By Greg Peel

The Dow closed up 15 points or 0.1% while the S&P rose 0.1% to 2139 and the Nasdaq fell 0.2%.

What Goes Up

Tuesday on the local market saw a rally led entirely by the resource sectors as China came back from holiday to buy up bulks and metals and Russia suggested it would be prepared to join with OPEC in oil production cuts. On Tuesday night the Dow fell 200 points for a number of reasons – one of them being a pullback in the oil price and another being a big miss on earnings from Alcoa.

I thus suggested in yesterday’s Report we would probably see the opposite yesterday, and indeed the only stand-out moves among the sectors yesterday was a 1.1% drop for materials and a 0.9% drop for energy.

But it was a lot worse early in the session. The ASX200 traded down as many as 46 points, led by resources, before the cavalry came over the hill and quickly pushed the index back up again to a fairly benign close. Aside from bargain hunting among resources, the banks managed to close on a slight positive and the early guide to AGM season appears to be one of capital management will buy you a bid.

Telstra’s ((TLS)) seen a bit of a revival since its AGM and yesterday CSL ((CSL)) confirmed its buyback, ensuring telcos and healthcare provided the offset yesterday against weak resources.

Consumer discretionary managed a slight gain. We might have expected more on the back of Westpac’s monthly consumer confidence survey showing a 1.1% index increase to 102.4, to mark three straight months of improvement, at a time the tinsel is going up and the muzak is becoming nauseatingly festive.

I made mention yesterday of general agreement among stock analysts that the housing boom is set to shortly cool and thus act as a drag on the economy, albeit there is disagreement about the timing. Market indicators such as finance, approvals and auction clearances are still positive but starting to now ease off.

Westpac’s survey yesterday nevertheless showed a 1.6% gain in the month in a sub-segment of expectations for rising house prices, to be 12% higher year on year. The proportion of respondents who think now is a good time to be buying a house has also been on the rise in recent months.

If your Uber driver tells you he’s just taken out a one million dollar mortgage to buy bed-sit in Blacktown, sell!

Shalom

Yom Kippur is not a public holiday in the US but it might as well be on Wall Street. That’s one reason why last night saw light volumes and little more than sideways trade all session, despite Tuesday night’s big plunge.

We may otherwise have expected a lack of activity ahead of the release of the Fed minutes at 2pm, but they failed to produce any excitement either. Basically they didn’t tell us anything we didn’t already know.

The case for a rate rise this year has strengthened, the FOMC believes. Indeed, September was a close call and three of twelve members dissented on the decision not to raise, and much has been made of the fact three is a lot. It was also noted that to not raise once by year-end after having talked rate rises all year, the Fed would lose credibility.

If it hasn’t already. It will still come down to the data, of course, but one presumes they would have to take a sharp turn for the worse to prevent the December hike that 70% of the market is predicting. Otherwise something out of left field is always possible, in Britain or Europe for example or even Russia. But these things we can never predict.

Assuming the majority of the market has now accepted a December hike and positioned accordingly, the focus between now and then is on two major issues – OPEC and the election.

Virtually nobody expects a production cut agreement in November will be reached but virtually nobody wants to take the risk. Hence the real risk is of an oil price tumble post meeting triggering another Wall Street sell-off.

There is the risk of the great unknown were Trump to be elected, but Wall Street has now shifted from being relieved Clinton will likely win to being rather concerned the Republicans could lose the House. Such concern was evident in the US healthcare and biotech sectors last night, which weakened on the fear Obamacare might be here to stay and the new administration will be able to clamp down on drug pricing.

As to how the Fed reacts to any such developments is unclear. The central bank is, of course, independent and apolitical. But it didn’t stop the FOMC overtly claiming Brexit risk as a reason to not to hike in June.

Either way, the US dollar continued to strengthen last night and an auction of ten-year bonds was settled at a lower price, such that the yield is up another 2 basis points at 1.78%. The past couple of months has seen the ten-year yield rise over 20 basis points. What does that tell us?

Commodities

West Texas crude is down US61c at US$50.21/bbl. Unless something is said between now and the OPEC meeting, oil is expected to hang around the 50 mark in the interim.

All base metal prices were positive last night despite another 0.3% rise in the US dollar index to 97.92, except lead, which fell 1.5%. Nickel was otherwise the only metal to gain in excess of 1%.

Iron ore was unchanged at US$56.50/t.

Gold is as good as unchanged at US$1254.10/oz.

The Aussie has bounced back 0.4% to US$0.7565.

Today

The SPI Overnight closed down 14 points or 0.3%, probably influenced by another dip in the oil price.

China’s September trade numbers are due today.

Iluka Resources ((ILU)) and South32 ((S32)) release production numbers today while Orora ((ORA)) and Transurban ((TCL)) are among those holding AGMs.

Rudi will travel to Macquarie Park to appear on Sky Business from 12.30 till 2.30pm.
 

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By Greg Peel

The Dow closed down 200 points or 1.1% while the S&P fell 1.2% to 2136 and the Nasdaq dropped 1.5%.

Erratum

In yesterday’s report I suggested Energy Resources of Australia ((ERA)) is no longer “producing” uranium. I said so in the knowledge the company was drawing upon stockpiles. It was a poor choice of words on my part.

ERA is indeed producing uranium via the processing of stockpiled ore. It is not currently mining uranium ore, which is really what I meant and should have said.

My apologies to ERA, Rio Tinto, and anyone who may have been misled by my semantical error.

Meeting Resistance

Yet again we saw a sharp move in the opening rotation of the local market yesterday and an immediate reversal at 10.30am. The ASX200 hit 5497 before pulling back sharply. But this time investors were keen to have another crack.

At midday the index had pushed back up to 5498, led by the resource sectors, which in turn were led by strong gains overnight in the prices of oil, bulks and metals. But clearly traders have set 5500 as the level to take profits on the rally we have seen from 5200 a month ago. By 3pm we were back to square.

In the final sector breakdown, resources were still the clear winners on the day. Indeed, of the top ten ASX200 up-movers on the day, all ten were either miners, oil & gas producers or companies servicing those sectors. Materials rose 0.9% and energy rose 2.3%.

The flipside saw a mixed bag of down-movers, mostly stocks that not so long ago had been high-flyers, including gold miners. The rout in the residential aged care sector continues, and indeed healthcare proved the worst performing sector on the day with a 0.9% drop.

There will be a few traders breathing a sigh of relief this morning that they had considered 5500 as a good level to take profits.

One theme popular among analysts at present, albeit drawing some level of disagreement on timing, is expectations of a cooling housing market. Housing is very important to the Australian economy given (a) it drives construction earnings, (b) it drives flow-on earnings in household goods and appliances, (c) it underpins bank earnings, and (d), higher house prices imply greater wealth and this makes consumers more confident.

The housing market has recently been the primary driver of the “non-mining” economy, allowing for positive GDP growth despite the ongoing decline in mining investment. That is why analysts are concerned – housing booms don’t last forever.

Yesterday’s data showed the volume of loans to owner-occupiers fell a greater than expected -3.0% in August. Since APRA clamped down on loans to investors, O-Os have picked up the ball and run with it. But now it seems they, too, are starting to back off. Loans to O-Os are -4.2% lower than they were a year ago.

Loans for housing construction rose 3.7% in August but are -1.7% lower than a year ago. We can conclude that the housing boom is indeed cooling, but slowly. Low interest rates continue to underpin.

Australian businesses remain confident, nonetheless. NAB’s survey for September showed a rise in the conditions index to 7.7 from 6.8 and a rise in the confidence index to 5.9 from 5.6. Slightly worrying, however, is a fall in capacity utilisation to 80.6% from 81.0%. After rising steadily over past months, utilisation appears to have peaked out. This does not bode well for ongoing business investment.

Potpourri

Why did Wall Street tumble last night? Take your pick.

Firstly, the rally over the past week has been led by the energy sector thanks to the price of WTI rising back over US$50/bbl, in turn due to talk of an OPEC/non-OPEC production freeze agreement. Last night WTI pulled back a bit. Hardly sinister nor any great surprise, but inevitably the energy sector saw selling.

Secondly, Alcoa reported a September quarter miss on both earnings and revenue and its shares fell 11%. Alcoa is always the first large cap company to report in every earnings season. Once upon a time the Alcoa result was considered an early indicator of how the season as a whole would play out.

Since the end of the commodity super-cycle, this is no longer the case. And Alcoa is not even a Dow component anymore. But with Wall Street heartened by the fact forecasts are for a net S&P500 decline of “only” -2% for the September quarter compared to -6% or more numbers of past quarters, such a weak start is just a little ominous.

Thirdly, Clinton is deemed to have won the second debate. Outside of oil, the swing towards Clinton has been cited as a reason for Wall Street strength given she represents the less dangerous status quo and Trump represents…well…who knows what Trump represents. But for Wall Street, “status quo” includes the Republicans retaining their majority in Congress so as to block anything fiscally unpalatable.

But now, as the Trump campaign quietly disintegrates, Wall Street has begun to fear the train crash may reflect on the Republican party in general, to the point the Democrats could win control of Congress. This has Wall Street worried.

While all of the above are contributing factors, perhaps the underlying macro reason for last night’s sell-off is the most influential.

Central banks across the globe are backing away from ultra-easy policy experiments. But the Fed is one step ahead, looking at a second tightening. Last night the US dollar index jumped 0.8% to 97.65. A strong dollar is not good for America’s multi-national exporters.

The expectation of a Fed rate rise has also had bond yields on the rise, and last night the US ten-year yield rose 4 basis points to 1.76%. This is the top of the range in place since the Brexit shock. If yields break out of the range, Wall Street fears a long-awaited rush to sell bonds may be triggered, sending the ten-year rapidly towards 2%.

That would not be good for stocks. Last night the VIX volatility index on the S&P500 jumped 16%, suggesting investors have again begun to seek downside protection.

So put it all together, and the fact the market was back to full participation last night following Monday’s holiday, and the Dow dropped 200 points – not quite the low of the day but not far off it.

Commodities

Throw a 0.8% jump in the greenback at commodities and price weakness is not hard to explain.

West Texas crude is down US38c at US$50.82/bbl.

Aluminium, copper and nickel all fell between -0.5 and -1% in London while lead fell -2.5% and zinc fell -3%. So much for China’s return.

But China’s return is clearly impacting on iron ore. It rose another US70c to US$56.50/t.

Gold has already had its big adjustment, but on dollar strength is down -US$6.50 at US$1252.90/oz.

The Aussie is down -0.9% at US$0.7538.

Today

The SPI Overnight closed down -45 points or 0.8%. Notwithstanding iron ore, the leading sectors to the upside yesterday may lead the downside today.

Westpac will release its October consumer confidence survey locally today.

With Wall Street on edge over Fed policy, the minutes of the September FOMC meeting will be released tonight.

CSL ((CSL)) will hold its AGM today.
 

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By Greg Peel

The Dow closed up 112 points or 0.6% while the S&P rose 0.4% to 2159 and the Nasdaq gained 0.5%.

All About Rates

As global central banks look to shift away from ultra-easy monetary policy, the scramble amongst global investors to reallocate portfolios is on in earnest. No more was this in evidence than on the Australian stock market yesterday.

Aside from the direct impact of rising US rates or tapering ECB QE on Australian stocks with offshore exposure, rising global rates also eases the need for the RBA to cut further. That “complication” of a too-strong Aussie will be dealt with.

Already the yield-paying sectors have borne the brunt of portfolio reallocation, as investors move away from safety and guaranteed return into growth and risk. Gold is a beneficiary of low global rates, and thus a loser on the flipside. While yesterday did indeed see carnage amongst Australian gold producing stocks, the materials sector was not the biggest loser on the day.

That privilege was reserved for utilities, which suffered another 2.0% drop. Telcos fell 1.1%. The diverse industrials sector contains many a dividend payer and it fell 1.5%. Despite eight of the top ten biggest down-movers on the ASX yesterday being gold stocks, the materials sector clocked up only a 1.4% fall, as other commodities provided some balance.

On the other side of the ledger, the Australian company most leveraged to US interest rates, QBE Insurance ((QBE)), won the day with a 3.4% gain. In a similar position is registry company Computershare ((CPU)), which rose 2.2% against the tide. These moves helped the financials sector to a 0.4% gain to provide some offset. The Big Four banks saw mixed moves.

This new global paradigm is a tough one for Australian banks. US banks rose on Wall Street last night because banks are beneficiaries of rising rates. A steeper yield curve means a bank can borrow cheap and lend dear. But why is the theory not the same for Australian banks?

Well, it should be. But the problem is the local banks pay high yields, so they are under pressure as yield stocks like any other. They also lend most of their money based on short term rates – mortgage rates are based off the RBA cash rate -- and not off the long term government bond rate as they are, far more logically, in the US. RBA rate cuts have provided the opportunity for the local banks to reprice their mortgage books amidst otherwise tepid growth in general credit demand.

Rising global rates are therefore not great news for Australian banks, albeit not a disaster either.

On a more domestic front, yesterday’s August retail sales number showed a 0.4% jump after being flat in July, beating expectations of 0.2%. This provided some balance to the consumer discretionary sector yesterday, given higher rates, or no further RBA cuts, are a headwind for retailers.

The local service sector PMI was also released yesterday, which showed a jump back to 48.9 in September from 45.0 in August. A positive, no doubt, but as I have said often enough, Australian PMIs are so volatile they are pretty meaningless.

Rates and Oil

Not so meaningless is the US service sector PMI, given the US economy is 70% domestic consumption based. It shot up to 57.1 from 54.1 and thus provided further cause for Wall Street to believe a December Fed rate hike is locked in. Or maybe even a November hike, although that is seen as unlikely. Tomorrow night’s non-farm payrolls number could nevertheless be a determinant.

To that end, the ADP private sector jobs number for September came up short, showing a drop to 154,000 new jobs from 175,000 the month before. But as long as non-farm payrolls come in with something reasonable, Wall Street will still assume a December hike.

And that means banks are the stocks of preference. While fears over Deutsche Bank’s survival have not gone away, they have abated somewhat. This has allowed the US banks to regain some lost ground on the back of rate rise expectations. Last night financials were a primary driver of Wall Street strength.

The other primary driver was the energy sector. Financials and energy are the two biggest sectors in the S&P500. Weekly US oil inventory data showed a drawdown last night when a build was forecast. The WTI price shot up to US$50/bbl at one stage before settling just under that level.

Of course it could all come a cropper if two things don’t happen before year-end – a Fed rate hike and confirmation of an OPEC production freeze. And there’s the US election of course. But the question is: were the Fed to stay on hold, is that good or bad for stocks?

On the one hand there are those believing a rate hike would trigger a sell-off, and on the other those who believe a lack of action from the Fed would have markets turning tail on sheer frustration. The fact that Wall Street rallied last night on, in part, rate rise expectation, is evidence that investors are adjusting to the inevitable rather than running scared.

Hence we see the same ongoing portfolio reallocation pattern as is underway in Australia – sell yield, buy cyclicals. Were the Fed not to hike this would all swing back the other way, but it’s hard to see, given the TINA effect, what would actually send Wall Street crashing. Except maybe Deutsche Bank crashing.

Commodities

West Texas crude is up US$1.10 at US$49.73/bbl.

Base metals were steadier last night other than lead and zinc, which both suffered 1.5% falls.

With China absent, iron ore fell US50c to US$54.50/t.

Gold has managed to steady, dropping slightly to US$1267.10/oz.

The US dollar index is steady at 96.15 and the Aussie is steady at US$0.7621.

Today

The SPI Overnight closed up 25 points or 0.5%.

While gold stocks should stop falling today, the rate-related theme otherwise remains the same.

Australia’s August trade data are due out today.

Bank of Queensland ((BOQ)) will release its earnings result.

And it’s the turn of the Westpac and NAB CEOs to be hit over the head with a parliamentary wet newspaper.
 

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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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