The Overnight Report: Softly, Softly

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            [5] => ((AWC))
            [6] => ((BDR))
            [7] => ((SKI))
            [8] => ((WFD))
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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

Adrift

It was a choppy session for the ASX200 yesterday, largely dominated by three key elements: construction work numbers disappointed, Santos ((STO)) rejected the Harbour Energy bid and Telstra ((TLS)) finally attracted some bottom-pickers.

The session began to the upside but failed to find any support. The morning’s news then tipped the market into negative territory.

Total construction work done in the March quarter rose 0.2% when 1.3% was expected. Across the segments, the numbers were mixed.

Public sector construction rose 2.7% while private fell -0.5%. Public sector work is now up 15% year on year as both federal and state governments implement infrastructure programs. Victoria is the star in this field, rising 14% for the quarter to be up 40% year on year.

The drop in private activity was not about a cooling housing market. Housing construction rose 0.4% to confirm the housing boom has a long tail, albeit the main contributor was alterations & additions. The culprit was non-residential construction, which fell a greater than expected -4.2% after a solid 2017.

ANZ Bank’s economists note new commencements for non-resi fell -20% in the December quarter, and approvals have fallen sharply in early 2018. This segment may yet put a dampener on the infra boom.

Harbour Energy had increased its offer for Santos ((STO)) but that was again rejected by the Santos board. Harbour has now taken its bat and ball and gone home. While the rejection is not a shock, Santos’ share price nevertheless fell -8.4% yesterday to top the ASX200 losers’ board, and take the energy sector down a standout -2.3%.

Profits continued to be taken in the healthcare sector, which fell -0.9%. All sectors closed in the red bar two. One was utilities (+1.2%), but the other was telcos (+1.3%). Telstra ((TLS)) finally found some brave buyers, and rebounded 1.5%. The stock had fallen -16% since early May.

Telstra still has enough market cap clout to ensure all the red on the sector screen still only translated to a -9 point fall in the index.

Heading into today, there does not seem to be much to get excited about. Wall Street was only mildly positive and commodity prices are mostly lower, including another -1.7% fall for iron ore.

The futures are down -12 this morning.

Release the Doves

Wall Street was also adrift last night ahead of the afternoon release of the minutes of the May Fed meeting. At lunchtime the Dow was down around -170 points.

The minutes suggested, in not so many words, that given it’s taken a decade for US inflation to get back close to the Fed’s targeted 2% level, in would be ingenuous to assume inflation could not slip back again somewhat before rising once more. Similarly, to knee-jerk react to a move above 2% may prove premature.

In other words, while the minutes all but confirmed the strengthening US economy and solid labour market ensures a June rate hike, thereafter the FOMC is prepared to let inflation wander around the 2% mark for a while before another definitive policy decision can be made.

Wall Street’s biggest fear is that the Fed would panic, particularly given the implied fiscal boost of tax cuts, which the minutes acknowledged, and raise rates too quickly. Following the release of last night’s minutes, the chance of a fourth hike in 2018 has diminished.

The Dow swung from -170 down to 50 up.

The US ten-year bond yield fell back -6 basis points to 3.0%.

The US dollar index nevertheless rose another 0.4% in defiance, but that was all to do with disparate global data.

A flash estimate of the eurozone’s May manufacturing PMI came in a at a 15-month low 55.5, down from 56.2 in April. The services PMI estimate dropped to 53.9 from 54.7 to mark a 16-month low.

Japan’s manufacturing estimate came in at 52.5, down from 53.8.

The US equivalent rose to 56.6 from 56.5, and services to 55.7 from 54.6.

There is not a lot of difference between the European and US absolute results. The growth rate in manufacturing is pretty similar for both. The difference is Europe is now slowing from what had been a surprisingly strong pace last year, while the US is quietly ticking up.

Another glaring transatlantic difference is eurozone corporate earnings in the March quarter grew by 3.7%. US earnings grew by 26%. The rough estimate is Trump’s tax cuts contribute about half of the US gain, but that’s still 13% to 3.7%.

Commodities

While the oil market mulls over whether OPEC might increase production to make up for Iran/Venezuela shortfalls, last night’s US weekly inventory lottery showed a surprise jump in crude stockpiles. WTI fell back to further widen the spread to Brent.

As to just what level of exports from Iran will be lost is questionable. The European signatories to the Iran nuclear deal are sticking with it and China and India have both indicated they will continue to buy Iranian oil, despite US sanctions.

Base metal prices are feeling the impact of a stronger greenback, as well as concerns the US-China trade war has not actually been resolved. Lead is bucking the trend on speculative Chinese buying.

Iron ore selling picked up pace again yesterday.

The Aussie is off -0.2% at US$0.7562.

Today

The SPI Overnight closed down -12 points or -0.2%.

Aristocrat Leisure ((ALL)) will post its earnings results today while Alumina ltd ((AWC)), Beadell Resources ((BDR)), Spark Infrastructure ((SKI)) and Westfield ((WFD)) all hold AGMs.

Rudi will appear on Sky News Business noon-2pm.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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