By Greg Peel

The Dow closed down 113 points or 0.6% while the S&P lost 0.5% to 2091 and the Nasdaq closed flat.

Energised

A 5.7% gain for the energy sector about sums up yesterday’s session on Bridge Street, although it was not a lonely journey. A strong gain for oil prices overnight spurred on energy stocks but ongoing gains for iron ore with support from base metals had materials up 2.0%, while the dominant market cap sector of the banks posted a 0.8% gain.

The banks may currently be under siege from all quarters but it seems the market is more interested in bad debt relief being offered by the commodity price rebound and the flow-on of stronger commodity prices into a reduced likelihood of the RBA having to cut its cash rate.

Assuming the commodity price rally holds. But it must be said some previously bearish analysts are beginning to concede there may be some justification in recent strength beyond just short-covering and seasonal restocking.

Healthcare and consumer staples both posted 1% gains yesterday but elsewhere movements were more modest, with the telcos missing out altogether.

The ASX200 has now left 5200 behind and is eyeing off 5300 on its way, chartists are assuming, to 5400, but we may see a stumble today after Wall Street decided to take some money off the table last night. It might be a mixed bag nonetheless, with oil prices off a bit last night but iron ore going nuts with another 7% jump.

Yield Off

Mario Draghi offered up no surprises last night in leaving ECB monetary policy unchanged following the shock & awe package delivered in March.

After a couple of strong post-Doha sessions which took oil prices to new 2016 highs, it was no shock to see a bit of a pullback last night. But while this did mean a bit of selling in US energy stocks, it was not the primary reason for a generally weaker session on Wall Street on the oil correlation, which was more of a March quarter story.

With the Dow having hit 18,000 and the S&P 500 having hit 2100, following a strong run up, it was time for some consolidation. These numbers are no more important than any other but because they are round, they are targets traders will often set as a triggers for taking profits.

Yet while the pullback in stocks last night was not surprising, the spread of sector movements was interesting.

The US ten-year bond yield has been moving up recently, rebounding from the depths reached following the aforementioned shock & awe package from the ECB which dragged down German yields and thus US yields on a relative basis. While the Fed has indicated it is in no rush to hike yet and US economic data releases have not been too encouraging of late, bonds have been sold off across the globe as general panic has subsided.

As US bond yields rise, the value of high-yielding US stocks eases. When the wheels fell off in January and into February this year as the oil price collapsed, investors ran to the shelter of yield stocks such as utilities and telcos and out of cyclicals such as resources. They were rewarded as bond yields continued to fall.

That trade is now reversing. With Wall Street having returned to 2016 highs on a commodity price rebound that is looking more entrenched, steadily rising US bond yields (now back at 1.87% in the tens having been down towards 1.6%), investors are switching out of those defensive yield names in fear they may miss a cyclical push higher.

Thus last night’s hundred point fall in the Dow and pullback from the high in the S&P was more about sector rotation than it was about general market selling. We note the Nasdaq, in which it would be hard to find a solid dividend payer among the growth stocks, closed flat.

Of course we’re also in the midst of US earnings season, and after a strong start it has to be said the results have become more mixed, offering another reason for Wall Street to take a breather.

Among the Dow stocks, misses led to sharp falls for Verizon and Travelers last night while American Express managed a modest gain. In the wider market, General Motors managed a decent gain but Mattel had a session Barbie would prefer to forget.

It got worse after the bell. All of Microsoft (Dow), Visa (Dow), Google and Starbucks posted misses and their shares are down 3-5% in the aftermarket.

Tonight sees results from some heavy industry names in the form of General Electric, Caterpillar and Honeywell and global barometer McDonalds. A common theme among reporters so far has been the impact of the strong greenback in the March quarter, as well as commodity price weakness, so given both have since reversed, traders are prepared to give some weaker results the benefit of the doubt as the June quarter progresses.

Commodities

West Texas crude is down US75c at US$43.43/bbl for the new June front month and Brent, already trading June, is down US84c to US$44.73/bbl. Note how tight that spread has now become.

Iron ore, blow me down, closed up US$4.40 or 6.8% at US$68.70/t.

Trading was mixed on the LME, with nickel down 2% and zinc 1% but copper and aluminium continuing their steady rise with 0.5% gains.

The US dollar index is up 0.1% at 94.66 but gold is a little higher at US$1248.00/oz.

It looks like perhaps the forex cowboys had set themselves for an ECB rate cut into the negative last night even though no one else expected such. The Aussie had pushed higher above 78 all through the local session then suddenly plunged in European trading to be down 0.7% over 24 hours at US$0.7739, despite the big jump in iron ore and despite little movement in the greenback.

Today

The SPI Overnight closed down 29 points or 0.6%. We’re probably due an index pullback, but it could be a jumble among the sectors.

Japan, the eurozone and US will all publish flash estimates of April manufacturing PMIs tonight.

Santos ((STO)) will release its quarterly production report today.

Rudi will link up with Sky Business through Skype this morning, probably around 11.05am to discuss broker calls. Citi is calling for dividend cuts from both National Australia Bank ((NAB)) and ANZ Bank ((ANZ)) over the next few weeks, so that might have an impact in today's session too.
 

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By Greg Peel

The Dow closed up 112 points or 0.6% while the S&P rose 1.1% to 2066 as the Nasdaq jumped 1.7%.

Can’t buy it, can’t sell it

While the ASX200 keeps finding reasons of late not to push up sustainably beyond 5000 – perceived bank woes are a case in point most recently – it just doesn’t like being under 5000 for very long either. While it was a choppy session on Bridge Street yesterday as sellers and buyers battled it out, the buyers won out in the end without any real incentive to do so other than every time the index falls below 5000, it pretty soon recovers.

The energy sector was the exception yesterday, rising 3.2% because the oil price recovered from an initial fall on Tuesday night and closed slightly higher. Traders in oil stocks must by now have very stiff necks from whiplash as they stampede backwards and forwards on every one dollar move in the oil price, only to find themselves forever back where they started.

Beyond energy, there appeared to be some bargain hunting going on in the industrials, healthcare, materials and consumer discretionary stocks yesterday. The banks closed relatively steady, which at the moment is a good day for the banks, while telcos fell, having not fallen on Tuesday, and consumer staples saw minor selling.

Buyers of oil stocks will nevertheless be feeling chuffed this morning following another jump in oil prices overnight. The ASX200 closed 55 points shy of 5000 yesterday and will likely close some of that gap today. The overnight futures are calling 18 points up but then they were calling 18 points down yesterday morning, and we closed up 21. An outside bet on 5000 being recovered today is not a silly one.

Oil Shock

US crude inventories fell by 4.9m barrels last week. Analysts had predicted a 2.9m increase. I don’t ever recall analysts getting the weekly numbers spot on but this is a bit of boilover. For those who get a bit warm and fuzzy over stats, it is the biggest fall in crude inventories for this particular week of the year since 1997.

When WTI futures “closed” early in the afternoon, the benchmark oil price was up over 5%. The market doesn’t actually “close”, it simply switches to electronic trading and carries on non-stop from Monday morning to Saturday morning. A closing price is nevertheless marked for bookkeeping purposes. Since that mark WTI has come off a bit, to be up 3%.

The oil price rally pretty much turned around what had threatened to be a weak session. Wall Street was soggy on the open, in line with European trading which had been soggy for most of the day. After the shock fall in German manufacturing orders revealed on Tuesday night, last night saw German industrial production for February falling 0.5%. This actually wasn’t too bad a result given forecasts were for a 1.8% fall.

The minutes of the March Fed meeting were also scrutinised last night. While Yellen’s speech last week largely rendered these minutes redundant, what was interesting was a debate between FOMC members about whether April should see a rate rise. Those believing April is too soon apparently won out.

Now, Yellen has suggested that April remains “live”, meaning the Fed could still hike if it so decided, but then every meeting has to, by default, be deemed “live” or what’s the point holding it? What we saw in the minutes was a rather unusual discussion about the future rather than the moment, ie whether or not to raise in March, and despite Yellen’s speech implying even June is looking unlikely, the fact April can be taken off the table was at least enough incentive for traders to pile back into “risk” stocks last night.

The epitome of “risk” stocks are the US biotechs, and with risk you get “momentum” traders. So when biotechs began to move up last night, the bandwagon was jumped upon. That’s why the Nasdaq was up 1.7% when the Dow only managed 0.6%. The S&P split the difference.

It could just as easily completely reverse in a session or two. Yellen will speak again tomorrow morning Sydney time, after the close of Wall Street tonight.

So between oil and a “momo” rally, Wall Street had a positive session last night.

Commodities

We recall that producers within and without OPEC are planning to meet in Doha in a couple of weekends to discuss a production freeze. Last night the Kuwaiti oil minister expressed confidence that an agreement would be reached. This clown is probably cracking the champagne as we speak believing he managed to orchestrate a 5% oil price jump when all of OPEC knows a production freeze is complete fantasy.

Only supply curtailment in the US will move oil prices higher. Last night’s weekly US inventory drop is why oil prices are up.

West Texas is up US$1.21 or 3.3% at US$37.73/bbl and Brent is up US$1.47 or 3.8% at US$39.81/bbl.

Yet again there were mixed moves in base metals last night. No move exceeded one percent.

Iron ore fell US20c to US$53.80/t.

The US dollar index is down slightly to 94.50 but gold is also down US$8.90 at US$122.30/oz.

One presumes the 0.8% rally back for the Aussie overnight to US$0.7600 is oil-linked.

Today

The SPI Overnight closed up 18 points or 0.4%.

As noted, Yellen’s speech will begin after Wall Street closes tonight.

Before that, we’ll see the local construction PMI and Bank of Queensland ((BOQ)) will publish its first half result.

Rudi will make his weekly appearance on Sky Business, 12.30pm-2.30pm and re-appear again on Switzer TV between 7-8pm.
 

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By Greg Peel

The Dow closed down 133 points or 0.8% while the S&P lost 1.0% to 2045 and the Nasdaq fell 1.0%.

Market Worries

“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”

This is the critical paragraph from yesterday’s RBA monetary policy statement, with the rest of the statement remaining little changed from previous months. Glenn Stevens has acknowledged that while stronger commodity prices are a welcome driver of a stronger currency, the “race to the bottom” among Australia’s trading partners has left the local currency sitting out like a shag on a rock through no fault of its own.

A weaker Aussie is important to aiding the transition away from dependence on mining investment in the Australian economy, hence recent strength is “complicating” the issue. This could be the first signal the RBA is prepared to act from an exogenous perspective, simply to bring Australia into line with the rest of the world. We note that even New Zealand has bowed.

The Aussie initially rallied on yesterday’s statement release because there was no rate cut – not that anyone was expecting one. Only then did the forex cowboys actually read the statement, and in so doing realise it was actually dovish. The Aussie is down 0.8% over 24 hours at US$0.7541 despite the US dollar being steady.

Yesterday was not a day, nevertheless, in which any hope of an imminent rate cut was going to make any difference to sentiment. The writing was on the wall at the close on Monday, when an attempt to rally above the 5000 mark failed. Markets that fail to go up tend to go down instead. And we’ve seen this movie all too often now – once we fall through 5000, we pretty quickly get down to 4900 or 4800, before returning.

Consumer discretionary is one sector that does not like a weaker currency, which may go some way to explaining that sector’s 2.1% fall yesterday. Although I’d suggest there was a delayed response to Monday’s weak retail sales data in play as well.

The banks don’t like lower rates, but there’s a lot more going on in the banking world at present than this concern alone. A 3.3% fall in the energy sector yesterday reflected a lower oil price, and for the banks this means an increased threat of default on energy sector loans. But we also had APRA releasing its discussion paper on Net Stable Funding Ratios on Monday, which by yesterday had bank analysts suggesting the majors will need to raise billions more in debt funding in order to comply. Throw in APRA’s warning that the current lending scene is beginning to look a lot like 2007, and there’s plenty of reason the banks were down 1.4% yesterday.

Including ASIC’s accusation Westpac has been rigging the bank bill swap rate settlement.

Despite an unchanged iron ore price overnight and mixed metal price movements, the materials sector fell 1.5% yesterday. Perhaps the ongoing insistence of analysts that the recent commodity price rally has no substance on a supply-demand basis is weighing. Or perhaps yesterday was just another day to sell everything. Only the telcos came out almost unscathed.

Not helping the mood was the release of Australia’s service sector PMI. It fell into contraction in March at 49.5, down from 51.8 in February. The service sector is the Australian economy’s underlying growth engine. The services PMI result is in stark contrast to the manufacturing PMI which is showing frenetic expansion, but the service sector is many multiples larger than the manufacturing sector in this country.

Around the Grounds

Which is not the case in Germany. If it wasn’t bad enough last night that the eurozone’s services PMI disappointingly fell to 53.1 from 53.3, data showing a 1.2% fall in German manufacturing orders when a 0.2% gain was expected caused ripples across the continent.  The German stock index fell 2.6% last night, while France chimed in with a 2.2% fall and the UK 1.1%.

The UK services PMI showed a gain to 53.7 from 52.7 while Japan again disappointed with a drop to 50.0 from 51.2. The winner on the night was the US, which posted a welcome return to expansion with a rise to 51.8 from 49.5.

IMF chief Christine Lagarde last night warned that global growth was slowing. The IMF has a habit of telling everyone what they already knew some six months after they originally knew it. Lagarde also suggested that while fiscal policy needs to play its part, negative interest rates represent “net positives” for the global economy. This is not an opinion held by the majority of the market.

The impact of Lagarde’s comments was a fall in the German ten-year bond rate to 0.10%, dragging the US equivalent down 5 basis points to 1.73%. There is  now talk of the German rate going to zero or lower, and the US rate thus testing GFC lows of 1.3%.

Healthy Pullback?

Oil prices opened lower last night, which, combined with the weak data out of Germany and Lagarde’s warning ensured a weak open on Wall Street. Tax policy was also in play, with Pfizer pulling out of a multi-billion dollar bid for global peer Allergen now the US government has clamped down on the practice of tax “inversion” – acquiring an offshore based company in a lower company tax regime and shifting headquarters.

Wall Street now anticipates more such takeover bids will be abandoned and takeover premiums will evaporate. Interestingly it was another session in which Wall Street ultimately ignored the oil price. WTI had already begun to bottom out and turn around when news came through of an explosion at an Iraqi oil well. Oil prices closed higher on the session but the selling in US stocks accelerated towards the bell.

The stronger service sector PMI was lost in the wash. Like Australia, the US service sector is much bigger than the manufacturing sector.

Last night’s weakness did not seem to bother too many traders, however, a lot of whom have been expecting a pullback following the sharp rebound from the February lows. Arguably Wall Street is consolidated back to a more measured platform from which to assess earnings results, which start to flow next week.

Commodities

West Texas crude is up US$1.06 or 3% at US$36.52/bbl while Brent is up US83c or 2.2% at US$38.34.

Yet another mixed night of trading on the LME saw copper and lead steady, aluminium down 1%, tin down 1.5% and zinc down 2%, while nickel rose 1%. If these ongoing ups and downs were consistent across the base metals then fair enough, but the reality is each metal is more often going up one night and down the next.

Iron ore remains unchanged at US$54.00/t.

Gold has jumped US$15.90 to US$1231.20/oz. It’s nothing to do with the US dollar index, which is steady at 94.63. It no doubt has a lot to do with the head of the IMF being keen on negative cash rates.

Today

The local energy sector should in theory find support today from a bounce in the oil price. Otherwise the SPI Overnight closed down 18 points or 0.4%.

Caixin will publish its China service sector PMI today, not yesterday as I erroneously assumed, because of the holiday in China on Monday. Renewed focus on the strength or lack thereof of the European economy will centre on German industrial production numbers.

The minutes of the last Fed meeting will be published tonight but they have already been superseded by the Fed chair herself, and Yellen will speak again tomorrow night.
 

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By Greg Peel

The Dow closed up 36 points or 0.2% while the S&P gained 0.5% to 1989 and the Nasdaq rose 0.6%.

Resilience

There was every reason to expect a sharp pullback on Bridge Street yesterday given reversals in commodity fortunes overnight (other than for iron ore) and indeed the ASX200 dropped 27 points form the open, matching the futures’ prediction.

But that’s where the pullback ended.

By the end of the day energy was down 2.7% and materials 0.7% but on a steady climb-back throughout the session, every other sector finished in the green. Leading the charge were the banks, up 1.6%, following some brief profit-taking from traders earlier in the week.

By the closing bell, utilities was the only sector of note not to post a gain of in excess of 1%. It was a market-wide buying spree, ex resources. Healthcare (+1.6%) was back in vogue, having previously provided the funds for a switch into resources, and even telcos (+1.2%) had a solid session.

This market currently looks determined to go up.

Consumer sentiment is not quite as solid as it was nonetheless. Yesterday’s Westpac survey for March showed a drop in the index to 99.1 from 101.3. It’s only a modest pullback, Westpac suggests, but numbers below 100 imply pessimism. It’s nevertheless notable that the Turnbull boost of last year is still holding its ground despite the dip.

Perhaps housing is something consumers can start worrying about. Yesterday’s January housing finance data were indicative of a slowing market.

The number of loans to owner-occupiers fell 3.9% in January but is still up 7.3% year on year, while the value of loans to owner-occupiers fell 4.3% but is still up 16%. The big move is in the value of loans to investors, which while only down 1.6% in January, is down 14.8% year on year, reflecting APRA’s tightening of bank lending capacity.

Imagine if negative gearing were removed. Mind you, economists admit January data can always be a bit misleading given everyone’s on the beach.

What’s Mario got in store?

It’s usually the day before a Fed meeting when Wall Street goes quiet, but that will happen next week. This week Wall Street, and the world, is focused on the ECB meeting tonight. There are great expectations.

If recent history is any guide, there will therefore be disappointment. Mario Draghi has, since his appointment as ECB president, pledged to do “whatever it takes”. Last year that meant the introduction of eurozone QE, which was increased in December, and a negative central bank deposit rate. Yet still the eurozone is at risk of deflation.

Thus the market is expecting Mario to bring out the big bazooka tonight, whatever that may be. Mario, on the other hand, tends to be a little more cautious with regard the weaponry he brandishes. So the scene is set tonight, and ahead of that meeting, markets are also being cautious.

Which is why another 5% surge in the oil price failed to spark much enthusiasm on Wall Street last night.

If Goldman Sachs is short oil, which we can assume from the investment bank’s “overbought” call on Tuesday night that saw oil prices drop back, last night wasn’t a winner. Interestingly, oil rallied despite another big increase in US weekly crude inventories, above expectation. And disappointingly, weekly production ticked up a tad once more after two weeks of encouraging falls.

But last night the market decided that increasing inventories – to maintain the highest levels since 1930 – are sufficient to force production cuts. Not just in the US, but across the globe. There is much anticipation that a long talked about OPEC/non-OPEC production freeze will finally eventuate following the March 20 meeting in Moscow.

I’ll just pause for a moment while this pig passes overhead.

The good news from amongst the US data, however, was that gasoline saw a drop in inventories three times that which was forecast. Heating oil inventories also declined. The US Energy Information Agency has implied from the data that US motor gasoline demand has risen 7% over four weeks.

So that is something the oil market can hang its hat on. Demand is rising. We just need supply to fall.

Commodities

West Texas crude is up US$1.91 or 5.3% to a new 2016 high of US$38.15/bbl. Ditto Brent, up US$1.36 or 3.5% at US$40.81/bbl.

After some solid China-related selling on Tuesday night, last night LME traders squared up again ahead of tonight’s ECB meeting. Nickel rebounded 3%, and even zinc managed a 1.5% rally. The other metals all saw rallies of roughly a percent.

It is inevitable that iron ore should see some pullback following its ridiculous price jump on Monday night. It’s down US$3.70 to US$59.60/t. Have we seen the blow-off top as the last Chinese steelmakers race to restock?

Currency markets were quiet last night and the US dollar index is steady at 97.13. A little bit of caution in the gold market sees that metal down US$7.30 at US$1252.80/oz.

There’s no holding back the Aussie nonetheless. It’s up 0.7% at US$0.7484.

Today

The SPI Overnight closed up 11 points or 0.2%.

The RBNZ has this morning cut its cash rate by 25 bips to 2.25%.

What will the ECB do tonight? Before we get there, Beijing will release Chinese inflation data today.

In another round of ex-divs on the local bourse today, BHP Billiton ((BHP)) will deliver its meagre offering, while Cochlear ((COH)), Brambles ((BXB)) and QBE Insurance ((QBE)) are other big names on today’s list.

Rudi will appear twice on Sky Business today. First from 12.30-2.30pm and later again on Switzer TV, between 7-8pm.
 

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