By Greg Peel

Banking on Trump

It was a choppy session on the local market on Friday, featuring three clear attempts to post a decent rally – from the open, at midday, and on the death – and two dips back towards square in between. By the end of the session, a theme was clear.

The sell-off in yield stocks which began pre-Trump on the growing expectation of a Fed rate hike, and to fund a switch into resource stocks as commodity prices surprisingly surged, is continuing post-Trump. US interest rates have shot up on inflation expectations, Fed or no Fed. Friday saw utilities down 3.0% and telcos down 2.5%.

While ongoing strength in commodity prices continued to support resources, sending materials up 0.5% and energy up 0.7%, the big winners on Friday were the banks. Taking the lead from Wall Street, where the expectation of looser regulations has ensured US banks have been leaders in the post-Trump rally, the Australian financials sector put on another 2.9% to provide the bulk of the index gain.

Funny that when the appetite for yield began to turn a couple of months ago, the banks were being sold down with the bond proxy stocks. Banks are after all amongst the most attractive yield plays. Now that US interest rates have leapt up without waiting for the Fed, the banks are soaring.

Presumably the market is assuming what is good for the US banks, in the form of looser regulation, is good for all banks. And higher interest rates are typically positive for bank margins, it’s just that in Australia we fear rising bad debts as a result, and a weakening in what is already subdued loan demand.

The world continues to adjust to Trump, even though there is little certainty on that front. What happens after the oaf takes the oath? A fundamental reason cited for the post-Trump market turnaround was the President Elect’s victory speech, in which he sounded a lot less like the volatile tyrant and a lot more like an actual president. Already talk is of the infamous wall being more of a fence. Where does this leave his promise to slap a 45% tariff on Chinese imports, for example, and to cut the corporate tax rate from 35% to 15%?

After a turbulent week, the dust will now begin to settle. Trump does not take over the reins until January. Aside from being keen to see who he chooses for key roles in his cabinet, Wall Street will now look to the OPEC meeting at the end of the month and the Fed meeting mid-December.

And what does Santa feel about all this? After the biggest weekly rally in five years, the Dow is at a new all-time high. We may have been expecting a post-Fed rate hike Santa rally from December on the usual buy-the-fact trade, but we’re already there. Whereto from here is not so clear. Wall Street stalled on Friday night and the SPI Overnight closed down 13 points on Saturday morning.

And China has thrown rather a wet blanket over commodity prices.

Topping Out?

It was a light volume session on Wall Street on Friday night given Veterans Day had banks and the bond market closed, and likely encouraged many to take a long weekend. We thus have to take Friday night’s action with a bit of a grain of salt.

The big news on the day was a surprise September quarter doubling of profits for chip-maker Nvidia, sending that stock up a whopping 30%. This reignited the Nasdaq, which had suffered post-Trump, while the other indices surged, due to weakness in the Big Tech names and FANG stocks in particular. These stocks saw some bargain hunting on Friday and the Nasdaq rose 0.5%.

The biggest Trump winners are resident in the Dow, and the same themes we saw post-election continued through Friday. The banks again led the charge. That sector has rallied no less than 10% since Wednesday.

The Dow closed up 39 points or 0.2% at a new all-time high, marking its strongest week since December 2011. In the broader market the exuberance eased off, nevertheless. The S&P closed down 0.1% at 2164.

It is also notable the Russell small cap index has rallied 10% since Wednesday, as smaller companies look towards a lower tax rate, less regulation and an unwinding of the Obamacare burden.

So the question being asked on Friday night was how far can this go? Probably not much further for now. What Wall Street can hope for at this very early stage of the Trump Era has priced in and needs to be confirmed, which in reality will be at least a year-long process.

Interestingly, Michigan Uni’s fortnightly consumer confidence measure published on Friday showed a surge to 91.6 from 87.2. Confidence had been on the wane in previous surveys which was beginning to worry Wall Street ahead of Christmas, but now it looks like all is well. Except that the survey was conducted pre-election.

Commodities

Last week Chinese futures exchanges increased margin requirements on coal, iron ore and steel product contracts in order to stem the tide of runaway speculation that has exacerbated the recent surge in prices. On Friday the Chinese regulators went after the copper market, enforcing new limits on positions.

Copper had already begun to rally pre-Trump but the post-Trump surge has sent the benchmark metal rapidly to its highest level in 17 months. All base metals have run up on the expectation of increased US infrastructure spending, despite the drag of a stronger US dollar, which was up another 0.3% on its index on Friday night to 99.06.

The news out of China clearly spooked the LME. Copper was only down 0.5%, but aluminium and lead fell 1.5%, zinc 2.5% and nickel 3.5%.

While the thermal coal price fell 5% on Friday, iron ore continued to surge the other way, up US$5.50 at US$79.70/t. A few months ago metals analysts would have suggested iron ore is no chance of getting back to 70, and in a blink it’s almost at 80.

It was not such a good session for gold, which having surged initially on Trump’s victory had come straight back down again, and now it has capitulated. Gold is down US$34.40 at US$1223.80/oz. Silver fared worse, falling 7%.

OPEC members may be talking the talk of production cuts but in the meantime they’re walking the walk of surging oil production. Production shot up in October, with Nigeria, Libya and Iraq leading the charge.

Could it be that OPEC members are simply trying to pump whatever they can ahead of a production freeze, or should we just accept that talk of a production freeze will only ever be that – talk? West Texas crude fell US$1.38 or 3% on Friday to US$43.18/bbl.

The slide in the Aussie has continued, down another 0.9% at US$0.7546.

As noted, the SPI Overnight closed down 13 points or 0.2% on Saturday morning.

The Week Ahead

If we’ve seen as much of a Trump adjustment as we’re going to get for now, attention can turn to how the rest of the world might be faring.

Japan releases its September quarter GDP result today and the eurozone follows suit on Tuesday. China releases October industrial production, retail sales and fixed asset investment data today and property prices on Friday.

What do we assume now about US data releases vis a vis the Fed? There are still plenty to come before the December meeting.

Tomorrow night sees retail sales, business inventories and the Empire State activity index. Wednesday it’s industrial production, housing sentiment and the PPI. Thursday brings the CPI, housing starts and the Philadelphia Fed activity index.

The minutes of the November RBA meeting are due tomorrow but being pre-Trump, they’re a little antiquated. More important to the central bank will be the September quarter wage price index due on Wednesday, which is the first of the quarterly releases ahead of the GDP result in a couple of weeks. On Thursday it’s the local jobs numbers that no one pays much attention to anymore.

On the local stock front, both ANZ Bank ((ANZ)) and Westpac ((WBC)) go ex-dividend today, which will distort the sector move on the day.

Earnings results are due from Elders ((ELD)) today, Ozforex ((OFX)) tomorrow, Graincorp ((GNC)) on Wednesday, James Hardie ((JHX)) on Thursday and AusNet ((AST)) on Friday.

This week will be one of the busiest on the AGM calendar.

Rudi will appear on Sky Business on Tuesday, via Skype-link, at around 11.15am. He'll host Your Money, Your Call Equities late on Wednesday, 8-9.30pm. On Thursday he'll appear twice. First from 12.20-2.30pm and again between 7-8pm for the Switzer Report. On Friday, he'll repeat the Skype-link at around 11.05am.
 

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By Greg Peel

The Dow closed up 218 points or 1.2% while the S&P gained 0.4% to 2170 and the Nasdaq fell 0.6%.

Risk On

What does Trump bring to the world? Well the assumption at this early stage is increased US spending, particularly in infrastructure which boosts the demand for raw materials, and inflation, which raises interest rates. How does this translate for the Australian market?

Yesterday we saw the materials sector up 5.8% and energy up 3.3% on the infrastructure theme, supported by solid commodity price jumps (ex-gold). We saw healthcare up 4.3% given that sector’s substantial US exposure.

We saw information technology the winner with a 7.1% gain but only because this tiny sector includes dominant component Computershare ((CPU)), which benefits from higher US rates.

We saw the consumer sectors up 2.5% (staples) and 2.0% (discretionary) as they benefit from an end to price disinflation. The losers on the day were telcos, up only 0.3%, and utilities, down 0.3%, because they suffer from higher rates.

We saw industrials underperforming with a 1.8% gain because this diverse sector of odds and sods features both winners and losers. The interesting one was financials.

Financials were up 4.3%, providing a good chunk of the ASX200’s 3.3% gain. Here within we have QBE Insurance ((QBE)), which lives and dies on US rates, but also the banks. Only a couple of months ago, the banks were being sold off on the threat of a Fed rate hike.

Higher rates are typically good for banks because they increase net interest margins. But in Australia’s climate of subdued business credit demand and a runaway housing market, higher rates reduce the demand for loans, increases the potential for bad debts, increase offshore funding costs and reduce dividend yield appeal. The boost in the resource sectors does, nevertheless, reduce the potential for bad debts in that particular space and higher rates provide for mortgage repricing, which is positive as long as defaults remain contained.

Whatever the case, the banks were included in the biggest up-day for the local market since 2011 yesterday. But it was not simply “Buy Australia”, as there was clear disparity among the big cap moves. The banks were up 3-4% but BHP Billiton ((BHP)) was up an extraordinary 8%. Woolworths ((WOW)) managed only 2% and Telstra ((TLS)) basically missed out.

What’s even more extraordinary about BHP’s jump is that 8% could still not get the stock into the Top Ten ASX gainers list on the day. You needed at least 10% to join that club.

We need to give a nod, with regard yesterday’s biggest movers, to some of the biggest short positions previously held. In this club we see Sims Metal Management ((SGM)), up 14%, Western Areas ((WSA)), up 12%, Orica ((ORI)), up 11%, Monadelphous ((MND)), up 11%, and yes, Rio Tinto ((RIO)), up 8%.

It was a scramble. At some point the dust will settle. To that end we note the Dow is up 200 points and the SPI Overnight is down 4.

But there’s no denying – the game has changed.

Disparity

If a clear divide between winning and losing sectors was apparent in the Australian market yesterday, it was glaringly visible on Wall Street last night. The theme that began on Wednesday night carried through.

It so happens that some of the biggest companies in America and thus components of the Dow Jones Industrial Index are exposed to infrastructure spending. Stocks like 3M, Caterpillar, General Electric and United Technologies. A Trump administration will be pro-Big Oil, which is promising for Exxon and Chevron.

Higher US rates are good for JP Morgan, Goldman Sachs and Travelers. The US ten-year yield was up another 5 basis points to 2.12% last night. The diminished threat of drug price regulation is good for Pfizer and Merck. All these names were among the big winners last night.

There were also losers – notably consumer staple stocks that had been so, so popular prior to the election, such as J&J, P&G and Coke. These likely suffered mostly from providing funds to buy other sectors. And other losers were the multinational iconic brands that Trump will go after to repatriate taxes – Apple, Microsoft and Nike.

The Dow is not all of Wall Street, and its arcane price average is not a particularly helpful benchmark. But the distribution of America’s largest companies across the various sectors provides us with a snapshot of the presumed winners and losers under The Donald.

Expand that to a wider market, and we see names like Facebook, Amazon and Netflix being added to the Microsofts and Apples to ensure a 0.6% drop for the Nasdaq.

Put it all together and the result is a 0.4% gain for the broad market S&P500. Not a notably big move. That was the day before.

That the S&P should be up only 0.4% the night after the ASX200 is up 3.3% likely explains why the SPI futures are down 4 points this morning, despite further very big moves up for commodity prices last night (ex-gold).

Commodities

The US dollar index is up another 0.3% at 98.81. While this provides a headwind for commodity prices, the promise of increased demand …ahem…trumps that issue. Accept for gold, which is not a commodity but a currency.

Gold is down US$13.90 at US$1258.20/oz.

Iron ore is up another US$3.20 at US$74.20/t.

Copper is up another 3.5%, zinc 1.5% and aluminium 1%.

While Trump may be good for Big Oil with regard environmental constraints and other considerations, he can’t do much about oversupply. Oil now has to wait it out until the November 30 OPEC meeting. West Texas crude is down US62c at US$44.56/bbl.

The Aussie has been on one hell of a rollarcoaster ride these past couple of days but the trend remains down. It’s now at US$0.7614.

Today

As noted, the SPI Overnight closed down 4 points.

Tonight in the US is Veterans Day (in line with Armistice Day here) which sees banks and the bond market closed but stocks and commodity markets open. Falling on a Friday, we’ll likely see many take a long weekend anyway to recover from whiplash.

We may also see something similar in the local market today. Some traders will be primed for a big slap-up lunch. Other, former traders will be serving it.

Rudi will connect with Sky Business, through Skype, to chat about broker calls at around 11.05 today.
 

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By Greg Peel

The Dow closed up 256 points or 1.4% while the S&P rose 1.4% to 2169 and the Nasdaq gained 1.2%.

Wrong on both counts

The polls said Clinton would win and the market set itself for such an outcome. The polls were wrong. The assumption was a Trump victory would send global stock markets into a death spiral. Ultimately, that assumption was wrong.

That assumption certainly looked to be accurate early in the afternoon Sydney time, when the ASX200 was down 200 points, the Dow futures were down 800 points, and the S&P and Nasdaq futures were “limit down” and thus suspended. Gold was up sixty dollars and the US ten-year yield was down 14 basis points at 1.72%.

There had been little disagreement a Trump victory would prompt a sell-off in stocks. But there was also general agreement the sell-off would be knee-jerk and not sustained, and that eventually there would be a recovery. Many traders were looking forward to an opportunity to pick up cheap stocks.

Unless they were up in the wee smalls of Wednesday morning US time, they have already missed out. Bolder players in the Australian market had the opportunity to jump in in normal trading hours yesterday as the US stock futures began to turn. The ASX200 still finished down 100 points, but as the bell rang, US futures were still on a recovery path.

Perhaps Brexit taught us two things: don’t trust the polls, and don’t hesitate too long to exploit the sell-off.

There’s no point in discussing who the winners and losers were on the Australian stock market yesterday. The SPI Overnight closed up 157 points this morning.

Wild Reallocation

Wall Street hit a new high before curbing its excitement but it has not been a market-wide rally. Various stocks and sectors moved sharply in either direction last night as traders played on the various policy themes emerging during Trump’s presidential campaign.

The Republicans have won the triple crown. They control the upper house, the lower house and the White House. They have an unrestrained mandate. The gridlock years of the Obama presidency are over.

US industrial stocks surged last night (infrastructure spending, lower tax, cutting red tape), the banks surged (repeal regulations, bond rate surge), drug companies surged (no pricing investigation), hospital stocks plummeted (repeal Obamacare), Big Tech companies, such as your Apples, Amazons and Microsofts, fell (bring taxes back to the US)… the list goes on. A week ago Wall Street was praying for administrative gridlock – Democrat in the White House if needs be but Republicans controlling Congress – and last night they were championing a new horizon of unencumbered economic growth potential.

The US ten-year bond yield has swung from being down 14 basis points at 1.72% to being up 21 basis points at 2.07%. The great bond sell-off Wall Street has been anticipating for years has occurred in a heartbeat. The initial move was a typical safe haven trade, matching a US$60 jump in the gold price to around US$1335/oz. Gold is now back where it started.

The sell-off in bonds likely reflects an assumption economic growth can return to the US, as well as divestment to buy stocks. Interestingly, the assumption was that of Trump were to win, the Fed would not be hiking in December. But that assumption was predicated on the other assumption that right now the Dow would be down a thousand points, not hitting a new all-time high.

Mind you, Trump has won on a policy of cutting taxes (reducing government revenue) and increasing spending (on infrastructure in particular). If, indeed, his supply-side approach does lead to strong growth and increased revenue as a result, it will not happen overnight. In between the US debt burden can only blow out further. Sell bonds.

So what does the Fed do now? The bond market had already set for a 25bps rate hike in December and has now added another 21 bps. The sky has not fallen in, so the Fed does not have the excuse it had with Brexit to wait and watch. And given Trump was highly critical of the Fed in general and Yellen in particular during the campaign, will Yellen even hang around?

Does the assumed rate hike mean anything anymore, now the world has changed completely?

Commodities

Over 24 hours, gold is down US$4.50 at US$1272.10/oz.

Increased US infrastructure spending is music to the ears of commodity producers. Copper rose 3.5% in London, nickel 2.5%, and aluminium 1.5%.

Iron ore has leapt US$3.20 or almost 5% to US$71.00/t, a price last seen in 2014.

West Texas crude is up US32c at US$45.18/bbl.

The US dollar index is 0.7% at 98.51 and the Aussie is down 1.5% at US$0.7653. I’m not sure this is the way Philip Lowe wanted to see the currency retreat. At the height of the fear, the Aussie was trading under US76c.

Today

Today opens to a new world. The SPI Overnight closed up 157 points or 3%.

The RBNZ has just cut its cash rate, citing political upheaval in the US as one factor, albeit the cut was widely forecast before yesterday.

Locally, housing finance data are due today and a raft of AGMs will be held.

Leicester City, Brexit, Footscray, Cronulla, the Chicago Cubs, Trump. When, exactly, did we shift into a parallel universe?
 

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By Greg Peel

The Dow closed up 72 points or 0.4% while the S&P rose 0.6% to 2143 and the Nasdaq added 0.8%.

The Calm

The ASX200 did spike up 30 points on the open yesterday which is hardly surprising given a near 400 point rally in the Dow. But given Australia had responded previously to the FBI news there was no reason to double-count, particularly given the election is yet to be won.

We thus drifted off the opening high in the morning and drifted lower again, back to flat, after the release of China’s October trade data, and there we stayed, ahead of today’s shenanigans.

China’s exports fell 7.7% year on year in October, more than the forecast of a 6.0% drop but less than September’s 10.0% drop. Imports fell 1.4%, more than the forecast of 1.0% but less than September’s 1.9%.

Notably, imports of iron ore, coal and oil were all lower in October than September, likely reflecting surging prices, particularly for coal.

And on that subject, in an effort to crack down on a surge in commodity speculation, three Chinese futures exchanges offering contracts in coking and thermal coal and steel products  last night increased the margins required to be paid to buy those futures contracts, news service MNI has reported.

As a result, thermal and coking coal prices fell 5% and 6% respectively in China, albeit ex-China thermal coal is up 2.5% and iron ore is also up another 1.5%.

As to how the Australian mining sector will respond today is unclear. Beijing is fighting against itself if on the one hand it is attempting to constrain coal production, and on the other is trying to constrain coal price speculation.

The Storm

Wall Street opened a tad lower last night following its big Clinton-driven rebound on Monday night but around 11am when the very, very early election numbers started to trickle in, the Dow shot up 150 points. Once upon a time we would have just waited till the polls had closed to speculate on a result but in this day and age of instantaneous information dissemination, every little fluctuation is being acted upon.

And so it was that news of a Trump court challenge to early voting at a couple of booths in Latino areas had Wall Street drifting back down, until the judge threw out the challenge and Wall Street went back up again. It is probably fortunate the markets actually close before the real numbers start to roll in.

Although futures markets continue to trade, and downunder all focus will no doubt be on the rolling results and on the response in those futures markets throughout the day.

There’s not much more that can be said at this point.

Commodities

West Texas crude is unchanged at US$44.86/bbl.

Copper has technically broken to the upside, and added another 2.5% last night, with short-covering likely now in play. Lead was also up 2% and nickel 1%.

Iron ore rose US$1.00 to US$67.80/t.

The US dollar index had ticked another 0.1% higher to 97.87 but the Aussie is on a tear, adding another 0.7% to US$0.7767 on both Clinton relief and commodity price strength.

Gold is down US$4.50 at US$1281.10/oz.

Today

The SPI Overnight closed up 24 points or 0.5%. As to how accurate this proves will come down to the rolling election results throughout the session and also to how much the market has already baked in a Clinton victory. One has to assume the risk is weighted to the downside, with not a lot more room on the upside on the election in isolation.

China will release October inflation numbers today while locally, Westpac will publish its monthly consumer confidence survey.

No major local earnings results today but a lot of AGMs, including those of Commonwealth Bank ((CBA)), following yesterday’s so-so result, Flight Centre ((FLT)), following its profit warning last week, Fortescue Metals ((FMG)) and Ramsay Health Care ((RHC)).
 

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By Greg Peel

The Dow closed up 371 points or 2.1% while the S&P gained 2.2% to 2131 and the Nasdaq added 2.4%.

As You Were

With the overnight futures pointing down another 29 points yesterday it was looking for all the world like we were set to test the Brexit low in the local market until the timely news from the FBI hit the wires. It seems a stretch that a sufficient number of Americans would swing from Clinton to Trump and back to Clinton again on the whole email charade, but hey, that’s America.

And there’s no denying Trump’s ascendency accelerated when last week the FBI re-opened the case, and no denying global markets did nothing but fall in the meantime. So whatever the case, the FBI news was always going to provide for a reversal. Risk on.

The 1.3% bounce in the ASX200 began from the open yesterday and gradually built further over the course of the session as traders watched the Dow futures rise steeply. The rebound was market-wide, with the stand-outs being healthcare, up 2.0%, energy, up 1.9% despite another fall in the oil price, and the banks, up 1.8% with a little help from a reasonable result from Westpac ((WBC)) and an unchanged dividend.

The yield sectors also managed to rebound and materials gained 0.8% despite the drag from gold miners, which featured heavily in the top ten biggest decliners on the day as the Trump hedge unwound.

From the “Just in case anyone noticed” desk we see that ANZ’s job ads series showed a 1.0% rise in October following a flat September. Job ads are trending at 4.8% annual growth which remains encouraging, although that’s down from 11.4% a year ago.

On the other hand, we also saw Australia’s construction PMI plunge to 45.9 in October from 50.9 in September. Regular readers will know I’m always sceptical of Australia PMIs as they are so, so volatile compared with those of other large economies. However, this one is not hard to accept. Construction contracted in all four segments of the PMI in October – engineering, commercial, housing and apartments.

Engineering is still your mining/gas decline and commercial should see a rebound based on last month’s building approvals data. It is residential that has economists worried, although it appears apartments are still selling like hotcakes in Sydney. The inevitable end of the housing boom will, many economists believe, prompt the RBA back into action.

But for now, it’s all about the soap opera that is the US election. Not that it would be a soap opera anyone would watch – it’s just too ludicrous.

Sympathy For The Devil

The odds of a Trump victory have blown out with the bookies, the Mexican peso has shot up, gold has shot down, the US dollar is up 0.8%, the US ten-year yield is up 5 basis points at 1.83%, the VIX had dropped 16% as traders bail out of option hedges and the Dow is up almost four  hundred. Even oil’s up. We might assume Wall Street does not want to see Trump win.

Indeed, the best possible result for Wall Street under the circumstances now seems the most likely. The devil they know, being Clinton, will be in the White House but the Republicans will control the House, ensuring policy deadlock. That means the government will struggle to interfere and everyone can get on with it.

We might just wait one more night to see whether this actually is the case – hopefully only one more night. If the result is not immediately clear we’ll be heading straight back down again. As we know from Selina Meyer’s experience, an even number of electoral collages means the result can actually be a tie.

From the “Just in case anyone noticed” desk we see that 88% of S&P500 stocks have now reported earnings for a 4% net beat over analyst estimates. While it’s the best result in six quarters, it will be the earnings season that history forgot in the face of one of the most historically compelling elections.

Commodities

Gold is down US$23.10 at US$1281.10/oz.

“Risk on” did not exactly sweep the LME. Bellwether base metal copper is up 2%, which might point to some Clinton exuberance, but nickel’s 6% jump lends more to the pending environmental decision in the Philippines. Aluminium stood still, zinc was up a bit and lead was down a bit.

Iron ore jumped nevertheless, up US$2.10 to US$66.80/t.

West Texas crude is up US68c at US$44.87/bbl.

The US dollar index is up 0.8% at 97.74 which on any other day should have the Aussie tumbling, but on the danger that Trump would pose to the US-Australia alliance and trading partnership the Aussie is up 0.5% at US$0.7714.

Today

The SPI Overnight closed up 10 points. Seems a bit underdone on a 2% Wall Street rally, but then we had first mover advantage yesterday.

There is an election in the US tonight.

While we wait, we’ll see Chinese trade data today and the local NAB business confidence survey.

Commonwealth Bank ((CBA)) will wrap up bank results season today with a quarterly update, while results are due from DuluxGroup ((DLX)) and Incitec Pivot ((IPL)). News Corp ((NWS)) will report quarterly earnings.

Newcrest Mining ((NCM)) and REA Group ((REA)) are among those holding AGMs and Macquarie Group ((MQG)) will go ex.

Rudi will connect with Sky Business later today, through Skype, to discuss broker calls at 11.15am.
 

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By Greg Peel

Two More Days

Another day, another drop for the ASX200 on Friday as Trump continues to rise in the polls and fear begins to seriously grip the market. Heading into the last two sessions ahead of the US election, there is no change on that front. Come Wednesday, we presumably will be looking at either a sharp rebound or a major collapse.

Traders report Friday was not about selling as much as it was about no one willing to buy. Falls were again relatively widespread, although again it appears yields on offer in the telco and utilities sectors have now become rather tempting. Those two sectors held up.

The banks were the worst performer with a 1.6% drop, but a lot of that was National Bank ((NAB)) going ex. Energy was the next worst performer, falling 0.9% as hopes of an OPEC agreement once again fade.

Individually, news of government investigation into price collusion in the US drug industry had Mayne Pharma ((MYX)) plunging 16%, while a profit warning from Flight Centre ((FLT)) was worth 8%. Orica bucked the trend on the day, rising 8% on a better than expected earnings report, while gold stocks continue to find support on the Trump hedge play.

The consumer sectors were unsure what to do with Friday’s local retail sales data. Sales rose a better than expected 0.6% in September from August but fell 0.1% in the September quarter from the June quarter. The month on month jump included a spike in food prices that will likely be temporary but otherwise, the bulk of sales represent household items needed to set up all those new apartments.

Eventually the boom in housing will recede. It is this fact that leads many economists to continue to forecast rate cuts from the RBA in the not too distant future, despite Friday’s Statement on Monetary Policy suggesting the central bank is very much on hold.

Record Breaking

The US added 161,000 new jobs in October. The number is a little lower than forecast but not enough to alter assumptions of a December rate hike. Unemployment fell back to 4.9% from 5.0%. Hourly wages rose 0.4% to be up 2.8% year on year, the fastest growth rate since June 2009.

That’s the rate rise confirmation right there.

With jobs proving a non-event, Wall Street was able to concentrate on the matter at hand on Friday night, being Trump. Oil also continued to drift lower, but so did stocks in general. The Dow closed down 42 points or 0.2%, the S&P fell 0.4% to 2088 and the Nasdaq lost 0.9%.

The ninth consecutive fall for the S&P500 represents the longest continuous losing streak since December 1980.

As is the case locally, Wall Street saw earlier selling as nervous investors squared up positions in case the unthinkable were really to occur, and late in the game nobody wants to buy. All we can do now is wait – wait for Wednesday night Australian time, and wait longer still if the result is not immediately clear, and maybe wait even longer if the result is challenged.

A rebound could only be triggered, one presumes, if Clinton is confirmed as victor.

Late Breaking News: The FBI has found no new evidence among emails to warrant charges being brought against Hillary Clinton.

Commodities

West Texas crude slid another US46c to US$44.19/bbl on Friday night.

Base metals were mixed on smallish moves, except for zinc which fell 1.5% and is proving the most volatile of the metals right now.

Iron ore rose US20c to US$64.70/t.

The US dollar index dropped 0.2% to 96.96 and gold is relatively steady at US$1304.20/oz. The Aussie is also relatively steady at US$0.7677.

The SPI Overnight closed down 29 points or 0.6%. Nothing occurred over the weekend to swing the balance. Looks like we might test the Brexit low of 5100 before the week is out. Unless the FBI news makes a difference today.

The Week Ahead

US election results will roll in over the course of Wednesday in Australia.

It’s otherwise a quiet week for US data releases. The US earnings season is now also winding down. Friday is Veterans Day in the US, which is one of those half-holidays that sees banks and the bond market shut but stock and commodity markets open. Falling on a Friday this year, you can be guaranteed it will be a long weekend for most.

Wall Street might need a holiday by then.

China will release October trade numbers tomorrow and inflation numbers on Wednesday.

The RBNZ will hold a policy meeting on Thursday.

Australian data releases this week include ANZ job ads and the construction PMI today, the monthly NAB business confidence survey tomorrow and the Westpac consumer confidence survey on Wednesday. Thursday brings housing finance numbers.

On the local stock front, Westpac ((WBC)) will post its earnings result today, as will DuluxGroup ((DLX)) and Incitec Pivot ((IPL)) tomorrow. Commonwealth Bank ((CBA)) will provide a quarterly update tomorrow and News Corp ((NWS)) quarterly earnings.

It’s another busy week for AGMs. Macquarie Group ((MQG)) goes ex tomorrow.

Note that from tomorrow morning, the NYSE will close at 8am Sydney time.

Rudi will appear twice on Sky Business this week, both via Skype, to discuss broker calls. First on Tuesday, 11.15am, then again on Friday, 11.05am.
 

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By Greg Peel

The Dow closed down 28 points or 0.2% while the S&P lost 0.4% to 2088 as the Nasdaq fell 0.9%.

Consolidation

5200 appears to be the next level of support for the ASX200. The index opened at this level yesterday morning, down almost 30 points, before rebounding swiftly. We then meandered along the flatline for the rest of the session before closing at 5225.

The futures are down 25 points this morning, so it looks like 5200 will be tested once more.

At that point the index is down 7% from the 5600 high at the beginning of August, reached in the post-Brexit rebound. The overreaching theme in that period has been expectations for a US interest rate rise sounding the end to the “search for yield” frenzy that saw many a bond proxy stock become overvalued. Also overvalued were many of the former market darlings among more defensive industries and a lot of new world growth stocks.

So we have consolidated. Where to next will be determined initially by the result of next week’s presidential election.

Behind the scenes the Australian economy is doing okay, despite the most dysfunctional government since…well… the previous one.

Australia’s trade deficit was predicted to narrow in September thanks to the surge in coal prices, but at $1.2bn the deficit was much narrower than the $1.7bn forecast, down from $1.9bn in August. Exports rose 1.6% and imports fell 0.8%.

Among commodity exports, coal rose 12.1% and metals 13.7% while agricultural exports chimed in with a 5.0% gain. Exports of services rose 0.5%, which was largely driven by inbound tourism which was largely driven by the Chinese.

Coal prices have continued to rise and given the lag between delivery contract prices and spot prices, export prices are still playing catch-up. Hence October is expected to show another solid improvement in the trade balance, perhaps even a surplus.

It’s all good news for the federal budget bottom line, and no doubt a welcome relief for Scott Morrison when everything else appears to be in a mess. As long as Mr Morrison doesn’t start taking the credit.

Losing Streak

Wall Street has now extended its run of losses to eight consecutive days – the longest losing streak in five years. It hasn’t been overly dramatic, rather representing an underlying nervousness.

Yesterday I posed the question as to what Wall Street would do if Trump wins. Of course we should also consider what might happen if Clinton wins, which is still the expected result but with less conviction than previously.

We can in fact break it down into three scenarios: Trump wins; Clinton wins but the Republicans retain the House; Clinton wins and the Democrats take over the House.

Wall Street does not want Clinton to win, but would rather Clinton wins than Trump. The best result is a Clinton victory and a Republican House – that way the Democrats will not be able to pass any damaging social reform-style legislation nor sign the Trans-Pacific trade partnership (although Clinton’s not keen on the TPP anyway) and Congress will remain in the same stalemate it has been in throughout Obama’s second term.

The less the parliamentarians can do to move the goal posts the better off the free market will be.

It would be a disaster, Wall Street believes, were the Democrats to take both the White House and the House of Reps. Indeed, it might be said Wall Street would prefer a Trump victory over this scenario.

So next week we’ll either see a big sell-off on two possible scenarios (albeit the Democrats taking the House would require a significant landslide) or, presumably, a solid rebound on the one scenario that at this stage appears the most likely, while far from confirmed.

Meanwhile, oil fell again last night, but there was a raft of positive data releases including the services PMI, factory orders and September quarter productivity that again pointed to a US economy moving steadily along, and again pointed to the Fed raising next month.

Despite the positive data, last night saw Wall Street attempt to rally from the open but gradually fade away to a slightly weaker close.

Commodities

The US dollar index has slipped another 0.3% to 97.12, but a jump in the pound last night helped as the Bank of England hinted that the next policy move might actually have to be a rate rise if inflation begins to take hold.

We’ve also learned this morning the UK High Court has ruled that the government needs parliamentary approval to trigger Brexit. This could be interesting. Brexit was a popular vote, but what was the burough count? Presumably members could justify ignoring the “will of the people” and vote against Brexit if their own borough voted to stay.

Having broken technical support, West Texas crude is down another US85c at US$44.65/bbl.

Zinc rose 2% on the LME last night, and copper and nickel around 1%. Lead fell 1%.

Iron ore rose US10c to US$64.50/t.

Gold’s rise continued, up another US$5.20 to US$1302.80/oz.

The Aussie is up 0.3% at US$0.7682.

Today

The SPI Overnight closed down 25 points or 0.5%.

Retail sales numbers are due locally today and the RBA will release its quarterly Statement on Monetary Policy.

Tonight in the US sees the second last jobs report before the December Fed meeting.

On the local stock front, Orica ((ORI)) will release its earnings result today and National Bank ((NAB)) will go ex-dividend.

Note that summer time ends in the US on the weekend so as of Tuesday morning, the NYSE will close at 8am Sydney time.

Rudi will connect with Sky Business through Skype to discuss broker calls on air, probably around 11.05am.
 

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By Greg Peel

The Dow closed down 77 points or 0.4% while the S&P fell 0.6% to 2097 as the Nasdaq dropped 0.9%.

Say it isn’t so

The ASX200 plunged 60 points from the open yesterday. The market is not in a positive mood, buyers are in hiding, and the last thing investors want to hear is that Donald Trump may be in the ascendancy. The world fears the thought of Trump with the launch codes. America’s trading partners, of which Australia is one, fear a return to a protectionist regime.

Buyers did come out of hiding late morning, staging a small recovery up to midday. But they stood aside again as another wave of selling hit, waiting until the index was down over 80 points before moving back in once more.

The second wave may have been inspired by the release of yesterday’s building approval numbers for September. On face value, a fall of 8.7% does not look encouraging for an economy reliant on housing construction to lead the transition from mining investment. But digging down, there are some positive signs.

Apartment block approvals fell 17.5%. It is generally agreed we are at risk of apartment oversupply in the major capitals. Yet while approvals have now peaked and are falling, down 4.4% year on year, the time it takes to complete an apartment block ensures construction will remain an economic driver for some time yet.

Non-residential approvals have near doubled year on year to September. Over the past few years that housing has been the economy’s primary driver, commercial construction has been missing in action. Just as investment in infrastructure is quietly taking the baton from investment in the resource sectors, commercial construction (office, retail, hotels) can help offset the inevitable decline of housing.

Not that anyone was much in the mood to dig down into the detail of the building approval numbers yesterday. The oft heard expression at present is “sell first, think about it later”. This is the approach being taken globally to Donald Trump’s rise in the polls.

Selling was once again relatively sector-wide yesterday, with a couple of exceptions. Firstly, the rally in gold, also Trump-related, meant gold miners dominated the ASX top ten gainers yesterday, and countered the fall in materials. Secondly, for the second day running, utilities managed a small gain against the tide.

It would appear investors have decide that the long, hard fall in bond proxy stocks have taken yields to levels that sufficiently compensate for rising global interest rates.

The biggest individual gainer on the day was CSR ((CSR)), following a better than expected earnings result.

Bring on December

The FOMC last night voted 8 to 2 not to hike, yet. No one was surprised. The computers went a bit nuts for a few minutes as usual, but Wall Street was a little more positive, while still in negative territory, following the afternoon statement release.

“The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of further progress toward its objectives.”

In other words, we’ll hike next meeting. December is a quarterly meeting, meaning the FOMC members will update their forecasts – the infamous “dot plots” -- and Janet Yellen will hold a press conference. It was Ben Bernanke who introduced the quarterly press conference in order to improve Fed transparency. The result is Wall Street now assumes any policy changes will only occur at these meetings, not at interim meetings.

And not before a presidential election, although the Fed will always deny this influences their decision. And never before has the Fed been faced with the likes of The Donald.

Trump continues to dominate the mood. While a further fall in the oil price helped Wall Street lower last night, the session was choppy and not as dramatic as Tuesday night. What does seem clear as that while selling is yet to accelerate, there is not a lot of interest in buying right now. Last night the Dow closed below 18,000 and the S&P500 below 2100 for the first time since Brexit.

What is a Trump victory worth? Five hundred down in the Dow? One thousand down in the Dow? Such questions are now being pondered.

Also being pondered is if there were a big Trump-driven sell-off in markets, would the Fed hold off in December, regardless of the economic data?

If Wall Street is not yet completely panicking, investors are continuing to move into gold as a safety hedge. The US dollar index is down another 0.4% at 97.42 this morning and gold has jumped another US$9.50 to US$1297.60/oz.

The more direct measure of Trump fear at present is nevertheless the Mexican peso. Having gradually clawed back ground after Clinton was considered victor after each of the three debates (except by Fox News), the peso has tumbled once more.

Commodities

The weekly US crude inventory lottery this week showed a record jump in stockpiles. To put it in perspective, a 14m barrel build when a 2m barrel build was forecast. Analysts had been waiting for an increase following a couple of weeks of surprise drawdowns, but they did not see this coming.

Even more surprisingly, the sudden jump was not about more US shale oil rigs firing up again on better oil prices, but on a big jump in imports. Go figure. It is probably also surprising West Texas crude fell only US$1.27 to US$45.50/bbl, particularly given hopes of an OPEC agreement are now waning.

Lead took the spotlight on the LME last night in jumping 2%. Zinc fell 1.5%.

Iron ore was unchanged at US$64.40/t.

The fall in the greenback may otherwise have ensured a rise in the Aussie, but the Aussie dropped yesterday following the weak building approval numbers. It’s steady over 24 hours at US$0.7656.

Today

The SPI Overnight closed down 16 points or 0.3%.

It’s service sector PMI day across the globe today and in Australia we’ll also see trade data. Japan is closed today and the Bank of England will hold a policy meeting tonight.

After a couple of quiet days, the local AGM season gets back into full swing today. We’ll also see a quarterly update from REA Group ((REA)), earnings results from BT Investment Management ((BTT)) and Xero ((XRO)) and the biggie, ANZ Bank’s ((ANZ)) full-year.

Rudi will be interviewed by Peter Switzer on Sky Business tonight, between 7-8pm.
 

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By Greg Peel

The Dow closed down 105 points or 0.6% while the S&P fell 0.7% to 2111 and the Nasdaq lost 0.7%.

Fluctuating Fortunes

On a day when most of the market was meant to be otherwise distracted, it was a very up-and-down session on the local bourse yesterday.

The ASX200 plunged around 45 points on the open to near the 5270 mark, suggesting Monday’s rally was indeed all about window dressing after a torrid month. We then saw a very choppy morning.

At midday the index was again down near 5270 when the Chinese PMI data came out. These were good enough for a 20 point recovery. Then the RBA statement came out and suddenly we were back at 5270 again. A sharp rally in the last half hour ensured a return to 5290.

Beijing’s official manufacturing PMI for October came in at 51.2, up from 50.3 in September, to mark its highest level in two years. Caixin’s independent measure usually shows some variation but it, too, came in at 51.2, up from 50.1. Beijing’s official service sector PMI saw a gain to 54.0 from 53.7.

All is heading in the right direction in China, it would seem.

Few expected the RBA to cut the cash rate yesterday afternoon and indeed the rate remains on hold at 1.50%. But the language of Philip Lowe’s statement had the market believing that there isn’t going to be another rate cut at all. Some excerpts:

“The Bank's forecasts for output growth and inflation are little changed from those of three months ago. Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years.”

“The rate of increase in housing prices is also lower than it was a year ago, although prices in some markets have been rising briskly over the past few months. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.”

Add a “strengthening” economy to “briskly” rising house prices and apartment oversupply, and a very good argument could be made that the RBA should start hiking, now.

No surprise therefore that the Aussie rose as high as US$0.7680 in evening trade.

It is a surprise the only sector to finish in the green yesterday, just, was utilities. The telcos were worst hit, down 1.8%, and a 0.5% drop for the banks provided the bulk of the index downside. Otherwise, selling was again rather evenly spread amongst sectors.

It looks like we’re in for another weak session today, with the futures suggesting a 36 point drop. The only bright spot might be the response to a ten dollar rally in gold.

Why would gold rally?

Be Very Afraid

One poll now has Donald Trump a point ahead of Hillary Clinton. The response was wholesale selling of the US dollar, stocks and bonds.

The Dow did manage a late recovery to be down only a hundred points, having been down two hundred points earlier in the afternoon. The US ten-year bond yield jumped to 1.87% before falling back to 1.82%. The US dollar index has fallen 0.6% to 97.77, which is why gold is up US$10.00 at US$1288.10/oz.

Other polls still have Clinton in the lead, but the margin continues to reduce. Whichever way you look at it, Trump has the momentum heading into the last week. Can we take any comfort in the fact “stay” had the momentum in Brexit polling right up to the vote?

Wall Street is certainly not feeling comfortable. Never mind that the US manufacturing PMI showed an encouraging gain to 51.9 from 51.5.

The Fed will release a policy statement tonight. Strength in the PMI is yet another reason to assume the Fed will hike in December, but there is little expectation of a hike tonight given the election will be held next Tuesday night. And we get another jobs report on Friday night.

One reality we might now assume is that if Trump does win the election – and right now you’d have to say it appears to be a coin toss – the correction many have long been waiting for on Wall Street could arrive in a hurry.

Commodities

West Texas crude is US7c lower at US$46.77/bbl.

Copper jumped a percent on the LME last night, while the other metals trod water.

Iron ore rose US60c to US$64.40/t.

Despite the US dollar index falling sharply after the Aussie had already rallied on the RBA statement, the Aussie is now only up 0.5% at US$0.7650.

Today

The SPI Overnight closed down 36 points or 0.7%.

Building approval numbers are out today locally.

The US sees the ADP private sector job number as well as the Fed statement tonight.

CSR ((CSR)) will post its earnings result today.

Rudi will appear on Sky Business today, instead of his usual appearance on Thursday; 12.30-2.30pm.
 

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By Greg Peel

The Dow closed down 18 points or 0.1% while the S&P was flat at 2126 and the Nasdaq was also flat.

End of Month

Investors do really like putting the month of October to bed each year, it's not being the historically weakest month of the year – that’s September – but the month most prone to sharp bouts of volatility. To get it out of the way is a relief, and yesterday it appeared a relief trade was in play.

In the morning the local market looked as if it was set to go nowhere, which is unusual for an end of month session in which profit-taking/loss cutting and window dressing are typically evident. But sure enough, from lunchtime things started to move. A steady rally ensued for a close of up 33 for the ASX200.

A market-leading 1.7% gain for the utility sector is the give-away – this bond-proxy sector has had a shocker this past month on US rate rise assumptions. Similarly we saw gains in telcos and healthcare, and the banks managed to struggle higher as well. These are the sectors that have been steadily sold off. Materials made a comeback after the Sell Australia trade of last week, while a 0.3% drop for energy is likely a bit too timid. Oil prices are off 4% overnight.

Star of the day was lithium producer Orocobre, which shot up 20% for no immediately obvious reason. The company put out a September quarter production report that actually disappointed but suggested a trend in the right direction after earlier difficulties. The stock has slid a long way from its July peak, set on lithium price exuberance, and with Macquarie and Deutsche Bank both reiterating their Buy ratings yesterday (not upgrading, as other reports have suggested), someone or ones piled in.

Peer Galaxy Resources ((GXY)) was dragged up 6% in the updraught.

Having wrapped up October, traders will likely look to a benign session on Wall Street and the fact this First of November happens to be a Tuesday as an excuse to do very little today. There will be a wary eye kept on the RBA but the odds of a rate cut are considered very low. If the RBA does happen to cut it might ruin a few Cup plans.

Cautious

I say that a 0.3% drop for the local energy sector yesterday seemed timid because with no agreement being reached at the OPEC meeting held over the weekend, it was a pretty sure bet oil would take a tumble last night. And sure enough, WTI is down 4%.

This provided one element of weakness for Wall Street last night, and Hillary Clinton provided the other.

Wall Street remains concerned the reopened FBI investigation into the Clinton email scandal will mean the unthinkable may transpire. And while the latest polls suggest the new investigation has not changed voters’ minds at this late stage, Trump has closed the gap to a level of statistical margin for error nonetheless. At least, in one poll. Others say differently.

On the flipside, US personal spending rose a better than expected 0.5% in September – the biggest increase since June. Incomes rose 0.3%. The headline personal consumption & expenditure (PCE) inflation measure rose 0.2% to mark a two-year high annual rate of 1.2%.

The core rate that the Fed likes to watch rose 0.1% for 1.7%, unchanged from August. But the bottom line here is that this important data set further cements the likelihood of a Fed rate hike in December.

Wall Street now expects such a hike and is ready for it. On that basis, anything that might upset that assumption in the meantime, and introduce renewed uncertainty, would likely upset investors.

It was end of month for Wall Street last night and while a little choppy, it was uneventful. The bad news of oil and Clinton was countered by the good of increased spending and greater Fed certainty. Unlike the Australian market, which has taken a tumble, Wall Street has only edged modestly lower of late. The earnings report run-rate continues to be positive but there are too many events to get through before making any new major investment decisions. The election now being the most obvious source of uncertainty.

Which is why no one much expects the Fed to raise on Wednesday night, ahead of the election next week and the October jobs report on Friday.

Commodities

West Texas crude is down US$2.05 at US$46.70/bbl.

Glencore announced yesterday it would put a zinc mine in Mt Isa under care & maintenance. While this is due to the current reserve having been mined out, rather than low zinc prices – zinc has been the best performer amongst the base metals this year – the zinc price on the LME still jumped 3% last night. The only other move of note was a 1% gain for aluminium.

Iron ore rose US70c to US$63.80/t.

The US dollar index is steady at 98.34 and the Aussie is 0.1% higher at US$0.7611 as we await the RBA decision.

Gold is up US$3.20 at US$1278.10/oz.

Today

The SPI Overnight closed down 9 points. Oil will have been the influence.

It’s manufacturing PMI day across the globe today including in Australia, while Beijing will release both the official Chinese manufacturing and service sector PMIs.

In Australia we’ll also see house prices, ahead of the rate and the race. Victoria is shut for business.

The Bank of Japan also holds a policy meeting today but given the tweaks made at the last meeting, nothing untoward is anticipated.

There are no local corporate events today, funnily enough.

Rudi will connect with Sky Business, through Skype, at 11.15am to discuss broker calls.
 

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(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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