The Overnight Report: Saving Face

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This story features SOUTH32 LIMITED, and other companies.
For more info SHARE ANALYSIS: S32
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Tuesday

Patriotic fervour ahead of the break? Offshore investors suddenly deciding Australia is cheap? Whatever the case, if we take out the materials sector Tuesday’s 0.6% gain for the ASX200 was very much a market-wide exercise. All other sectors closed in the green, in a range of +0.5% (telcos) to +1.8% (consumer discretionary).

Wall Street provided no impetus, other than not to fall. The futures called the market up 6 points in the morning, but we closed up 35. Momentum built as the session wore on, and the index barged through 5900 as if it wasn’t there.

The great frustration is that every time the Australian market shows such a spark of life, independent of Wall Street, Wall Street turns around and throws a bucket of cold water on proceedings. The Dow fell four hundred points on Tuesday night and the SPI futures closed down -34 points on Wednesday morning.

A trend-bucking -1.4% fall for the materials sector on Tuesday was all about sanctions, or lack thereof. Aluminium prices surged after the US effectively sanctioned Russian producer Rusal, and nickel prices also rose on suspicion of nickel being next in the firing line. When the US Treasury suggested a possible easing of the sanctions on Rusal on Monday night, the aluminium price fell -7% and nickel fell -3%.

Subsequently, South32 ((S32)) topped the ASX200 losers board on Tuesday with a -9.6% fall. Alumina ltd ((AWC)) chimed in with a -6.8% fall.

Unrelated to sanctions, Boral ((BLD)) fell -8% after providing a trading update highlighting unfavourable conditions in North America. Gold miner Resolute Mining ((RSG)) produced a weak quarterly report and fell -7.2%. Were it not for a -7.1% fall for Australian Pharmaceutical Industries ((API)), post earnings result, all of the ASX200 top five losers would have been materials stocks.

The winners board featured a mix of companies posting no more than a 4% gain, underscoring the buy-the-index feel to Tuesday’s session. Even the banks (+1.0%) were back in business.

The economic news of the day was the March quarter CPI report.

Headline inflation rose 0.4% for the quarter and 1.9% year on year, when 0.5% and 2.0% were expected. Core inflation rose 0.5% and 1.9% when 0.5% and 1.8% were forecast. No great surprises on a net basis.

Core inflation is now a tick below the RBA’s 2-3% target zone, but there is no sign price inflation is about to explode. Wage inflation remains stagnant, thus even if the core CPI hits 2% this quarter, the RBA is not going to hit the brakes anytime soon.

Tuesday Night

Peak earnings? That is the question on Wall Street’s lips.

On Tuesday night the US ten-year bond yield kissed the 3.0% level before falling back to 2.98%. But while rising rates are providing an undercurrent of nervousness, they were not the main focus of the session on Wall Street. The Dow opened over a hundred points higher.

Big Dow industrials such as Caterpillar and 3M were among those reporting earnings on Tuesday night. Both beat estimates and provided solid guidance. Indeed, roughly a third of the S&P500 has reported and this stage and 83% have beaten estimates, despite elevated expectations.

By early afternoon the Dow was down over -600 points. What the hell went wrong?

The sell-off was triggered by the Caterpillar post-result phone hook-up with analysts, in which management rattled off all the good news before suggesting that the March quarter may prove to be the “high watermark” for earnings. Prior to Tuesday night, concern had been building that while the March quarter would be a cracker for earnings, tax cut boosted, it is not going to get any better than that.

3M effectively retained strong guidance for the June quarter, but tightened the earlier earnings range by bringing down the top end.

“Peak earnings” is the fear. Some commentators said don’t be silly, but then Caterpillar turned around and all but confirmed the worst. Wall Street spun and plunged.

Adding fuel to the fire was commentary from a number of large companies having reported prior or reporting on Tuesday that input costs are rising. Steel is one input example, given producers are already adjusting prices for tariffs yet to come into effect. More universal an issue is rising oil prices. Earnings are up but costs are now rising.

There is also a begrudging acceptance that while it won’t happen overnight, new regulations will be created with regard social media privacy and data protection and this will cost the big tech companies in terms of compliance and sentiment. That cost will ripple down the tech supply chain.

FANG & Co were also among those stocks sold off heavily on Tuesday night.

The correction in aluminium (-3%) and nickel (-1.7%) continued, weighing on materials, while oil prices also fell back to drag down the energy sector.

In the spotlight now with regard to oil is Iran. What will Trump do, sanction-wise? At one stage on Tuesday night he implied a deal should be able to be worked out with Iran, and hence oil prices fell. Later in the day he called Obama’s deal “insane”, so as you were, except that oil prices chose not to rebound.

So, a quick tally. What is weighing on the mind of Wall Street at present?

Tariffs, sanctions, rates, inflation, regulations, Russia, Syria, Iran, North Korea and now “peak earnings”.

The Dow closed down -424 points or -1.7% while the S&P lost -1.3% to 2634 and the Nasdaq lost -1.7%.

Moves of note in commodity markets on Tuesday night: aluminium down -3%, nickel down -1.7%, WTI oil down -1.3%. The US dollar index dipped a little and the Aussie was steady just above US$0.76.

Wednesday Night

After two failed attempts, the US ten-year yield pushed through the feared big figure to close at 3.02% on Wednesday night, up another 4 basis points. The Dow fell another -200 points in the morning, but by 3pm was up over 100. A wild last hour concluded with a 50 point gain.

The session was all about earnings, overwhelming the significance of the bond yield breakout. Boeing delivered a result which blew forecasts out of the water, and rose 4%. As the biggest stock in the Dow by dollar share price, Boeing single-handedly helped the average out of Tuesday night’s mire.

Notably, in its own conference call, Boeing made no suggestion of peak earnings. Management also played down China tariffs and reported no great pressure on input prices as yet. Soothing words in comparison to Caterpillar’s the night before.

When it comes to the cap-weighted S&P, Boeing is just another stock. We’re now in the thick of US earnings season and upside surprises continue to track over 80% when around 65% is normal. Yet while Wednesday night offered some reprieve after Tuesday night’s plunge, the session was volatile and unconvincing.

It may well be more convincing tonight. Facebook reported after the closing bell and its shares are up 7.5% in the aftermarket as I write.

Facebook had fallen -20% in the wake of the Cambridge Analytica scandal and assumptions of increased regulations on social media. The stock was always set for a pop, assuming its earnings result was reasonable. A sharp rebound tonight will likely drag up all of the sold-off FANG & Co names tonight and lift Wall Street in general.

To that end, we note the SPI futures closed up 41 points this morning, despite Wall Street posting only a slight rebound. Having closed down -34 points yesterday morning, the SPI’s net gain can only be attributed to expectation of a Facebook-led rebound on Wall Street tonight.

Commodities

The US dollar index rose another 0.5% last night on rising bond yields, and at 91.26 is now roughly unchanged for the year. Yet the currency is having little impact on commodity prices at present, other than gold, given tariffs and sanctions reign.

Aluminium and nickel both recovered some ground last night, as did oil.

Iron ore fell US$1.00 last night after falling -US30c on Tuesday night to be at US$66.25/t.

The greenback is clearly influencing the Aussie, which is down -0.5% at US$0.7565. This will offer some reprieve for our miners who took a hit on Tuesday.

Today

The SPI Overnight is net 7 points higher since Tuesday’s close on the ASX.

Wall Street will be keeping an eye on numbers for durable goods and trade tonight, but all eyes will be on the ECB policy meeting. By now the world might have been expecting Mario Draghi to start easing off on the QE and negative rates, particularly with the US ten-year back over 3%, but recently the wheels have rather fallen off the European economic resurgence.

Locally, Newcrest Mining ((NCM)), OceanaGold ((OGC)) and Senex Energy ((SXY)) post production reports today while Brambles ((BXB)), Growthpoint Properties ((GOZ)) and GPT Group ((GPT)) provide quarterly updates.

Wesfarmers ((WES)) reports quarterly sales.

Rudi will make a trip to News ltd headquarters in Surry Hills to appear on Sky News Business from noon till 2pm, or whenever Scott Morrison decides to give a press conference before that time.

The Australian share market over the past thirty days…

We hope you enjoy our newest addition to the Overnight Report…

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