By Greg Peel

The Dow closed up 114 points or 0.6% while the S&P gained 0.7% to 2271 as the Nasdaq jumped 1.0%.

Consolidation

Share price moves in two stocks yesterday pretty much sum up the action on the local market over the last few sessions. Fortescue Metals ((FMG)) fell 6% to be the second worst ASX200 performer on the day, and CSL ((CSL)) rose 3% to be the best performer. Neither company issued any new news.

In Fortescue’s case, we saw another jump in the iron ore price overnight.

The bottom line is Fortescue has been on a tear this past few months and CSL has been slumping. The US election gave the former an added boost and the latter fell further as investors weighed up the winners and losers of a Trump presidency. But now that we’ve rallied this far, investors are rotating out of the winners and back into the losers.

It’s not a smooth rotation – sector moves have been pretty choppy these past few sessions – but the theme is clear. The ASX200 is consolidating around the 5550 level as the market tidies up after the party that has been the Trump rally and positions for what might next transpire.

The materials sector dominated the index downside yesterday with a 1.7% fall, countered by a 1.3% gain for healthcare. The banks, which have also had a good run, fell 0.6% and no other sector much troubled the scorer. Energy went nowhere despite the big move up in the oil price overnight because it had already made its big move up on Monday.

Things can only get better, it would seem. The local stock market has enjoyed a strong rally despite the Australian economy going backwards last quarter and despite business conditions softening notably over the second half of the year. Yesterday’s NAB business survey for November saw a fall in the business conditions index – measuring the “what is” – to 5.3, down from 6.6 in October and 8.1 in September.

Yet business confidence – the “what will be” -- recovered to 5.0, having fallen to 4.3 in October form 6.3 in September.

If the Australian economy is flagging, the Chinese economy is showing signs of improvement.

Chinese industrial production rose 6.2% year to date in November, a tick better than the expectations, and retail sales rose 10.8%, much better than expected. Fixed asset investment came in as expected at 8.3% year to date, in line with the prior month.

The numbers tie in with earlier reading on the Chinese PMIs and trade data for November, suggesting the Chinese economy is moderately improving.

Suck it up

Last night the Dow rose another hundred points to cross the 19,900 mark. Once again there was no particular incentive for the sudden renewed boost of confidence, after recent sessions had shown signs of the rally running out of puff. And having sold Big Tech on Monday night, suddenly last night Big Tech was highly sought after.

Hence the Nasdaq turned around to outperform, led by FANG and co, while in the Dow, the two biggest winners on the day were tech dinosaurs IBM and Intel. How come?

It appears that Dow 20k will indeed be a self-fulfilling prophecy. The assumption after last night’s session is that confirmation from the Fed tonight of a rate hike will provide the final incentive. The landmark level is providing its own gravitational pull. What is the significance? There is none. It’s just that 20,000 is a nice round number.

As I have noted in previous Reports, those making predictions about “where the Dow will be in three months’ time”, for example, never come up with a number like 19,847. They come up with a round number, like 20,000. That then becomes a goal, and usually a point at which a pullback is triggered given profits are taken once the goal is reached.

As to whether the Dow hits and can push through 20k will probably come down to the Fed, given tonight’s FOMC policy statement represents the last major “event” of the year. A rate hike is assumed, so attention will be focused on the Fed’s thinking for 2017. Now that Trump is set to change the fiscal landscape, and US bonds yields have surged, surely the Fed cannot approach 2017 with the same monetary policy stance it has held throughout 2016.

The push towards Dow 20k continues to be driven by those stocks that missed out or fell back in the initial Trump rally, such as Big Tech. The initial winners, such as infrastructure stocks, aren’t plunging, just stalling for now.

Commodities

Things were a bit quieter on the commodity front last night.

West Texas crude is up US27c at US$52.84/bbl.

Base metal prices all moved within a 0.5-1.5% range, with aluminium and nickel up and copper, lead and zinc down.

Iron ore fell US80c to US$82.00/t.

Gold is down a tad at US$1158.70/oz with the US dollar index steady at 101.07.

The Aussie continues to creep higher, up 0.2% at US$0.7502.

Today

The SPI Overnight closed up 24 points or 0.4%.

Westpac will publish its monthly consumer confidence survey locally today.

Numbers for US industrial production, retail sales and wholesale inflation are due tonight ahead of the release of the Fed statement, “dot plot” forecasts and Janet Yellen’s press conference.

Rudi will participate in the Christmas Special tonight (starts 7pm) with members and guests of the Chatswood Chapter of the Australian Investors Association (AIA). Tomorrow he'll present on stage to members of the Australian Shareholders Association (ASA) in Sydney, at noon. So no Sky Business appearance on Thursday this week.
 

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By Greg Peel

The Dow closed up 39 points or 0.2% while the S&P fell 0.1% to 2256 and the Nasdaq dropped 0.6%.

Oiled Up

The ASX200 jumped 20-odd points from the open yesterday, as the futures had predicted, and then did nothing much up to lunchtime. After lunch it swiftly fell back to the flat line, suggesting perhaps a large sell order hit the market.

In the wash-up, we saw another session lacking any market-wide theme. Rather, it was all about individual sectors and stocks.

Anticipation of Russia and other non-OPEC producers joining the OPEC production cut plan had the big energy names leading the way, sending the energy sector surging 2.9%. Santos ((STO)) topped the board with a 5% gain. On the other side of the ledger, healthcare suffered the biggest fall of the session, dropping 1.7% as sector leader Ramsay Health Care ((RHC)) fell out of favour.

Elsewhere, sector moves were mixed and fairly negligible. The banks stood still, materials rose slightly despite a dip in the iron ore price, and utilities and telcos swapped 0.7% up-down moves respectively.

Among individual stocks, there’d be some nervous cows out there this morning after Bellamy’s Australia ((BAL)) went into a trading halt, following a “please explain” from the ASX regarding disclosure. It may be another bad session for the infant formula exporter today, as suggested by yesterday’s 6.5% drop for peer a2 Milk ((A2M)) and 3.5% for Bega Cheese ((BGA)).

Another stock in focus of late has been residential aged care provider Estia Health ((EHE)), thanks to a wild ride in 2016. It also went into a trading halt yesterday, but in this case pending a capital raising announcement.

The biggest loser on the day was old world travel agent Flight Centre ((FLT)), which dropped 7% after Morgan Stanley slashed its target price on the stock and downgraded to Sell equivalent.

Chartists have been keeping an eye on the 5550 level as the pivot point for a rally towards 6000. The index is now consolidating just above that level, and this morning the futures are suggesting a pullback below. There is now hot debate as to whether Wall Street’s Trump rally will run out of puff, and tomorrow night we have the Fed meeting.

Tenuous

The Fed meeting has provided Wall Street with pause for thought, and questions over the duration of the Trump rally are constantly being asked. Oil helped the Dow up slightly last night, but in a return to selling of the FANG stocks, the Nasdaq dipped.

Interestingly, last night saw a bit of a jump in the VIX volatility index on the S&P500. It rose 8% to 12.7 having last week dipped down to 11. As a general rule of thumb, anything above 30 suggests fear and anything below 20 suggests complacency. At 11, history suggests the market has become over-complacent. Many a correction has begun with the VIX at 11.

Last night’s buying of option protection may simply be Fed-related, or it may suggest there is a growing cohort believing the rally has now run too far. Yet all talk is of Dow 20,000, and this may yet become a self-fulfilling prophecy.

At the same time, the US ten-year bond yield continues to rise, ticking up another 2 basis points last night to 2.48%. While a 25 point hike from the Fed is assumed, will the FOMC suddenly change its tune and become hawkish? The problem for the Fed is the US dollar. It dipped last night, but has run hard post-election and the trend remains up.

Commodities

Last month OPEC agreed to cut production by 1.2m barrels per day, with Saudi Arabia copping the bulk of 500,000bpd. Last night a group of non-OPEC producers, led by Russia, agreed to cut production between them by 558,000bpd.

Aside from the amount of reduction itself, the agreement is seen as significant given Russia and Iran are closely allied. Iran had all year been the sticking point for OPEC, thus Russia’s production cut sends a message to its ally.

Last night West Texas crude jumped 6% on the Nymex open to US$54.50/bbl, before drifting back for the rest of the session. This morning it is up US$1.10 or 2% at US$52.57/bbl. The production cut agreements raise two specific questions.

One: Will OPEC members stick to their quotas? They never have before.

Two: Assuming the oil price does hold above US$50/bbl, will US shale production simply fire up again to fill the supply gap? Last week the US rig count rose 21 to 498, representing the biggest weekly jump since July last year.

The overriding question is thus one of whether the oil price can remain supported for any length of time. At present, consensus suggests 2017 can see oil averaging above 50 but given the time lag for oil rigs coming back on line, it could all fall apart again in 2018.

It was another mixed session for base metals last night and it’s all becoming a bit tedious. Aluminium, copper and nickel down, lead and zinc up.

Also rather tedious is iron ore price volatility. Iron ore has jumped back US$3.20 to US$82.80/t.

The US dollar index is down 0.5% at 101.04 but has not provided much of a lift for gold, which is up slightly at US$1161.50/oz.

The Aussie has matched the greenback in rising 0.5% to US$7489.

Today

The SPI Overnight closed down 21 points or 0.4%. There is an implication within we had our oil stock rally yesterday.

NAB will publish its monthly business confidence survey today.

China will release industrial production, retail sales and fixed asset investment numbers for November.

Rudi will connect with Sky Business via Skype to discuss broker calls at around 11.15am today.
 

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By Greg Peel

The Dow closed up 65 points or 0.3% while the S&P rose 0.2% to 2246 and the Nasdaq gained 0.4%.

Breakout

The ASX200 surged through the 5500 resistance level from the open yesterday and continued to track higher through the session, following Wall Street’s lead. Buying was centred in the large caps and cyclicals, and particularly the financials.

It was a good day for the banks but it was insurance companies that stole the limelight yesterday as the financials index rose 1.7%. Aside from a new lease of life for QBE Insurance ((QBE)) thanks to rising US rates, Insurance Australia Group’s ((IAG)) well-received investor day had that stock leading the charge.

Materials rose 1.5% thanks to another big jump in the iron ore price while energy was once again the only loser on the day, falling slightly on the lower oil price. Not participating in the rally were utilities and healthcare.

There were mixed data releases out yesterday on the trade front, whether or not it was going to make any difference.

In the wake of Wednesday’s shock GDP contraction came a shock blow-out in Australia’s trade deficit in October. It widened to $1.54bn from $1.27bn in September when economists had forecast a narrowing to $0.6bn due to rising commodity prices. But while exports rose 1.4%, imports rose 2.3%.

It was a mixed bag among exports, with coal rising 7% in value but iron ore falling 11%, and rural exports falling 4%. On the import side, lumpy aircraft orders were an influential element behind the jump. They don’t happen very often.

Yet economists continue to believe the numbers will improve from here, as those slow moving commodity export prices catch up to reflect spot prices. If only we could look into the future, so to speak. Oh wait, we can.

China’s exports rose 0.1% year on year in November when a 5% drop was forecast. Imports rose 6.7% when a 1.3% drop was forecast. That’s the biggest gain in two years, and attributable to a surge in the imports of iron ore, coal, oil and copper. China’s housing boom and government infrastructure program are making their mark, although there is likely some distortion provided by the week-long Chinese holiday in October, which would have delayed exports until November.

Putting the Australian October and Chinese November numbers together, there was no reason the stock market needed to pause for thought yesterday.

Indeed, the technical breakout of the 5500 level has chartists now eyeing off a move back to the previous 6000 high.

No Taper Tantrum

The European economy has been growing modestly and managed to sail through the Brexit vote unscathed. But 2017 is the year Brexit will actually begin to happen (presumably, although there remains a school of thought it won’t happen) and the Italian referendum has put the spotlight on next year’s elections in major eurozone economies. The December ECB meeting typically brings major policy announcements, and last night didn’t disappoint.

Heading into the meeting, the popular assumption, given the risks, was that the ECB would extend its bond purchase program (QE) for another six months from the current March 2017 deadline and then consider tapering purchases thereafter. Instead, Draghi threw a bit of a curve ball. QE will be extended all the way to the end of 2017 but as of April, monthly purchases will be reduced to E60bn in value from the current E80bn.

Markets were initially a tad confused – Wall Street dipped early – but by the end of the European sessions and half way through the Wall Street session it was decided this was good news. QE will continue to support the eurozone economy but tapering suggests confidence in growth ahead.

The German stock market jumped 1.8% by the close and Wall Street once again pushed higher, ticking off another quadrella of all of the Dow, S&P, Nasdaq and Russell hitting new all-time highs.

What was notable on Wall Street however was a clear rotation trade. Strength in the indices came from those sectors initially sold off in the Trump rally, such as yield plays and Big Tech, while a drag was provided by selling in the big Trump winners to date, such as infrastructure stocks and banks.

As profits are taken on the expensive winners and redirected back into the cheap losers, the debate heats up over just how far Wall Street can run before Trump even gets into office, how much gain is being “borrowed” from 2017, and just what sort of correction may transpire given this initial over-exuberance.

Commodities

“Non-OPEC” will hold a meeting this weekend to discuss its part in OPEC’s planned production cuts. For “Non-OPEC” read Russia. There are fourteen oil producing nations attending but once you drop past Mexico and below, contributions to global production become more negligible. The gorilla not in the room is the US.

The meeting has nevertheless reversed the last few days of drift in the oil price. West Texas crude is up US99c at US$50.85/bbl.

More ups and downs for base metals overnight. Aluminium rose 1% and copper 0.5% but lead and zinc fell 1.5% and nickel 3%.

Iron ore dropped US50c to US$81.90/t.

The ECB announcement had the euro heading lower, sending he US dollar index up 0.9% to 101.06. Industrials metals prices appear to be uncorrelated to the greenback at present but gold is not, although gold is only down US$2.90 at US$1170.80/oz.

The Aussie is off 0.3% at US$0.7459.

Today

The SPI Overnight closed up 16 points or 0.3%

Local housing finance numbers are out today and China will release inflation data.

Westpac ((WBC)) will hold its AGM.

Rudi will connect with Sky Business through Skype at around 11.05am to discuss broker calls.

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By Greg Peel

The Dow closed up 297 points or 1.6% while the S&P gained 1.3% to 2241 and the Nasdaq rose 1.1%.

No Worries

It’s been interesting of late to note quite a level of variance emerging with regard Australian economist views, distilled down to forecast for the RBA cash rate. The popular media had, prior to yesterday at least, hyped up some expectations that the next rate move would be up. There are indeed such expectations, but a rate rise is not expected into late next year at best.

Other economists are happy to simply suggest 1.5% is the bottom, but don’t yet foresee a hike in the offing, but there remains quite a cohort that are convinced that by next year the RBA will be forced to cut to 1.25% or even 1.00%. Suddenly, yesterday, this view seemed more viable.

Australia’s GDP contracted by a worse than expected -0.5% in the September quarter, and the annual growth rate fell to 1.8%. The rate in the June quarter was 3.3% -- much higher than expected at the time (and March brought a positive surprise as well) – hence sudden calls that the RBA would soon have to hike. Now the picture is more clouded.

Just some give-back? All agree December will bring about a reversal of fortunes as higher commodity prices flow through. And if the stock market is the barometer of economic expectations, the fact yesterday saw the ASX200 rally almost a percent, and actually kick up late morning when the GDP data dropped, suggests there’s not a lot of concern.

Presumably there was some element of “central bank put” at play. If the economy slows the RBA will cut – all good. If the RBA doesn’t cut it’s because the economy has picked up again – all good. But the funny thing is that while yesterday’s index rally was indeed all about interest rates, it was not about the RBA.

National Bank ((NAB)) and Westpac ((WBC)) yesterday announced increases to their variable investor mortgage rates. The bank sector rallied a market-leading 1.3% and provided the bulk of the 0.9% index gain. The GDP offers up RBA rate cut possibilities, and the banks implement rate hikes.

Funny old world. Of course it is that funny old world that keeps Dr Lowe awake at night. How can the RBA use one, and one only, interest rate to alleviate pressures on the wider economy while not adding further fuel to the housing market fire? Well he got an answer yesterday – leave it to the banks.

By contrast, among the better performing sectors yesterday (energy was the only loser, on the lower oil price), the consumer sectors, telcos and utilities all had good sessions, just as they might if an RBA rate cut were nigh.

But what we have seen these past few sessions is a move back into the high yield and high growth stocks that have been beaten down these past few months. This has helped to broaden the base of the rally back post Italy scare. The same theme has been playing out on Wall Street. Last night that story took a remarkable turn.

Bow to the Dow

For many on Wall Street there is one technical theory that remains sacrosanct one hundred years after it was posited. Dow Theory suggests that when the Dow Jones Industrials Average and the Dow Jones Transports Average hit new highs simultaneously, it signals a bull market.

One hundred years ago the US economy was all about building railroads for steam trains, pumping out Model Ts and hooking up the first telephones. Thus the parallels to 2016 are obvious, of course. The Dow averages are arcane measures that most traders ignore completely given the weightings therein are a reflection of share price rather than market cap. That’s why the S&P500 is seen as the “true” measure. But when Dow Theory kicks in, suddenly everyone dons a top hat.

Wall Street opened last night about where it left off the night before and began a modest rally. At around lunchtime, the Dow Transports hit an intraday high for the first time in two years, and every gain for the Dow Industrials at present is a new high. When that happened, someone placed a US$5bn program buy order into the S&P500 futures. All hell broke loose.

A “program” order is one in which a buyer approaches a proprietary desk of a broker with an order to buy “the market”. The broker offers a price for the stocks therein (using computers of course) and then covers that order in the futures – being the market proxy. The broker prices in a premium to cover the risk of having to unwind their stocks/futures position over time. The buyer has what they want in one smooth hit – not having to place 500 individual stock orders.

Nothing else happened on Wall Street last night. One buy order and the Dow is up 300. Just about every other US index, major and minor, hit a new all-time high as well.

It’s interesting that Dow Theory should suggest a bull market for Wall Street in December 2016. Wall Street has been in an uninterrupted bull market since March 2009.

Commodities

Oil is now acting as if it has been pushed a little too far ahead of actual evidence of OPEC production cuts. West Texas crude is down US90c at US$49.86/bbl.

Base metals are acting as if they had become speculatively overbought in the near term. All closed lower in London, with copper, nickel and zinc all down 2% or near to it.

But Lord only knows what’s going on in iron ore. It’s up US$3.80 to a two-year high US$82.40/t.

The US dollar index is down 0.3% at 100.18, helping gold up US$6.20 to US$1173.70/oz.

The Aussie dipped briefly on the weak GDP number yesterday but has since rebounded, up 0.3% over 24 hours to US$0.7479.

Today

The SPI Overnight closed up 49 points or 0.9%. Is today the day the ASX200 rallies through 5500 and, this time, keeps going?

China will release its trade balance data for November today and Australia will release its trade balance data for October.

The ECB will hold a policy meeting tonight. The expectation is that QE will be extended another six months from the current March timeframe. The December meeting has recently been the one in which Draghi makes the big policy announcements. Volatility alert.

Insurance Australia Group ((IAG)) and Santos ((STO)) host investor days today.

Rudi will appear on Sky Business twice today. First from 12.20-2.30pm and later he'll return for an interview on Switzer TV between 7-8pm.
 

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By Greg Peel

The Dow closed up 35 points or 0.2% while the S&P gained 0.3% and the Nasdaq rose 0.5%.

Negative Growth?

Yesterday morning the index futures were suggesting the ASX200 would recover all that was lost on the Monday following the Italian referendum result, being around 50 points. Never mind that Friday had also seen a 50 point fall as the polls suggested a “no” vote would likely be the outcome in Italy.

It was a stumbling start but we got there around lunchtime, before peaking and drifting off for the rest of the session to a more modest 28 point gain. Interestingly the peak was reached after the release of the September quarter current account data, not before it.

I have been noting that unless there was a substantial boost to the terms of trade in the quarter, the weakness in prior data on construction, capex and corporate profits was signalling a quarter of potentially negative growth. Well, we didn’t get there.

The current account deficit did indeed contract courtesy of higher commodity prices but a drop in the volume of commodity exports and a jump in imports means net exports will actually detract from today’s GDP result. Forecasts are now sitting in a range slightly either side of zero growth for the quarter, implying an annual growth rate of just over 2.0% compared to the June quarter’s 3.3%.

Maybe the market needed to mull the numbers over lunch, as thereafter we saw the ASX200 begin to pull back.

There is no need to panic nonetheless, as economists continue to cite the time lag between contracted commodity prices and spot. The December quarter will be more of a beneficiary of recent spot price gains, thus staving off and thought of recession.

The sector story of the day was healthcare, and specifically residential aged healthcare, which was boosted by the listed triumvirate in the space of Estia, Japara and Regis all posting 11-13% gains. The government has backed down on the regulatory changes that had been touted and which had led to these three stocks having a shocker in 2016.

The healthcare sector rose 0.6% yesterday but this was a far cry from the 2.0% lost the day before on European fears impacting upon the real muscle in that sector, such as your Ramsays, with significant exposure on the continent.

Otherwise the session mostly saw buying across the board, reversing a lot of the across-the-board selling seen on Monday. The odd sector out was consumer staples, which fell 0.6% following press reports of the two big supermarkets undertaking a Christmas price war.

No one blinked at 2.30pm when the RBA statement was released leaving the cash rate unchanged. Move along, nothing to see here. Carson was of course still having conniptions as usual.

Interestingly the SPI futures are up 35 points this morning, outperforming Wall Street’s lead and defying mostly weaker commodity prices overnight. Perhaps that gap left from Monday’s sell-off still needs to be filled.

Better than TV

Trump, Trump, Trump – that’s all one hears about on US business television these days. If the Donald is not singling out one air conditioning manufacturer for individual support to save American jobs, he’s telling Boeing what it can do with its $4bn bill for the new Airforce One and announcing a planned $50bn US investment by Japan’s Softbank, creating 50,000 jobs, but no one knows what in.

Trump has stopped Carrier moving a plant from Indiana to Mexico. To reduce costs in Indiana, Carrier will look to largely automate the plant.

In the meantime, Wall Street continues to drift incrementally higher, ticking off new all-time highs almost daily. No one appears too keen to ignite more of a Santa rally given Santa has already been well and truly beaten to the jump by a different Father Christmas.

What has been notable this week on Wall Street is a rotation back into defensives and yield stocks which have been trashed, and out of banks and industrials which have soared. The theme now appears to be lock in profits and wait to see what happens next.

What happens next may not actually happen until after late January.

We are nevertheless counting down to next week’s Fed meeting, albeit that has every chance as being as much of a non-event as yesterday’s RBA meeting. A rate hike? Who knew?

We do otherwise have to get past tonight’s ECB policy meeting. But again it is unlikely Draghi sees any need to alter policy. He stood ready for a fallout from the Brexit vote that never actually came, and he was probably similarly ready for the Italian referendum but nothing untoward has transpired there either.

Not yet, anyway.

Commodities

There had been much talk that were OPEC, Russia and others to indeed reach production cut agreements, WTI oil would go to US$55/bbl and maybe even push to US$60/bbl. But it is also well understood any price towards 60 would see US shale fire up again, hence WTI is presently struggling to hold above 50. It’s down US43c at US$50.76/bbl.

Another mixed session in London saw aluminium and copper lose 1% and zinc gain 1%.

Iron ore rose US20c to US$78.60/t.

The Aussie is down 0.2% at US$0.7455 which doesn’t seem like much given yesterday’s underscored expectations of a possibly negative GDP result, and can be explained by a 0.4% gain in the US dollar index to 100.48. Forex markets appear to have already absorbed the threat of a weak GDP.

Gold is down US$3.20 at US$1167.50/oz.

Today

The SPI Overnight closed up 35 points or 0.6%.

The GDP result is due out late this morning.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

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All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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By Greg Peel

The Dow closed up 45 points or 0.2% while the S&P rose 0.6% to 2204 as the Nasdaq gained 1.0%.

Wrong

Yesterday the local index futures were calling the ASX200 up 21 points before the opening bell, following Friday’s 50 point drop which surprised many and likely represented a square- up ahead of Sunday’s Italian referendum. The polls were suggesting the “no” vote would win.

And it did. Easily. For once the polls were right. Not “right”, it seems this morning, was the Australian stock market’s reaction. We fell another 40 points on the latest global “disaster” in what was more or less a single step-down. The index traded sideways for the rest of the session.

The SPI futures are up 50 points this morning, suggesting perhaps that if Friday’s move can be questioned, yesterday’s move was just plain misguided. Have we not learned anything this past six months? The world collapsed on Brexit, but within a couple of days had rallied back and headed north. The world collapsed on Trump’s victory, but not even for one trading session before a substantial rally followed. It therefore should have been obvious a “no” vote win was a buy signal.

It all sounds so obvious with hindsight.

Whether or not yesterday’s local trading session will prove at all relevant after today, it was clear within sector moves that the Italian factor was the driver. The biggest loser was healthcare, down 2.0% given the extensive European exposure of the big names in that space. Financials were down 1.2% because Italian banks have been shaky for a long time. Consumer discretionary fell 1.8%, led by the providers of pizza and toasted sandwich makers with strong European markets. So the list goes on.

The big winner on the day was utilities – a sector that has been beaten down severely of late. While defensive yield might offer a good place to hide in times of trouble, the 3.2% surge for the sector was more a case of ka-ching for DUET Group ((DUE)) following a takeover offer from the Chinese.

Speaking of the Chinese, stock indices were down across the Asian region yesterday – presumably on Europe fears – but a -1.2% fall for the Chinese index was the stand-out. Here we might point away from Europe and towards a certain President Elect who, much to the dismay of diplomats, likes to rattle Beijing’s cage. More than a few silent supporters on that front, I would imagine.

There was also quite an initial dip in the New Zealand market after Australia won the first ODI.

But we will likely dismiss yesterday’s moves today, if offshore markets and the SPI Overnight are any guide. What was interesting yesterday was that the ASX200 closed smack on 5400, providing a decidedly technical twist to the session.

New Record

The EU takes another quiet step towards disintegration and the Dow hits a new all-time high. The Italian stock market barely blinks, France rallies 1.0% and Germany 1.6%. The euro surges a full percent against the greenback. What do we make of it all?

Well for starters, the polls had for some time suggested “no” would win so markets had time to prepare. And this time the polls were right. Secondly, Brexit and Trump taught us that any politically-driven market plunge offers up a great buying opportunity. The relevant markets were indeed down initially, but not for very long.

And thirdly, so what? Italy’s constitution is not reformed, an election is called and maybe a clown gets in (there’s been a bit of that about lately) and maybe, sometime in the future, Italy votes to leave the EU. But meanwhile the market will roll on, and on Thursday night the ECB, if it deems necessary, will come to the rescue.

On Wall Street, the mood was more of a shrug than any startling. The stock indices opened higher and drifted along for the rest of the session. The Dow was the only major index to hit a new high but it underperformed the Nasdaq, which has been the main underperformer post-Trump.

There was also solid economic data to price in. The US service sector PMI leapt to 57.2 in November from 54.8 in October.

Commodities

The euro is up 1% so the US dollar index is down 0.6%. While commodity prices have not been following a strictly inverse relationship to the greenback of late, this dip seemed enough to at least spark some short-covering on the LME. Aluminium closed up 1.5%, lead and nickel 2%, and copper and zinc 3.5%.

Iron ore rose US40c to US$78.40/t.

West Texas crude drifted off US48c to US$51.19/bbl.

Neither the dip in the greenback, nor the implications of the Italian referendum, did anything for gold. It’s off slightly at US$1170.70/oz.

The Aussie is up 0.4% at US$0.7473.

Today

The SPI Overnight closed up 51 points or 0.9%.

The RBA will meet today and leave its cash rate on hold.

The Australian September quarter current account numbers are due today, including the terms of trade. If they don’t show significant improvement, all previous quarterly data, including yesterday’s disappointing corporate profit numbers, point to a very weak GDP result tomorrow.

Rudi will connect with Sky Business through Skype around 11.15am today to discuss broker calls. Tonight, from 8-9.30pm he will host Your Money, Your Call Equities.
 

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By Greg Peel

Jitters

Few pundits were predicting a one percent plunge for the local market on Friday but the mood can be best summed up by two sector moves. The oil price was up 4% overnight and energy closed down 1.2%. The iron ore price was up 8% and materials also closed down 1.2%.

The banks had been bought up during the week and they closed down 0.9%. Indeed, all sectors were down, be they cyclical or defensive, growth or yield. It was a market-wide sell-off that fed upon itself as the day progressed.

Not helping the mood was Bellamy’s Australia ((BAL)), which crashed 43% due to a “temporary volume dislocation in China”. Come again? Oh, less milk was sold than expected, thanks to Chinese regulation complications.

Another one bites the dust. Bellamy’s has become the latest among the non-traditional, high-multiple growth stocks on the Australian market to issue disappointing guidance and watch investors run screaming for the exits. The stock was last week the third most shorted on the ASX, at almost 13%, but obviously the shorters were in no rush to cover on Day One of what may yet be an ongoing de-rating.

A2 Bruté? Bellamy’s dragged down other stocks in the sector in sympathy, including A2 Milk ((A2M)), down 10%, and Bega Cheese ((BGA)), down 6%.

But one stock does not a market-wide sell-off make. Often the local market will square up ahead of a US non-farm payrolls report but considering a Fed rate rise is already well and truly priced in, it can’t have been that.

More likely it was a combination of the ASX200 having moved too close to the “sun” of 5500 on the Thursday, only to suddenly worry that the polls were suggesting the Italian referendum might come in with a “no”, the Italian president would resign and call an election, and Italexit, or “Italeave” as it’s being more popularly referred to, would be the next step in the fall of the EU.

On that note, we see Austrians did not vote in the Far Right candidate for president over the weekend, indeed quite the opposite. Although the role is merely a ceremonial one, commentators are suggesting the Brexit-Trump freight train has been halted, for now.

The polls close in Italy at 9am this morning, Sydney time. Indications of the result are expected from around midday.

Meandering

The aforementioned US jobs number for November came in at 178,000, below expectations of 200,000. Wages growth came in at negative 0.1% following October’s 0.4% spike, to be up 2.5% year on year. The unemployment rate fell to 4.6% -- a low last seen in 2007 – when a steady 4.9% was expected. But this was due to a drop in participation.

Six months ago, this result would have had Wall Street claiming “no Fed rate hike” and possibly buying up stocks as a result. A rate hike is however baked in, so no response on that front. Economically the number was a disappointment, but not majorly, and indeed it is on-trend with results in 2016.

Thus the jobs report had little effect on Wall Street’s direction on Friday night. The oil price traded a little higher again, metals prices were mixed, but there was nothing there to provide obvious direction.

Rather, Wall Street meandered its way through the session slightly positive and slightly negative at times. Sector moves indicated Friday was a good day to square up on the week’s trades, with high-flying banks and other cyclicals sold and beaten-down utilities and REITs bought.

While Wall Street, too, heard nervous discussions about what might transpire in Italy, no one appeared to be in panic mode.

The Dow closed down 21 points or 0.1% while the S&P was flat at 2191 and the Nasdaq gained 0.1%.

Commodities

West Texas crude rose US83c on Friday night to US$51.67/bbl.

Base metals were again volatile in London. After big jumps up during the week, lead and zinc both copped profit-taking to the tune of 3% while nickel rose 2% and copper and aluminium both lost 0.5%.

After a ridiculously volatile week in Singapore, iron ore fell US10c to US$78.00/t.

The US dollar index was 0.3% lower on the jobs report at 100.72 but gold was up only slightly at US$1173.60/oz.

The Aussie was 0.5% stronger at US$0.7446.

Futures traders appear to have decided Friday’s trade on the local market was overdone. With Wall Street flat and the Italians yet to go to the polls, the SPI Overnight closed up 21 points or 0.4% on Saturday morning.

The Week Ahead

It’s a big week economically in Australia this week.

The RBA meets tomorrow but no policy change is expected. It should be noted, nonetheless, that the economists and other market commentators are becoming increasingly polarised over whether the next rate move will be up or down.

The biggie is the September quarter GDP result on Wednesday. After weak lead-in numbers for construction and capex, economists are forecasting 0.2% quarterly growth for 2.5% annual growth, well down from 3.3% in the June quarter. We still have some more lead-in numbers to consider this week, being company profits and inventories today and the current account tomorrow, which encompasses what should be a much improved terms of trade.

Monthly data across the week include the services PMI today and construction PMI on Wednesday, ANZ job ads today, the October trade balance on Thursday and housing finance on Friday.

China will release its November trade balance on Thursday and inflation numbers on Friday.

A quieter economic week for the US sees the services PMI tonight, factory orders and trade on Tuesday, and fortnightly consumer sentiment on Friday.

The ECB holds a policy meeting on Thursday, by which point we’ll know what’s happened in Italy.

On the local stock front, corporate newsflow slows right down this month compared to the frenzy of the November AGM season, albeit there are still a few late-cycle AGMs to get through. Most notable is that of Westpac ((WBC)) on Friday.

Insurance Australia Group ((IAG)) and Santos ((STO)) will each hold investor days on Thursday.

Rudi will appear on Sky Business on Tuesday, via Skype, to discuss broker calls at around 11.15am. On Thursday he'll appear between 12.30-2.30pm and again between 7-8pm for the Switzer Report. On Friday he'll repeat the Skype-link, probably at around 11.05am.

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By Greg Peel

The Dow closed up 68 points or 0.4% while the S&P fell 0.4% to 2191 as the Nasdaq dropped 1.4%.

Energised

OPEC announces production cuts, the oil price jumps 8% and the Australian energy sector jumps 7.2%. That about sums up yesterday’s trade on the ASX. We recall that only the day before, growing scepticism of OPEC reaching any sort of deal had the energy sector down 1.9%.

Wednesday also saw the local materials sector diving 2.8% on big falls in iron ore and base metal prices. On Wednesday night iron ore fell further, base metals bounced modestly and gold fell sharply, but yesterday the materials sector rose 2.9%. What’s good for oil is good for all commodities, it seems.

The materials sector would have taken some heart from yesterday’s Chinese PMI data. Beijing’s official manufacturing PMI rose to 51.7 in November from 51.2 in October, beating expectations. Caixin’s independent measure of smaller entities went the other way, dipping to 50.9 from 51.2, but this, too, was better than expected.

Beijing’s official service sector PMI showed a rise to 54.7 from 54.0.

While resources dominated yesterday’s local trade, other sectors made a contribution to the 1.1% gain for the index. Most influential was a 1.3% gain for the banks which, now that commodity prices have rebounded and diminished the potential of mining/oil company loan defaults, appear to be trading on the basis of rising interest rates are good for bank margins.

Only a few months ago the banks were being sold on exactly the same basis, given concern over bad debts and the possible impact of rising mortgage rates meeting rising unemployment.

Consumer discretionary also rose 1.3% yesterday, which is interesting given a stronger oil price means a higher petrol cost. The offset, presumably, is higher commodity prices are good for the so-called “mining states” of WA and Queensland and thus good for the workers and consumers therein.

The losers on the day were once again the yield sectors, on higher interest rates and the rotation out of defensives and into cyclicals, as has been the theme of the second half of this year.

As the index rumbled its way up to a 1.1% gain yesterday there was one stumble along the way, late morning, following the release of Australia’s September quarter capex data. The numbers were a little disappointing.

Total capital expenditure fell 4.0% in the quarter to be down 13.7% year on year. That number continues to be dominated by the resource sector, which saw a 7.2% fall to be down 35.1%. Most disappointing is that while non-mining capex is up 4.8% year on year, the September quarter saw a 2.3% dip.

It was also disappointing that capex intentions – plans to invest in the year ahead, also fell from the previous quarter’s survey.

Australia is undergoing a very slow economic transition. As the last of the big LNG facilities reaches the end of the construction phase in the next couple of years, the mining investment slide will finally end. But we are already seeing signs of the housing construction boom – which to date has provided the bulk of the offset – soon coming to an end. Non-mining, non-housing investment wherefore art thou? Tourism can’t carry all of the can.

Rotation Continues

The WTI oil price was up another 3.7% last night, surpassing the US$50/bbl mark. Presumably those traders who were still in shock on Wednesday night were prompted into action. We must remember that the oil market had set itself short ahead of what most believed would be yet another lack of OPEC agreement. Those shorts will need to be flushed out.

What’s good for oil is good for America, and subsequently US bond yields. The ten-year is up another 7 basis points overnight to 2.44% and all talk now is of 3% by year-end.

Interestingly, the US dollar index dropped 0.5% last night – possibly suggesting squaring up ahead of tonight’s US jobs numbers – but either way the dollar has run a long way since the election and thus is offering up a drag on US export earnings. Hardest hit are those companies in the Big Tech space.

Thus last night on Wall Street was a bit of a repeat performance of the night before, which, I noted yesterday, seemed a return to the days immediately following Trump’s victory. Resource and infrastructure-related stocks are being bought, FANG and biotech stocks are being sold, as are defensives and yield plays. Thus we saw the Dow up 0.4% last night but the Nasdaq down a solid 1.4%. The S&P500 split the difference with a 0.4% fall.

The US manufacturing PMI rose to 53.2 from 51.9. Yet another solid piece of data to underscore Fed rate rise expectations, if a 2.44% ten-year yield (now up over one full percentage point from the 2016 low) is not enough on its own. Tonight sees the last non-farm payrolls report before the December Fed meeting.

Commodities

West Texas crude is up US$1.79 at US$50.84/bbl.

Base metal prices eased back again in London last night, but not spectacularly. Aluminium fell 1% while the others all fell around 0.5%.

Iron ore – what can we say – up US$5.90 or 8.2% to US$78.10/oz. There must be some very dizzy traders in Singapore.

Despite the US dollar index falling 0.5% to 101.01, gold is a tick lower at US$1171.20/oz.

The Aussie is up 0.3% at US$0.7413.

Today

The SPI Overnight closed down 10 points or 0.2%. While we can point to the S&P500 being down 0.4%, another 4% jump for oil and 8% jump for iron ore would on any other day be big news, but perhaps we priced this in yesterday.

Australian October retail sales numbers are due today.

Tonight sees the US jobs numbers.

Sunday sees the Italian referendum on constitutional reform. The polls are suggesting a “no” vote, which would see the Italian prime minister resign and the EU once again face another possible crisis, a la Brexit. Given the polls said “no” to both Brexit and Trump, we might expect a “yes” vote. But that would be inconsistent with the way the world is now headed.

Rudi will connect with Sky Business via Skype this morning to discuss broker calls. Probably around 11.05am.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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