the Dow shot up to be almost 400 points higher, before easing off a little to the close. It appears that from a sentiment point of view, this news from the White House was the trigger required for those looking to buy to do so.

Adding to the afternoon turn in sentiment were the latest US vehicle sales data for March. They were much better than expected, leading to rallies for the likes of GM and Ford. More notably, quarterly production numbers provided by Tesla put to rest fears the electric car maker could never meet the production targets it had set for itself. After a poor run recently, Tesla jumped 6%.

One comment made to Dow Jones by an investment strategist last night rather sums things up nicely:

“This is still a market trading on fear instead of fundamentals and on tweets instead of technicals, which has made it frustratingly difficult to figure out where we’re headed in the near term.”

Exactly.

Commodities

The trend evident late last week in base metals continued last night as the LME reopened. Copper and nickel were up another percent and aluminium was down a percent.

A bit of a spike for iron ore has proven short-lived, it fell -2.5%.

Gold enjoyed a risk-off session on Monday night but gave back half of that in last night’s risk-on rebound.

Oil did the same, only the other way around.

The Aussie is up 0.3% at USD$0.7683.

Today

The SPI Overnight closed up 19 points or 0.3%.

Locally, building approvals and retail sales numbers are due today.

The March private sector jobs report is due in the US tonight.

The Australian share market over the past thirty days…

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