Overnight: Glittering Passage

The Dow closed down -37 points or -0.2% while the S&P lost -0.3% to 2681 and the Nasdaq fell -0.4%.

Lift Off

The promise of pending US tax reform was the catalyst the Australian market needed to finally break away from the pull of 6000 with a degree of conviction. The market opened to the upside from the opening bell yesterday and thereafter followed a steady upward trajectory to the close.

The star sector of the day was materials, up 1.4% on stronger overnight commodity prices. One need only look at yesterday’s leaders board to appreciate the “new world” theme to recent sector moves. Atop the table was Lynas (rare earths), followed by Syrah (graphite), Orocobre (lithium) and Saracen (gold/nickel).

Beyond materials, sector moves were largely consistent in magnitude, suggesting market-wide buying. The only sector not to join in was the mixed bag that is industrials, which in particular has been dragged down by a surprisingly negative draft access decision from the Queensland regulator provided to rail haulage company Aurizon ((AZJ)), sending the stock sharply lower these past two sessions.

Consumer discretionary was among the winners despite another substantial fall for embattled Retail Food Group ((RFG)), to the tune of -25%. RFG has now fallen -55% since Fairfax released the first of its three-part expose on the company’s treatment of franchisees.

Residential aged care stocks were amongst the losers yesterday. Japara Healthcare ((JHC)) warned of lower occupancy rates at its update yesterday sending its share price, and the share prices of peers Estia ((EHE)) and Regis ((REG)), lower.

But the healthcare sector still managed a 0.5% gain yesterday.

If last week was a week of uncertainty on the markets, reflected in the ASX200 banging around the 6000 level unable to break away, this week so far has been one of relief. The Fed hiked as expected last week but guidance was not overly hawkish. An Australian political deadlock was avoided when the pin-up girl lost in the tie-breaker. US tax reform, which so easily could have been stalled in negotiation for months, has suddenly been rushed through.

It’s beginning to look a lot like Christmas, and once past derivative expiry tomorrow, the glasses will be raised on what has been a frustrating but ultimately positive year for Australian equities.

Unless, of course, the final piece of the tax reform puzzle falls into place later today local time – passage in the Senate – and tonight a big “sell the fact” response transpires on Wall Street.

The local futures are down -22 points this morning.

Bring It

The US tax reform bill sailed through the House last night despite twelve Republican representatives voting against it, alongside all of the Democrats. They are all from states with the highest state taxes and fear a mass population exodus now state taxes will not be deductible from federal tax.

There is not expected to be any dissenters in the Senate, which as I write is preparing to take the bill to a vote – the final vote. The Democrats are expected to use up all of their allowable five hours of debating time assigned ahead of the vote, while the Republicans are expected to get on with it quickly rather than bang on for five hours themselves.

Thus it is possible the bill will be passed before the ASX closes for the day.

A couple of weeks ago it was considered unlikely we would have reached this stage before Christmas. By last week, it looked inevitable that we would. Wall Street responded by rallying ever further.

On Monday night, when it was announced the bill would go to the House last night, Wall Street rallied but drifted back at the close. Last night, Wall Street closed lower, albeit mildly so. What will happen tonight, when the bill passes in the Senate?

If there is a “sell the fact”, commentators do not believe it will be substantial. There are too many buyers lined up at lower levels and at the end of the day, tax reform is a positive for the US economy. But Wall Street has run a very long way to this point.

While the US equity market’s response last night may have been muted, it was not the case in US bonds. Indeed, in global bonds. The US ten-year yield jumped 7 basis points to 2.46% — a move basically “permitted” by the German ten-year bund yield jumping 7bps to 0.38%.

Equity markets have been pricing in US tax reform all year. Bond markets continue to be hamstrung by QE in Europe and Japan. If global long yields are now starting to rise, 2018 could be the year the global market has been waiting for when rates truly do start rising from their GFC depths, led by the US, as was anticipated for both 2016 and 2017.

The US dollar, on the other hand, remains stuck in the mire. The dollar index is down -0.3% at 93.44.

Commodities

Aluminium rose 1% in London but the other base metals were quiet.

Iron ore fell -US90c to US$73.50/t.

Gold is steady at US$1261.60/oz.

The oil market appears to have gone to sleep, with West Texas crude up US37c at US$57.46/bbl. We await US inventory data over the next couple of sessions.

The Aussie is -0.1% lower at US$0.7664.

Today

The SPI Overnight close down -22 points or -0.4%.

It’s a non-event day for local economic data and for scheduled corporate events, bar monthly traffic stats from Sydney Airport ((SYD)).

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.

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