Overnight: Compromise Possible, They Say

World Overnight
SPI Overnight (Dec) 6611.00 – 7.00 – 0.11%
S&P ASX 200 6615.30 + 25.10 0.38%
S&P500 3666.72 – 2.29 – 0.06%
Nasdaq Comp 12377.18 + 27.82 0.23%
DJIA 29969.52 + 85.73 0.29%
S&P500 VIX 21.28 + 0.11 0.52%
US 10-year yield 0.92 – 0.03 – 2.95%
USD Index 90.70 – 0.42 – 0.46%
FTSE100 6490.27 + 26.88 0.42%
DAX30 13252.86 – 60.38 – 0.45%

By Greg Peel

Resourceful

The materials sector had not been a standout performer in last month’s vaccine-fuelled rally. It was not left behind, but took a backseat to the banks in particular. The iron ore price for a long time was stuck in a range of around US$115-125/t and not generating much excitement.

And the gold price fell swiftly from its brief look at US$2000/oz, leading to volatile daily sessions for gold miners over the period. The copper price has done little but rise gradually in that time, but then most gold miners are also copper miners and vice versa.

Even as the iron ore price quietly pushed up through US$125/t, the big miners were not much in the spotlight. Only earlier this week, as the price broke US$130/t, did the materials sector start to move. Only yesterday, after iron ore hit a seven-year high, did everyone get the memo.

The materials sector jumped 3.8%.

It was a bit of a coincidental double-whammy that Australia’s October trade numbers came out yesterday and showed the biggest trade surplus since April and record exports of iron ore. The trains are rolling into Port Hedland full of rocks, and rolling back full of cash. Bank dividends? They pale in comparison.

The energy sector also rose yesterday, up 1.5% despite only a small gain in oil prices. Energy had been sitting it out this week as it awaited a decision from OPEC-Plus as to whether production cuts would be ended or extended, and indeed still didn’t know yesterday. More on that below.

It seemed yesterday was the day investors rediscovered the resource sectors, and to that end sold everything else to get in there. Every other sector closed in the red bar property (+0.3%).

I noted yesterday healthcare seems to be used often as a funding source, and it fell -0.9%. The aforementioned banks fell -0.5%. Selling elsewhere was fairly consistent around the -0.5% level.

Fortescue Metals ((FMG)) blew away the competition in rising 13.3%. Mineral Resources ((MIN)) jumped 7.6% and Rio Tinto ((RIO)) 6.9%. BHP Group ((BHP)) could not make the top five winners with 4.9%.

The madness that is Whitehaven Coal ((WHC)) rose 8.8%. This despite the October trade numbers showing a 14% rise in iron ore exports and a -2% fall in coal exports. On Monday Whitehaven fell -9.6%.

The strong export numbers were enough to overcome strength in imports as well. Vehicle imports rose 5.4% to be back to pre-pandemic levels. Gotta put something in them, so fuel imports rose 2.9%, but remain only around half of pre-pandemic levels at this stage.

The iron ore price is up another dollar overnight, and given the gold price has bounced off its lows this week and regained the US$1800/oz level, it has not acted as a counter this time.

So has everyone now got their iron ore stocks? Good.

After a late sell-off on Wall Street, the futures are down -7 points this morning.

Maxed Out

With the Boeing 737 Max now cleared for take-off, Ryanair last night added 75 new Maxes to its prior standing order of 135. It’s the first substantial order for the Max since grounding. Pundits suggest it is now the safest plane in the sky, given what it had to go through to be finally cleared.

Boeing shares rose 6%, and being the highest dollar value stock in the Dow, led the average to a new intraday all-time high last night.

But sentiment was strong across the board, and indeed all three major indices hit intraday record highs last night before being slapped down by selling at the death. The Dow was up 300 points late in the session.

Driving early strength was, of course, unconditional excitement over progress on a stimulus package, despite everyone having seen this movie over and over. Pelosi and McConnell spoke on the phone last night. McConnell later suggested a compromise was possible.

But only if the Democrats moved towards the Republican position. On Wednesday night a bipartisan group of Congress members put forward a US$908bn package, which is well below the Democrats last offer of US$2.2trn and not much above the Republicans stubborn US$500bn bid. McConnell remains in favour of US$500bn.

It’s a tough one for Pelosi. With a Democrat in the White House shortly, there seems no reason to stoop to the Republican’s level now, after all this time. But if the Republicans do retain the Senate in the Georgia run-offs, the stalemate may yet drag on through 2021. If the Democrats even up the Senate, with VP as casting vote, then out will roll the trillions.

In the meantime, the US posted a record daily death toll on Wednesday night. The mayor of Los Angeles, for one, is now urging residents simply to stay at home.

Next week Congress has to vote on a federal budget, and the suggestion is a stimulus package could be rolled into the one bill. The Republicans could still bring the government to shutdown as their last hurrah in the Trump presidency. Trump would no doubt love it.

But hope springs eternal, and Wall Street appears to again be fixated on the notion there will be stimulus. The Russell small cap index – a cyclical bellwether – beat the major indices last night with a 0.6% gain.

There was much excitement that new jobless claims fell to 712,000 last week, having peaked at 787,000 a couple of weeks ago. But never since the pandemic began has the number fallen below 700,000, let alone actually fallen. More than 20 million Americans remain out of work, and rent relief ends on Christmas Eve.

Commodities

Iron ore is the new bitcoin.

Nothing much to note elsewhere, other than in oil markets. Last night OPEC-Plus agreed to increase production by 500,000 barrels per day starting in January. While this is not what the market wanted to hear, the 500,000 number was actually a relief because it could have been much worse.

The current production cut is -7.7mbpd. The hope was this would be extended to March, which has not happened, but 0.5m off -7.7m is not too dramatic. Hence oil prices rose.

So too did the Aussie, as the greenback tanked again and thanks to a surging trade surplus. It’s up 0.6% at US$0.7448.

Today

The SPI Overnight closed down -7 points.

Australia sees final numbers for October retail sales today, but the ABS had already released preliminaries.

It’s jobs night in the US.

Premier Investments ((PMV)) holds its AGM today and Eagers Automotive ((APE)) holds an EGM.

Spot Metals,Minerals & Energy Futures
Gold (oz) 1839.40 + 10.50 0.57%
Silver (oz) 20.46 – 3.54 – 14.75%
Copper (lb) 3.47 + 0.01 0.20%
Aluminium (lb) 0.92 – 0.01 – 1.08%
Lead (lb) 0.92 – 0.01 – 1.34%
Nickel (lb) 7.20 – 0.06 – 0.77%
Zinc (lb) 1.24 – 0.01 – 0.55%
West Texas Crude 45.77 + 0.52 1.15%
Brent Crude 48.85 + 0.65 1.35%
Iron Ore (t) 137.80 + 1.05 0.77%

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 Lighten from Hold Ord Minnett
Downgrade to Neutral from Buy UBS
WEB Webjet Downgrade to Hold from Buy Ord Minnett
WOR Worley Downgrade to Lighten from Hold Ord Minnett

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencie

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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