The Overnight Report: Oil’s Well

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This story features SEEK LIMITED.
For more info SHARE ANALYSIS: SEK
The company is included in ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

By Greg Peel

That is the Question

Hike another 25, pause and stop, pause and start again later – those are the choices facing the RBA this afternoon, according to economist expectations. In the immediate term, 25/pause is still an each-way bet.

Uncertainty heading into to today had the ASX200 trimming the Wall Street-driven morning gains through the afternoon, turning a 69 point peak into a 45 point closing gain. That caution is reflected this morning ahead of the meeting, with the S&P500 up 0.4% overnight but our futures up a mere 4 points, despite what the energy sector will likely do today.

Energy was already at it yesterday, rising a chart-topping 2.3% on modest increases in oil prices overnight. Last night oil prices rose over 6%.

Materials was the only sector to close in the red (-0.7%), on a dip in iron ore prices and to a lesser extent, gold, which is also up overnight.

It was a risk-on session, with cyclicals performing while defensives lagged, the exception being real estate (+1.9%). Ord Minnett put out a mildly upbeat sector update – more a case of limited downside rather than raging upside.

Bond yields didn’t move yesterday, so that helped.

The banks continued to claw their way back (+0.8%) and consumer discretionary (+1.9%) underscored risk-on excitement. Technology (+1.9%) followed the Nasdaq.

Building approvals data for February out yesterday looked solid, with total homes approvals rising 4.0%, houses, within the total, rising 11.3%, and non-residential approvals rising 39.8%. But this follows January, for which those numbers were -27.1%, -13.5% and -27.6%, so February wasn’t really all that flash. And apartment block approvals fell -8.1% after falling -43.1% in January.

Not that January is typically a busy month for building approvals as one would imagine, except these numbers are seasonally adjusted.

Unsurprisingly, total housing loans fell -0.9% in February, having fallen -2.4% in January.

Yet for the first time since the RBA started hiking, Australian house prices posted a monthly increase in February, of 0.6%, led by Sydney and Melbourne. Prices are down only -8.5% year on year, confounding forecasts of -10-20% falls to the bottom, and prices were up 28.6% since the RBA cut to near-zero in 2020, so just a flesh wound really. But as ANZ Bank’s economists note:

“Weakness in building approvals suggests that housing construction is likely to fall substantially over the next couple of years. This will ultimately exacerbate the housing supply issue. An already very tight housing market looks to be feeding through to higher prices, and there is some evidence of this in the moderation of housing finance weakness in recent months.”

Whether house prices will survive the fixed rate mortgage “cliff” is another matter.

Place your bets on the 2.30 at Martin Place.

Some Give-Back

Investors on Wall Street elected not to lock in profits on the last day of the March quarter, but opened the new quarter with signs of such. The Nasdaq led Wall Street up over the quarter and last night fell -0.3%.

Hardly monumental, with the tech-led index recovering from an earlier -1% drop.

It appears as if the June quarter began with a switch out of outperforming tech into underperforming industrials, with the Dow jumping 327 points, but it’s all smoke and mirrors.

Chevron rose over 4% on the OPEC production cuts while United Health did the same on the Biden administration's completion of a new set of rules for (US) Medicare on Friday. Take those two out of the price-weighted average and the Dow did little.

The economic news of the day was that the US manufacturing sector fell further into contraction at a PMI of 46.3 in March, down from 47.7 in February, to mark the lowest level since May 2020 when the industry was locked down.

On that news the US ten-year yield fell -6 points and the two-year -8 points.

The energy and health sectors stole the show in the S&P500 with some help from materials, balancing out the index to a modest gain as tech stocks fell.

After a surging March quarter, Wall Street may now go into a holding pattern ahead of earnings season in a couple of weeks’ time, assuming nothing comes out of the blue. Pundits will continue to debate, ad nauseum, what the Fed will do in a full month’s time.

Commodities

Oil prices soared after OPEC-Plus surprised last night in announcing it was slashing output by -1.16 million barrels per day. The (voluntary) cuts will begin in May and run until the end of 2023, Saudi Arabia announced, saying it was a “precautionary measure” targeted toward stabilising the oil market.

We recall the Biden administration spent last year selling oil out of the US Strategic Reserve in an attempt to push prices back below US$100/bbl. While the sales were never credited on having much impact beyond the underlying supply/demand balance, the administration said it would start refilling the Reserve at prices under US$70/bbl.

Seemed a long way down at the time, but last month WTI spent plenty of time under US$70/bbl, but no purchases were forthcoming. The theory is this has annoyed the Saudis and Russia, hence the production cuts.

Back in the day, OPEC always suggested its sweet-spot price was US$85/bbl – good for profits without destroying demand.

On the strength of the oil price surge, the Aussie is up a full 1.6% at US$0.6790 with the US dollar down only -0.4%.

Today

Strap in, the SPI Overnight closed up 4 points.

RBA at 2.30pm.

The US will see numbers for factory orders and construction spending tonight.

Seek ((SEK)) holds its first investor day in years today.

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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