Overnight: Winner’s Circle

The records were being tallied last night as the S&P, Nasdaq and oil price all posted the best January in decades. Dow down-15, but S&P up 0.8%.

World Overnight
SPI Overnight (Mar) 5818.00 + 14.00 0.24%
S&P ASX 200 5864.70 – 22.00 – 0.37%
S&P500 2704.10 + 23.05 0.86%
Nasdaq Comp 7281.74 + 98.66 1.37%
DJIA 24999.67 – 15.19 – 0.06%
S&P500 VIX 16.57 – 1.09 – 6.17%
US 10-year yield 2.64 – 0.06 – 2.23%
USD Index 95.56 + 0.16 0.17%
FTSE100 6968.85 + 27.22 0.39%
DAX30 11173.10 – 8.56 – 0.08%

By Greg Peel

Running Scared

It should have been a good day on the local market yesterday, and that’s the way it started. The ASX200 was up 26 points in the first hour on the back of a surge on Wall Street, driven by a big shift towards dovishness from the Fed.

But darkness looms.

The government will receive the bank Royal Commission report today and hang on to it until after the ASX close on Monday, so as to avoid share price volatility. A sensible move from the government (did I just say that?), but not one which has avoided volatility ahead of the report release.

Having been carted in 2018, both in micro (RC) and macro (global market weakness) terms, the banks have enjoyed somewhat of a recovery in 2019, with hard-to-ignore dividends on offer. Might be a good idea to take some profits ahead of the report release, for who knows what evils lie within. That’s exactly what’s been happening these past few days.

Yesterday was also the end of the month, so another good reason to lock in and get out. Financials fell -1.5%, and thus turned a 26 point gain for the index into a -22 point loss.

End of month profit-taking was possibly also the story for telcos (-1.6%) given their big pop a couple of days ago, while AGL led down utilities (-0.8%).

It was again left to the resource sectors to carry the can, with iron ore and oil prices continuing to rise. Materials gained 0.9% and energy 1.0%.

The biggest percentage gain was posted by IT, up 2.5%, as it blindly followed the Nasdaq as usual, including Facebook’s aftermarket jump on a positive earnings report. Accounting software firm Xero ((XRO)) leapt 8.8% for reasons unapparent, to top a leaders’ board otherwise dominated by miners.

A miner also topped the losers’ board. Syrah Resources ((SYR)) fell another -10.1% yesterday having fallen steeply the day before. Seems the market is concerned about uncertain graphite pricing and we should note Syrah is the most shorted stock on the ASX, at 17% as of last week.

China didn’t throw the local any bones yesterday either, unless you consider a rise in the Chinese manufacturing PMI to 49.5 in January to be positive. That’s up from 45.4 in December and better than 45.3 expectations but still reflects an industry in contraction, whichever way you look at it.

The good news is the services industry has now grown to be half of China’s economy and the services PMI rose to 54.7 from 53.8.

Today will bring PMI results from the rest of the world.

Wall Street is stronger again. We are awaiting the outcome of US-China trade talks. It’s a Friday. The futures are up 14.

Party like it’s 1989

As I write, Amazon has just reported. The share price is marginally lower in the aftermarket but the stock rallied 3% into the release.

Facebook was the big story last night, having posted its result after the close on Wednesday night. It rose 12%, ensuring the best January for the Nasdaq since 2001.

But the S&P500 has pipped that, posting its best January since 1989. We won’t mention the mini-crash that followed in October that year.

Earnings results continue to flow and continue to be net positive. Last night nevertheless saw a weak result for DowDuPont, which fell -8% and was a major factor in Dow underperformance.

Last night Wall Street was still basking in the afterglow of the Fed statement and Powell’s comments. The Fed’s policy shift is probably timely, given last night’s US data releases.

Weekly new jobless claims have been running at around 200,000 which is the lowest level in some 50 years or so. Last night they jumped 50,000. Seasonal factors have been blamed but that’s a big jump. The Chicago PMI fell to 56.7 from 65.4. Still solid expansion, but that’s a big drop.

Combine the shift in Fed policy and those weak data points, and the US ten-year yield dropped -6 basis points to 2.64% last night. It seems like only a moment ago we were at 3.25% and threatening to break up. But that was before someone said “slowing global growth”.

A lot of that slowing global growth can be put down to the US-China trade war, as China’s PMI attests. Trump is expected to talk personally to the Chinese vice premier Liu He today (our time) and insists he’s keen to do a deal, but expectations have been watered down somewhat ahead of that meeting.

The deadline for the tariff increase is March 1. Before then, Trump wants to reach a deal mano a mano with his good mate Xi. It remains to be seen whether these preliminary discussions take us forward or backwards.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1320.30 + 1.80 0.14%
Silver (oz) 16.01 – 0.01 – 0.06%
Copper (lb) 2.77 + 0.04 1.47%
Aluminium (lb) 0.85 + 0.00 0.54%
Lead (lb) 0.95 + 0.00 0.52%
Nickel (lb) 5.54 + 0.03 0.63%
Zinc (lb) 1.22 + 0.01 0.93%
West Texas Crude (Feb) 53.86 – 0.34 – 0.63%
Brent Crude (Mar) 61.89 + 0.20 0.32%
Iron Ore (t) futures 85.40 + 0.35 0.41%

I noted yesterday that the LME closes just as Fed statements are being released, so last night was the first chance for base metal prices to respond to the big drop in the US dollar that followed.

Speaking of “best January since”, for West Texas crude the next word is “ever”. WTI dipped last night on likely month-end profit-taking following an 18% gain in the month.

The US dollar index bounced back 0.2% last night but it looks like a few shorts still need to be cleared out of the Aussie. It’s up 0.2% at US$0.7264.

Today

With the US government back up and running, at least for the moment, we will see the jobs numbers tonight. Manufacturing PMIs are due across the globe.

Local data releases also include house prices and the December quarter PPI.

January is behind us, and thus too the resource sector production report season. But February is now upon us, so soon we’ll be knee-deep in earnings reports.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AIZ AIR NEW ZEALAND Upgrade to Neutral from Underperform Credit Suisse
Downgrade to Underperform from Outperform Macquarie
AMP AMP Downgrade to Equal-weight from Overweight Morgan Stanley
CCP CREDIT CORP Downgrade to Hold from Accumulate Ord Minnett
CGF CHALLENGER Upgrade to Equal-weight from Underweight Morgan Stanley
DLX DULUXGROUP Upgrade to Outperform from Neutral Macquarie
FMG FORTESCUE Downgrade to Hold from Add Morgans
GUD G.U.D. HOLDINGS Upgrade to Buy from Neutral UBS
GXY GALAXY RESOURCES Upgrade to Outperform from Neutral Credit Suisse
Downgrade to Neutral from Outperform Macquarie
ILU ILUKA RESOURCES Upgrade to Outperform from Neutral Macquarie
NCM NEWCREST MINING Downgrade to Underperform from Neutral Credit Suisse
Downgrade to Hold from Accumulate Ord Minnett
OGC OCEANAGOLD Downgrade to Underperform from Neutral Credit Suisse
Downgrade to Neutral from Buy UBS
RBL REDBUBBLE Upgrade to Add from Hold Morgans
RMD RESMED Downgrade to Lighten from Hold Ord Minnett
SFR SANDFIRE Downgrade to Hold from Buy Deutsche Bank
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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