The Overnight Report: Reality Bites

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This story features WESTPAC BANKING CORPORATION.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Meeting Resistance

The Australian market took a Friday breather after a solid run through last week, but yesterday the bulls were back in action from the opening bell. A strong lead from Wall Street and some big jumps in base metal prices, along with higher oil, drove the opening.

The ASX200 hit 6110 around 11am but that was that. It spent the rest of the session fading to the close.

Westpac ((WBC)) posted a better than expected result before the open, once again lifting the financials sector, but it faded away to only a slight gain at the death. Westpac closed up 0.8%.

The resource sectors ultimately posted the strongest gains, with materials and energy both up 0.8%.

Consumer staples added 0.6% and industrials, many of which are enjoying the sliding Aussie, also gained 0.6% but beyond that sector moves were unremarkable. Healthcare and IT were slight losers.

NAB’s business conditions index bounced back in April from a softer March, when trade war talk was all the rage, to mark a new all-time record of 21.1, up from 15.4. Unsurprisingly, miners contributed the bulk of the rebound.

Confidence also recovered to 10.1 from 8.0. We’ll look forward to the May result in the wake of tonight’s budget.

ANZ’s job ads series showed a 0.4% gain in April, down from a 0.7% gain in March, and trending lower for the past three months. Ads are nonetheless up 10.5% for the year.

It appears 6100 is going to be a tough nut to crack, on the road to the previous post-GFC high of 6135. Wall Street was up again last night but tempered by Iran talk. WTI has hit US$70/bbl for the first time in four years but the LME was closed last night so no base metal moves.

The futures are up 20 points this morning, which would take us up to the 6100 mark once more. Tonight we’ll be looking for anything market-moving in the budget, but these days anything of significance is always “leaked” beforehand, at least in principal if not in detail.

There may be some impact on individual sectors, particularly those heavily dependent on government regulation and policy.

Double-Edged Sword

The exuberance seen in Friday night’s session on Wall Street, led by jobs data and Apple, carried over into last night’s trade from the open. The Dow immediately jumped over 200 points before plateauing through to mid-afternoon.

It was then that Donald Trump announced that he would make an announcement regarding the Iran nuclear deal at 2pm tomorrow, meaning 4am tomorrow Sydney time. Within an hour the Dow had fallen back to square, before bouncing back for a reasonable gain on the close.

Trump has until May 12 to scrap/renegotiate Obama’s Iran deal before it is due for recertification. Wall Street has known since the election campaign Trump intends to change it one way or the other, and the ongoing reshuffle in the White House has filled the room with hawks. So there’s nothing new to fear, it’s just that the time has come, making Wall Street nervous.

A scrapping of the deal implies renewed sanction on Iranian oil exports. There is already a premium built into the oil price for such an expectation, but it is fitting WTI hit the new big figure of 70 last night. It’s great for the US energy sector, which was the best performer in the S&P500 last night, but that’s where it ends.

A higher oil price is a tax on just about everything else. The energy sector was once the biggest in the US market but those days are past, with energy now paling into insignificance behind Big Tech and the banks. Exxon Mobil was for a long time America’s biggest company, but the likes of Apple, Amazon and others have since left Exxon in their dust.

At the same time, the US dollar continues to rise, and is now higher for the year. Economic data out of Europe continue to trend to the softer side, weakening the euro, and suggesting it will be a long time before the ECB ceases QE. Japan is also hanging on to its own QE program, while the UK has its own problems.

The bears on Wall Street have been worrying about a slowing global economy, but it appears the US economy is in fine fettle for the moment. Higher oil prices and a stronger currency may nevertheless take their toll.

There is, one assumes, the possibility that OPEC-Russia might adjust its production cut quotas to compensate were Iranian exports to be once again taken out of the equation.

There is also the possibility the signatories to Obama’s Iran deal do not fall into line with the US this time, if the deal is to be scrapped. We know Macron is upset about the situation.

And of course we all know too well Trump’s tactics are those of initial shock followed by seemingly begrudging compromise, so whatever he says tonight may not be the final outcome.

We note that a new NAFTA deal is expected to be resolved by week’s end.

Commodities

The LME was closed last night for the UK bank holiday, hence no base metal price moves.

Oil prices did not rise substantially, as they have been rising to this point for some time. But WTI at US$70/bbl and Brent at US$75/bbl is notable.

The Aussie has slipped -0.3% on the stronger greenback to US$0.7513.

Today

The SPI Overnight closed up 20 points or 0.3%.

China will release April trade numbers today.

Locally we’ll see March and March quarter retail sales numbers.

Scott Morrison will at 7pm bring down the budget, but probably not the house.

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

The Australian share market over the past thirty days…

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