The Overnight Report: No Problems Here

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This story features RIO TINTO LIMITED, and other companies.
For more info SHARE ANALYSIS: RIO
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Momentum Returns

After Tuesday’s 50-plus point rally for the ASX200, yesterday morning the futures had anticipated a bit of a cooling off, closing down -8 points pre-open. And then the index rallied another 63 points to a new all-time high.

It’s looking a lot like July, when the index rallied exponentially from mid-month to finally surpass the pre-GFC high on July 31. It was a momo/FOMO trade – algorithms climbing over each each in momentum self-fulfillment, while humans jumped in for fear of missing out. When the bell was rung, the index promptly fell -6.5%.

Just saying.

Trade deal enthusiasm is supposedly the major catalyst of the rally, because – and stop me if you’ve heard this before – a deal is getting close. There were nevertheless some individually positive catalysts to draw upon yesterday.

Australian construction work done in the September quarter fell -0.4%, which was a much less negative result than the -1.0% forecast by economists. Residential construction fell sharply, again, and that segment is not expected to trough for several months. Engineering construction was down, but only slightly, while non-residential construction, both private and public, jumped 4%.

It was a “much better” result than the June quarter, suggested ANZ’s economists.

Interestingly, yesterday’s rally did not require the recent prime driver – healthcare – to participate. Telcos (+2.1%) stood out as the outperformer, after Telstra’s investor briefing was worth +2.8%. Materials enjoyed a slight turnaround in the gold price, while ignoring a fall in the iron ore price, to jump 1.1%.

Rio Tinto ((RIO)) announced the go ahead yesterday for $750m of investment in its Greater Tom Price operations, signalling the start of the next phase of Pilbara expansion by the biggies. Rio rose 1.1% and BHP Group ((BHP)) chimed in with 0.8%.

Among the leaders yesterday, Bravura Solutions’ ((BVS)) AGM update was worth 12% on Tuesday and another 14.5% yesterday. Collins Foods ((CKF)) reported earnings yesterday and rose 6.6%. The other three of the top five were all gold miners, after the gold price finally rebounded a little on Tuesday night (it fell back again last night), and perhaps on some sector excitement in the wake of Evolution Mining’s ((EVN)) Canadian acquisition.

The worst performer on the day could only manage -4.5%, and that was Bank of Queensland ((BOQ)), which is raising capital. We might also note that while investors piled back into the banks yesterday (+0.8%), Westpac ((WBC)) sat it out (-0.2%).

Between telcos, utilities (+1.9%) and consumer staples (+1.1%), we’d have to call yesterday an exuberant rush into defensives, rather undermining any “risk-on” theme. However after two days of sogginess, discretionary jumped 1.2% yesterday, so buying was pretty market-wide.

Now that we’ve again hit a high, is that it? Back down we go? Well the futures are up 22 points this morning. Maybe this time it’s different. Maybe Trump’s December 15 tariffs will be withdrawn.

And the Winner is…

The tumbleweeds started rolling through the NYSE after lunchtime last night as everyone rushed to get the hell out of the city before everyone else rushed to get the hell out of the city. Stock markets could have closed up at 1.30pm, as they did not move again after then.

But beforehand, the day’s economic releases had Wall Street excited amidst lingering nervous confidence on trade.

US durable goods orders rose 0.6% in October when -1.1% was forecast. Consumer spending rose for the eighth month in a row, up 0.3% when 0.2% was forecast. Core PCE inflation fell to 1.6% from 1.7%, meaning no reason for the Fed to intervene, despite the Fed Beige Book acknowledging the US economy is expanding modestly, with US businesses seeing continued growth in economic activity, wages and prices. The US September GDP result was revised up to 2.1% growth from 1.9%.

Chinese industrial profits fell -9.9% in October, the biggest fall since 2011.

Such contradiction in the data only serves to strengthen Wall Street’s belief that Trump may actually be right when he says China needs a deal more than America does, despite the Chinese having always suggested they can solider on through no problem. Maybe they can – yesterday a Chinese auction of dollar-denominated government bonds was massively oversubscribed.

But it’s not momo/FOMO on Wall Street, rather an incremental grind up into further blue sky which constantly raises the question of “has a trade deal now been priced in?” Some warn of “sell the fact”. Most suggest a deal would spark another leg-up, big time.

Someone will be proven right. But there still has to be a deal.

Wall Street is closed tonight and Friday night is a half-day session, and typically a waste of time, other than Black Friday Watch.

Assuming trade talks take a brief hiatus while the US celebrates its most important holiday, we may have to wait until next week for new developments.

Commodities

Zinc enjoyed a little rebound, iron ore continued in other other direction and gold gave back the prior session’s gains.

The weekly US crude inventory lottery was not a winner.

The Aussie is down -0.2% at US$0.678.

Today

The SPI Overnight closed up 22 points or 0.3%.

The next big GDP component will be released today locally in the form of private sector capex and capex intentions.

Evolution Mining ((EVN)), Fletcher Building ((FBU)) and IOOF ((IFL)) are among those holding AGMs today.

Aristocrat Leisure ((ALL)) goes ex-div.

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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