Overnight: Bipartisan Sense

World Overnight
SPI Overnight (Dec) 6614.00 + 20.00 0.30%
S&P ASX 200 6590.20 + 1.70 0.03%
S&P500 3669.01 + 6.56 0.18%
Nasdaq Comp 12349.37 – 5.74 – 0.05%
DJIA 29883.79 + 59.87 0.20%
S&P500 VIX 21.17 + 0.40 1.93%
US 10-year yield 0.95 + 0.01 1.50%
USD Index 91.12 – 0.19 – 0.21%
FTSE100 6463.39 + 78.66 1.23%
DAX30 13313.24 – 69.06 – 0.52%

By Greg Peel

Break out the flares

The Australian economy grew by a better than expected 3.3% in the September quarter and broke a record going back to the seventies, which is of course all very meaningless. The June quarter’s -7.0% fall was unprecedented and it’s still a long way back, as evidenced by the fact annual growth has improved only to -3.8% from June’s -6.4%.

The sector that has caught everybody out in past months is household consumption. Quite frankly no one predicted the surge in demand for not just electronic goods driven by lockdowns but for homeware items as well, and then underestimated the speed with which Australians would jump back on the bandwagon in travel and other areas once restrictions began to be lifted.

Consumer spending jumped 7.9% in the quarter having fallen -12.5% in June, and jumped 11.0% ex-Victoria. While spending was boosted by government support, a drop in the savings rate to 18.9% from 22.9% indicates households are beginning to feel more confident again.

That’s still a very elevated savings rate in historical terms, and to Westpac’s economists the most important factor looking ahead to when government support measures such as JobKeeper ultimately wind down. Savings should be able to smooth out the transition back to some kind of normal, rather than the economy falling back into a hole.

It would appear the stock market was hoping for more from the GDP numbers, despite the result beating consensus, as on their release the ASX200 fell into a hole. Or maybe it was just sell-the-fact. The index recovered during the afternoon in what was a mixed session sector-wise with no real macro theme.

Materials stood out with a 1.6% gain, driven by a surging iron ore price and a recovering gold price, along with sustained strength in copper and friends. Sandfire Resources ((SFR)) topped the index on Tuesday with a 9.8% gain on upgraded copper expectations and did it again yesterday, rising 12.3% on positive silver exploration results.

Healthcare (-8.9%) provided the main offset. This sector is in favour one day and out of it the next for reasons not necessarily apparent, other than perhaps occasionally being used as a funding source to chase other sectors.

Technology strangely fell -0.9% despite Nasdaq outperformance overnight, with all of Nearmap ((NEA)), Appen ((APX)), Bravura Solutions ((BVS)) and WiseTech Global ((WTC)) copping some selling. Maybe a portfolio reallocation from a big player.

Movements in other sectors were negligible, with the banks and energy sitting it out altogether.

After such a solid November, driven by the US election, vaccines and the reopening of this country, it is not easy to see just what may transpire to send the index either surging again or collapsing. The vaccines are a put option, but the long road to full recovery remains as a cap.

Shock Agreement?

Americans went to the polls with the Democrats unmoved on their demands for a US$2.2trn second stimulus package and the Republicans refusing to budge from US$500bn. The Democrats may have won the election but there won’t be a result in the Senate before the January 5 Georgia run-off, and in the meantime the virus is running amok, destroying lives and businesses.

The pressure is on, hence last night the members of the two parties offered up a bipartisan package worth US$900bn. The proposal is yet to be endorsed by Democrat or Republican leaders in either house. And the president has to sign off on it if it gets that far, and I don’t mean the new one.

This was one piece of news that turned Wall Street around from early losses last night.

Early weakness was driven on the one hand by an ADP private sector report for November which showed 307,000 jobs added compared to forecasts of 420,000, and on the other by a Fed Beige Book which showed “little or no growth” in some Fed regions.

The other positive piece of news was that of the UK approving the Pfizer and Moderna vaccines, with the first shots to be given from early next week. Simultaneously, Boris is winding back the UK’s strict lockdown.

This move has questions being asked as to why the US FDA has to wait until December 10 to consider the Pfizer vaccine, and December 17 for Moderna’s, when it is assumed a rubber stamp is all that’s required.

I noted yesterday that while Wall Street supposedly rallied on stimulus hope on Tuesday night, the split of cyclicals to growth was the wrong way around. The Nasdaq outperformed the Dow. Well on more concrete stimulus news last night, that was reversed.

If we exclude an -8% fall for Dow newbie Salesforce, which is stumping up a sly 28 bill to acquire cloud services peer Slack, the Dow outperformed a stagnant Nasdaq last night. Not big numbers, but clear.

The acquisition has been compared, in potential success terms, to Facebook’s acquisition of Instagram. Yet investors weren’t thrilled, probably because Facebook only paid US$1bn for Instagram.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1828.90 + 14.40 0.79%
Silver (oz) 24.00 + 0.04 0.17%
Copper (lb) 3.46 – 0.02 – 0.47%
Aluminium (lb) 0.93 + 0.01 0.63%
Lead (lb) 0.93 – 0.00 – 0.27%
Nickel (lb) 7.26 – 0.11 – 1.54%
Zinc (lb) 1.25 – 0.00 – 0.24%
West Texas Crude 45.25 + 0.67 1.50%
Brent Crude 48.20 + 0.80 1.69%
Iron Ore (t) 136.75 + 3.70 2.78%

Iron ore has broken up through US$130/t and so far, no stopping it.

Stimulus hopes have the US dollar falling again, and gold rising.

Oil prices made a bit of a comeback on weekly US inventory data but the market still awaits the OPEC-Plus meeting moved to tonight.

The RBA probably wishes the GDP result wasn’t quite so flash. The Aussie is up 0.5% at US$0.7404.

Today

The SPI Overnight closed up 20 points or 0.3%.

Australia will see data for October housing finance today, along with a final report for the trade balance, noting a preliminary has already been delivered.

It’s services PMI day across the globe today.

The corporate calendar today features only ex-divs, being those of Fisher &Paykel Healthcare ((FPH)), Pendal Group ((PDL)) and TechnologyOne ((TNE)).

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BRG Breville Group Upgrade to Outperform from Neutral Macquarie
DMP Domino’s Pizza Upgrade to Neutral from Underperform Macquarie
Upgrade to Add from Hold Morgans
Upgrade to Buy from Hold Ord Minnett
Upgrade to Neutral from Sell UBS
GPT GPT Group Downgrade to Neutral from Outperform Credit Suisse
HLO HELLOWORLD TRAVEL Downgrade to Lighten from Buy Ord Minnett
IGO IGO Co Upgrade to Lighten from Sell Ord Minnett
SFR Sandfire Upgrade to Outperform from Neutral Macquarie
STO Santos Downgrade to Neutral from Outperform Credit Suisse
TPW Temple & Webster Downgrade to Neutral from Outperform Macquarie
TWE Treasury Wine Estates Upgrade to Outperform from Neutral Credit Suisse
Downgrade to Sell from Buy Citi
Downgrade to Lighten from Hold Ord Minnett
Downgrade to Neutral from Buy UBS
WEB Webjet Downgrade to Hold from Buy Ord Minnett
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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