Overnight: Awaiting The Fed

World Overnight
SPI Overnight (Dec) 6186.00 + 6.00 0.10%
S&P ASX 200 6185.90 – 1.00 – 0.02%
S&P500 2915.56 – 3.81 – 0.13%
Nasdaq Comp 8007.47 + 14.22 0.18%
DJIA 26492.21 – 69.84 – 0.26%
S&P500 VIX 12.42 + 0.22 1.80%
US 10-year yield 3.10 + 0.02 0.78%
USD Index 94.13 – 0.12 – 0.13%
FTSE100 7507.56 + 49.15 0.66%
DAX30 12374.66 + 23.84 0.19%

By Greg Peel

Oil vs Banks

The ASX200 moved in a 26 point range yesterday only to return to where it started. There was not much action among most sectors but a couple did stand out.

A 2.2% jump for the energy sector suggests investors were a little slow to move on Monday, given the OPEC news that sent the Brent price surging was already known.

The interesting point about the decision by OPEC and friends not to increase production to balance the loss of Iranian exports was not simply a matter of defying president Trump for the sake of it but rather a suggestion the bloc and its partners (Russia) did not actually have the spare capacity to do so. This would suggest oil prices can only go higher still.

How this fits in with the fact oil prices bounced out of the forties and have reached the eighties because OPEC decided to cut production is unclear.

One thing we can note, locally, as anyone who has just filled up at the pump would know (I got a shock yesterday myself), that the combination of rising oil prices and a falling Aussie is beginning to notably cut into household budgets – those already strained by mortgage commitments, utility bills and no wage growth.

Countering energy’s gain yesterday was a -0.7% fall for financials.

A report from ASIC noted yesterday that it takes the banks an average of 1726 days to realise a breach of the banking laws has been made and to do something about it. It is taking the banks an average of 150 days to notify ASIC that a breach has been found when the regulator requires 10.

This would be enough to justify weakness in the sector yesterday but on a wider basis, D-Day approaches. It could be as early as this week we see the delivery of the interim report from the Royal Commissioner. One doubts it will be cheery.

Elsewhere, materials (+0.6%) continued to enjoy more positive metals prices while the selling in CSL ((CSL)) has eased as the Aussie drifts back from its recent high. Healthcare rose 0.5%.

If traders are playing it safe ahead of tonight’s Fed announcement then we could be in for another quiet one today. Tomorrow is a quarterly stock option expiry, although these generate less volatility than SPI/index option expiries, and Friday is the end of the quarter.

What’s notable about this quarter, despite hitting a new post-GFC high in the period, is that unless we see sharp moves in the next three sessions, the index will close as good as flat for the quarter. This suggests no need to lock in profits or window-dress, but we’ll see.

Pull the other one!

Donald Trump informed the UN General Assembly last night, in not so many words, that he was the greatest president in the history of the world. Oh how they all fell about. It was a reaction Mr Trump noted with an uncertain smile that he “wasn’t expecting”.

Trump also stepped up the rhetoric against Iran, as good as branding the country the Evil Empire, before next on the ticket came the Iranian leader, who suggested the door was open for renegotiation of the nuclear deal – the one Trump long ago labelled as the worst deal ever made.

Good luck. The new sanctions come into effect in November.

Energy was unsurprisingly the best performing sector on the S&P500 last night, followed by consumer discretionary. Economists had expected the Conference Board’s monthly measure of US consumer confidence would dip in the latest survey, given the escalating trade war, but instead it rose to the highest level in eighteen years.

Let’s count that back – oh yes, just before the Tech Wreck.

Amazon rose 2% last night, and with Netflix now shifted out of discretionary and into the new communications services sector, the S&P discretionary sector pretty much is Amazon.

The new sector, which includes Netflix, Facebook, Google, media companies and the legacy phone companies, was the third best performing sector and the last to close higher on the day.

The worst performers were the defensive bond-proxy sectors – utilities and REITs – which are back on the slide now the US ten-year bond yield is up at 3.10% and maybe this time will push on through.

But that’s been said more than once this year already. And the year before. And the year before that.

US yields have quietly risen across the curve in recent sessions and the the 2-10 year spread has actually widened slightly, yet US banks just can’t seem to catch a bid. Rising rates and a widening spread should be manna for a bank, but the financials sector has been weak for some time and weak again last night.

It has been noted that among other things, US banks are big lenders to international trade.

The Nasdaq swung back into outperformance last night after one of its now regular brief periods of profit-taking. S&P index rejigging has no impact on the Nasdaq’s make-up. Tech is still tech and the FANGs make up most of the market cap, particularly of the Nasdaq 100.

With both the US stock and bond markets poised, the Fed will release its statement tonight and Jerome Powell will hold a press conference. A rate hike is baked in, but what will be the view on December?

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1200.80 + 2.00 0.17%
Silver (oz) 14.43 + 0.20 1.41%
Copper (lb) 2.81 – 0.02 – 0.79%
Aluminium (lb) 0.91 + 0.00 0.03%
Lead (lb) 0.91 – 0.01 – 1.01%
Nickel (lb) 5.78 + 0.00 0.02%
Zinc (lb) 1.13 – 0.00 – 0.07%
West Texas Crude (Nov) 72.08 – 0.19 – 0.26%
Brent Crude (Nov) 81.53 + 0.09 0.11%
Iron Ore (t) futures 68.62 – 0.06 – 0.09%

Nothing to see here.

The Aussie is down -0.1% at US$0.7247.

Today

The SPI Overnight closed up 6 points.

Fed notwithstanding, Wall Street will also be keeping a close eye on data for durable goods orders and new home sales tonight.

Locally, Blackmores ((BKL)) is among a small handful of stocks going ex, Nufarm ((NUF)) will provide a parched earnings report, and AGL Energy ((AGL)) holds its AGM.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ORE OROCOBRE Upgrade to Equal-weight from Underweight Morgan Stanley
PMV PREMIER INVESTMENTS Downgrade to Sell from Neutral Citi
Downgrade to Hold from Buy Deutsche Bank
RIO RIO TINTO Upgrade to Add from Hold Morgans
RWC RELIANCE WORLDWIDE Upgrade to Hold from Sell Deutsche Bank
SGM SIMS METAL MANAGEMENT Upgrade to Outperform from Neutral Credit Suisse
WHC WHITEHAVEN COAL Upgrade to Buy from Neutral Citi
WPL WOODSIDE PETROLEUM Upgrade to Outperform from Underperform Credit Suisse
WSA WESTERN AREAS Upgrade to Buy from Neutral Citi

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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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