Overnight: Grinding Higher

By Greg Peel

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Did the Coalition just deliver an election-winning budget? Given the budget is effectively “lame duck” ahead of the election, and parliament is now disbanded, one can only assume yesterday’s stock market response was one which implies this will be the budget we’ll be working with. For while it might be market-friendly, the polls hardly suggest it’s in the bag.

Bill gets his go tonight, so any response tomorrow will be interesting to observe. Tax cuts appear baked in either way, but what Labor confirms with regard negative gearing and other investment issues will be critical. Notably, the banks did not much participate in yesterday’s rally which was otherwise largely market-wide, so there clearly remains some caution.

The budget was delivered into a market already enjoying positive momentum, but the difference yesterday was investors did not sell defensives to buy cyclicals, rather bought everything to varying degrees, except energy (-0.2%). Materials (+1.7%) was back as the standout winning sector, but that was mostly due to a surging iron ore futures price.

Also adding to positive sentiment yesterday were economic data releases.

Helping to underpin the Coalition’s return to budget surplus projection was the February trade balance, which came in at a record surplus of $4.8bn when $3.7bn was forecast. Mind you, it can all be traced back to tragedy in Brazil. The loss of Vale iron ore production meant resource exports increased 11.4% in the month, led by an 11.1% rise in “metal ores and minerals”, which offset coal (-12.7%) and rural (-1.1%) export declines.

Overall exports were flat on the month, with a fall in manufactured goods balanced by travel. Imports declined -4%, largely due to lower fuel exports, which can be lumpy, and work on a price lag that imply higher prices for fuel ahead.

The record was realistically all about iron ore, so hay must be made while the sun shines. It is notable, nonetheless, that the Coalition’s budget surplus projection is based on an iron ore price of around US$50/t, so plenty of headroom there.

The other data release was retail sales, which jumped 0.8% in February when 0.3% was forecast. This restored some confidence after a disappointing December-January, and suggest a tight labour market is helping to offset the “wealth effect” of falling house prices.

Consumer discretionary had a good session (+0.7%) but was still pipped by industrials (+1.0%), healthcare (+0.9%) and telcos (+0.9%).

Among individual stocks, Syrah Resources ((SYR)) jumped 8% for the second day running on the release of its earnings report, while Domain Group ((DHG)) also gained 8% for no obvious reason other than possibly budget related, although REA Group didn’t follow. The company does have a strategic review underway. As of last week Syrah was over 17% shorted and Domain over 6%.

On the loser’s board, Smartgroup Corp ((SIQ)) topped the table with an -8% loss on a big change in directors’ interest.

The ASX200 is now around 50 points shy of the post-GFC high set last August. Can this momentum continue? Well we might note that for the past three sessions the futures have called the market up 30-odd points each morning, and on a net basis have not been wrong, but this morning the futures are up all of one point.

I feel a breather coming on.

Resolution Nigh?

“Ninety percent of the deal is done, but the last 10% is the hardest part, it’s the trickiest part and it will require trade-offs on both sides,” Myron Brilliant, executive vice president for international affairs at the U.S. Chamber of Commerce, told the Financial Times last night, adding that talks are in the “endgame stage”.

On that note the US indices eked out another gain, although not convincingly so. The Dow had been up over a hundred points mid-session. It’s been incremental, but the S&P500 has now marked five consecutive up-days and is within 2% of its all-time high.

Critically, Wall Street is back where it was before the “trade war” effectively broke out. Which means either a positive resolution on trade is fully priced in, or there is enough going on elsewhere (economy, earnings) to provide a premium on top of what remains of trade risk.

While “90% done” seems encouraging, it matters not if the tricky 10% remains a stumbling block. Talks resume in Washington tonight.

In terms of the US economy, last night’s ADP private sector jobs report disappointed. An addition of 129,000 – the lowest in 18 months – fell short of 165,000 expectations. Friday’s non-farm payrolls number is expected to exceed 200,000, and the assumption is the shock 20,000 number for February will be revised upward. If not, well…

Well then a Fed rate cut tightens in the odds. We recall that trade optimism is one reason Wall Street has recovered its December quarter losses, but the Fed “pivot” to a neutral stance has been an equivalent driver.

Thereafter, the big US banks start reporting on Friday week to herald the beginning of what will be a critical earnings result season.

Commodities

It’s all about iron ore at the moment, although nickel has cracked the US$6/lb mark.

Yesterday’s positive local data ensured the Aussie jumped back 0.6% to US$0.7111, having fallen -0.6% the day before on the RBA statement.

Today

The SPI Overnight closed up one point.

It’s a rare occurrence, but the global calendar is free of any major releases today.

Scentre Group ((SCG)) holds it AGM today.

Harvey Norman ((HVN)) goes ex.

The Australian share market over the past thirty days…