Overnight: Fangs Bared

The Dow closed up 103 points or 0.4% while the S&P lost a point to 2626 as the Nasdaq fell -1.3%.

Punching Through

The ASX200 had no trouble surging through the 6000 level from the opening bell yesterday on Wall Street strength, but if the algos were trying to stir up a technical break-out trade, they failed. The index peaked on the opening rotation and spent the rest of the session drifting back. Up 47 became up 26 by the closing bell.

Having suffered several sessions of weakness on parliamentary inquiry concerns, the banks yesterday took the lead from their US counterparts and rose 0.6%, propping up the index. Materials (+0.7%) and energy (+0.8%) respectively ignored lower commodity prices.

Investors continue to pile into AGL Energy ((AGL)), which yesterday jumped another 3.5% to send utilities up 1.7%.

The other standout was consumer discretionary (1.1%), which has been gaining in momentum ever since Amazon launched. It’s a buy-the-fact trade given many retailers have been heavily beaten down on the Amazon threat, supported by Amazon’s launch being only a soft one to date. Myer ((MYR)) jumped 4.2%.

Where to fund the buying? Healthcare has steadily risen over the past several sessions to provide what is a true defensive option in this market, so yesterday it fell -0.5%. Seek ((SEK)) disappointed with its AGM update yesterday and fell -3.6% to be the worst ASX200 performer on the day, helping industrials down -0.5%.

And Telstra ((TLS)) can’t catch a bid, with telcos down -0.2%.

At 6011 the index is sitting above prior resistance but not optimistically so. The futures are down -7 points this morning on what is a tricky Wall Street session overnight to interpret, with the Dow up again but the Nasdaq slammed.

Following a data-free week to date there is much to absorb on the economic front locally today.

We have monthly data for building approvals and private sector credit due – both proxies for how the housing market is faring – and the biggie is September quarter capex and capex intentions numbers. We might be more introspective today.

Rotation

Last night’s revision of US September quarter GDP came in at 3.3%, above 3.2% consensus expectation, up from the prior estimate of 3.0%, and following on from the June quarter’s 3.1%. Everyone was happy, and the US bond yield rose 4 basis points to 2.37%.

But that was not the main focus of Wall Street’s attention last night.

We recall that earlier this week, Morgan Stanley downgraded its sector recommendation on the chipmakers to Equal-weight from Overweight, citing overblown valuations despite strong growth. The likes of Advanced Micro Devices "AMD", Nvidia and co have rallied 50-100% year to date. Chip stocks wobbled.

Last night they tumbled. Interestingly, aside from the growth story of computer chips being in everything from phones to fridges in the New World, the semi-conductor sector is also highly connected to the boom in crypto-currencies. Having surged through US$10,000 on Tuesday night, last night bitcoin hit US$11,000 early in the session and then proceeded to plunge -20%.

Not sure who is the cart and who is the horse in that relationship.

The chip tumble soon morphed into widespread selling of previously high-flying tech stocks, particularly the FANGs. Having risen steadily throughout the Thanksgiving Black/Cyber period on strong sales, Amazon retreated -2.7%. The mini tech wreck saw the Nasdaq drop -1.3%.

No one was the least bit surprised, and nor was anyone panicked by tech selling. These growth companies have seen their share prices double and triple in some cases in 2017. Leviathan Amazon is up 50%. Market-watchers would not be too surprised if the sector copped a -20% correction, so exuberant has the buying been this year.

And one sector does not make a market. Wall Street did not sell in general last night, it simply rotated out of the winners and into some of the losers. We saw it in Australia yesterday, and last night Wall Street followed suit by piling into beaten-down retailers. Despite all the warnings, bricks & mortar still fared alright in Thanksgiving sales and those dinosaurs have been the reverse story to tech year to date.

Macy’s, for example, was down -27% year to date as Wall Street ploughed on to new highs, but rose 8% last night.

The banks were again sought after, Home Depot was another retailer to perform well, and as the FANGs copped a beating, IBM rose 1%. Hence the Dow again hit another new record. If you can keep your head…

The S&P500 was caught in the crossfire to close flat.

Energy stocks came under more pressure last night as once again the WTI price slipped lower. Doubts are now emerging with regard tonight’s OPEC meeting.

Talk out of Vienna is that while the nine month extension to production cuts being sought by Saudi Arabia will be agreed upon, it will only be done so with a caveat of reviewing the situation after six months, at the time of the next scheduled OPEC meeting. While Putin seems to be on board with the Saudis, Russian oil producing companies are not so keen, and across all of OPEC there is a general concern production cuts are simply providing US shale with a free ride.

Commentators suggest such a caveat would be enough to spark a more substantial pullback in oil prices tonight, given price strength over the past few weeks.

Commodities

West Texas crude is down -US48c at US$57.41/bbl.

Aluminium fell -1.5% in London last night and copper -0.75%, while nickel recovered 1%.

Iron ore rose US20c to US$67.20/t.

Janet Yellen talked up the US economy in her testimony last night, and was supported by the GDP revision. Gold is down -US$8.80 at US$1284.30/oz on rate rise expectations.

The US dollar index is down -0.1% at 93.19 as pound buying continues.

The Aussie is -0.3% at US$0.7580.

Today

The SPI Overnight closed down -7 points.

As noted, local data today include building approvals, credit and capex numbers.

China will release November PMI numbers today.

OPEC will meet tonight.

Aristocrat Leisure ((ALL)) reports earnings today.

Blue Sky Investments ((BLA)) hosts an investor day.

Bank of Queensland ((BOQ)) and Tatts ((TTS)) hold AGMs.

Greg Peel

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

View more articles by Greg Peel →