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Overnight: Inflation Tales
BY GREG PEEL - 01/02/2018 | VIEW MORE ARTICLES FROM FNARENA NEWS

 

World
DJIA 26149.39 + 72.50 0.28%
S&P500 2823.81 + 1.38 0.05%
Nasdaq Comp 7411.48 + 9.00 0.12%
S&P500 VIX 13.67 – 1.12 – 7.57%
US 10-year yield 2.72 – 0.01 – 0.22%
USD Index 89.10 – 0.10 – 0.11%
FTSE100 7533.55 – 54.43 – 0.72%
DAX30 13189.48 – 8.23 – 0.06%
SPI Overnight (Mar) 5981.00 – 1.00 – 0.02%
S&P ASX 200 6037.70 + 14.90 0.25%

By Greg Peel

Rate Support

I suggested yesterday that were the ASX200 to fall in synch with Wall Street following the big drop in the US it would be a case of blind panic, rather than an appreciation that Wall Street has soared in 2018 and we haven’t. Sure enough, we opened down around -30 points and breached 6000, but held just below.

Then came the CPI data.

The headline CPI rose 0.6% in the December quarter, as it had done in the September quarter, to annual rate of 1.9%, up from 1.8%. Consensus had a 0.7% rise to 2.0%. The core rate rose 0.4%, as it had done in September, to be unchanged at 1.8%. This is the rate for which the RBA has a 2-3% target zone.

The result was a bit noisy, given the ABS has reweighted the segments in the calculation. But the bottom line is those expecting an RBA rate rise sometime soon no longer do, and those assuming a hike in 2018 believe it won’t be till late in the year. Weak inflation notwithstanding, the US dollar is not doing what it’s supposed to do – rise on rising Fed rates and a stronger US economy – hence the Aussie is much higher than the RBA would like. A rate hike would only make things worse.

The stock market turned on the news and then continued to rally back through the afternoon, likely drawing in bargain hunters following after the 6000 level held. The resource sectors were the drag on the day due to weaker commodity prices, with energy down -0.9% and materials -0.2%, while every other sector finished in the green.

Aside from weaker commodity prices, the resource sectors were likely also impacted by a weaker than expected Chinese manufacturing PMI. It fell to 51.3 in January, down from 51.6 in December and below 51.5 forecasts. The services PMI nevertheless rose to 55.3 from 55.0. Beijing would not be disappointed with these numbers.

The local healthcare sector managed a 0.6% gain yesterday, despite dominant CSL having a down-day. A takeover bid and subsequent 45% pop for Sirtex Medical ((SRX)) was the driver. Could this open the door for more healthcare M&A? Australian Pharmaceuticals ((API)) got the silver with a 4.2% gain and Sigma Healthcare ((SIG)) the bronze with 4.1%.

The winning sector on the day was telcos, up 1.9%, given Telstra ((TLS)) rose 1.9%. The comeback continues for big cap and despite Telstra not paying the sort of dividends it used to, it still offers an attractive yield when rates are lower for longer. By the same token, utilities rose 0.4%.

Month-End

Boeing reported its December quarter earnings last night and blew forecasts out of the water, sending the stock up 4.4%. That’s 120 Dow points, in a session in which the Dow closed flat.

Apropos of recent Dow discussion in this report, I have noted that at around US$350, Boeing’s share price is the largest in the Dow and hence the most influential in the price average. The biggest company on Wall Street – Apple – trades at only $167. Hot on Apple’s heels in market cap is Amazon, which is not in the Dow. One might expect at the next adjustment, Amazon would have to be included on a size basis, but it trades at $1450.

That’s four times the price of Boeing and ninety times that of GE. Were Amazon in the Dow, the Dow would simply be Amazon. Time for a stock split?

The Dow was up 260 points early on in the session with Boeing helping to spark renewed buying after two sessions of selling. The president’s State of the Union address the night before was considered uneventful, when it could have been typically Trump-crazy, so that was seen as a positive.

The indices then drifted off somewhat ahead of the release of the Fed statement.

“Market-based measures of inflation compensation have increased in recent months,” said Janet Yellen as she bad farewell. This is the first time an “increase” in inflation expectations has been noted, and hence Wall Street took the statement to be, at least mildly, hawkish.

The market now has the chance of a March rate hike at over 90%, and hikes in June and December at over 50%. There is a 20% chance of a fourth hike in there somewhere. This statement did not take a fourth hike off the table.

Wall Street then spent the next hour tumbling, all the way back to square. It would be easy to point at a “hawkish” statement as being the trigger, but in fact such an assumption is disproved by sector moves. Banks are beneficiaries of higher rates, for example, and they closed lower. Utilities are losers from higher rates, but they closed higher.

General consensus suggests Wall Street gave up all of its gains in the afternoon for the same reason as significant selling was seen on Tuesday night – end of month rebalancing by pension funds that have to reduce their equity weightings to account for January’s extraordinary gains. When that selling was exhausted, a late rally was sparked.

The tell-tale will be tonight when, it is presumed, pension fund selling will have disappeared

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1346.50 + 9.40 0.70%
Silver (oz) 17.29 + 0.21 1.23%
Copper (lb) 3.18 + 0.00 0.07%
Aluminium (lb) 1.00 + 0.01 0.52%
Lead (lb) 1.18 0.00 0.00%
Nickel (lb) 6.09 + 0.01 0.22%
Zinc (lb) 1.62 + 0.01 0.45%
West Texas Crude (Mar) 64.78 + 0.40 0.62%
Brent Crude (Apr) 68.90 + 0.38 0.55%
Iron Ore (t) 73.10 – 0.40 – 0.54%

Nothing much of note here expect for gold. If the Fed is more hawkish, we should have seen the US dollar rise and pressure the gold price. But yet again the US dollar index has fallen, down -0.1% to 89.10, so gold has jumped up again.

The Aussie is -0.3% lower at US$0.8057 thanks to the CPI.

Today

The SPI Overnight closed down one point.

Everyone else’s manufacturing PMI is due today, including Caixin’s take on China.

Locally we’ll also see building approvals.

On the local stock front, with resource sector quarterlies all done and dusted by month-end, it’s the calm before the storm.

The Australian share market over the past thirty days…



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The content of this information does in no way reflect the opinions of FN Arena, or of its journalists. In fact we don't have any opinion about the stock market, its value, future direction or individual shares. FN Arena solely reports about what the main experts in the market note, believe and comment on. By doing so we believe we provide intelligent investors with a valuable tool that helps them in making up their own minds, reading market trends and getting a feel for what is happening beneath the surface. This document is provided for informational purposes only. It does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. FN Arena employs very experienced journalists who base their work on information believed to be reliable and accurate, though no guarantee is given that the daily report is accurate or complete. Investors should contact their personal adviser before making any investment decision.

 

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