The Overnight Report: Day Ten

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

By Greg Peel

The Dow closed up 34 points or 0.2% while the S&P gained one point to 2363 but the Nasdaq slipped -0.4%.

Resources Shaky

The local resource sector was slapped from the open yesterday, sending the ASX200 down -40 points. This was well out of tune with the overnight futures indication, even taking Rio Rinto’s ((RIO)) ex-dividend into calculation.

Was this a reaction to the Fed minutes, which hinted that the next rate rise may come as soon as March? That means a stronger greenback and weaker commodity prices. But the FOMC tempered its March indications by noting it needs to wait to see what fiscal policy changes might enter the mix. And in fact, the greenback went down on the day.

We can argue that resource sector stocks, particularly the big miners, have had a spectacular run on the commodity price rebound. Earnings results have for the most part exceeded hastily upgraded expectations. But reports from the big iron ore miners and big LNG players have now been and gone and there’s not a lot of faith in commodity prices rising higher still. A good time to lock in profits.

Interestingly, base metal prices were all slapped overnight in London, in the LME’s first opportunity to respond to the Fed, and the iron ore price was down -3% in Singapore. The explanation? A possible Fed rate rise in March. But gold jumped one percent on a slightly weaker greenback. The explanation? Fed not likely to raise in March ahead of fiscal clarification.

Take your pick.

What we do know is the sudden sell-off in the local market yesterday morning lasted only as long as the first half hour’s opening rotation. Then the buyers rushed in. By day’s end, again taking Rio’s ex-div into account, the softer session was more in line with the way the futures had called it pre-open.

Beyond that, it was another tale of earnings report domination. Numbers one through seven of the top ten gainers yesterday reported on the day. Numbers eight to ten reported on Wednesday. Outside of Qantas ((QAN)), yesterday’s winning reporters were all stocks that have for one reason or another been beaten down or underperformed over past months – Estia Health ((EHE)), InvoCare ((IVC)), Crown Resorts ((CWN)), Asaleo Care ((AHY)), Nine Entertainment ((NEC)), Perpetual ((PPT)).

Most of the stocks on the top ten losing side yesterday were companies that reported on Wednesday. iSentia ((ISD)) copped it again, while Vocus ((VOC)) saw selling after Wednesday’s buying. The tragic story of the day was Ardent Leisure ((AAD)), reporting yesterday, which wrote down the value of its Dream World theme park and lost another -22% on its share price.

There was also disappointment stemming from yesterday’ release of December quarter capex numbers, although they were a bit of a mixed bag.

A -2.1% fall in private sector spending in the quarter, driven yet again by declining mining investment, was greater than forecast. But the latest estimate of FY17 spending plans actually represented an upgrade from the estimate recorded at the September quarter release. The first estimate of FY18 spending was weak, implying a -12.5% fall as non-mining investment again fails to offset mining’s decline. But economists note that first estimates and reality rarely match.

The end result of it all is that the December quarter GDP, due next week, will be a little softer than assumed. But the capex data are not anything that is going to shift the RBA from its “on hold” position.

Fiscal Folly?

We’re still waiting to hear any detail of Trump’s planned tax reforms, which are always seemingly due two weeks away. Last night we did learn that the new Treasury Secretary Tim Mnuchin is hoping to get the reforms passed by Congress before the August recess.

Virtually every commentator has suggested from Day One that if Trump even thinks he’s going to pass his reform bill even this year he’s got rocks in his head. Time and time again it is pointed out that it took Ronald Reagan years to get his reforms through Congress. And that’s just one bill. There’s also Obamacare, which Trump has suggested needs to be dealt with first. Creating a new healthcare system and getting it through Congress is even more of a challenge, commentators suggest, than tax reform.

And there’s still the little matter of the border adjustment tax. Mnuchin’s language on that front is leading to doubt over whether a BAT of any form will ever come to pass.

So everyone’s confused. Last night the Dow racked up its tenth straight rise to an all-time high but in falling on the day, the Nasdaq marked its first two-day losing streak in 2017. The S&P was up, just, but the Russell was down. Are we starting to see cracks appearing?

There is no denying US economic data are heading in the right direction. Among last night’s weekly new jobless claims data it was noted the moving average of those data has reached its lowest level in 43 years. But ask anyone – the rally up to now has been all about Trump and nothing else.

It is unlikely Wall Street can keep going up in a vacuum of any detail on fiscal policy. The trend may ultimately be to the upside on what Trump manages to achieve but at some point the market must stop and wait. And if it stops, it will inevitably pull back.

There is no concern of Wall Street correcting hard. There are too many slow moving buyers lined up ready for any sort of dip. But something has to give soon.

Commodities

On Wednesday night oil went down so last night it was due to go up. The weekly US inventory numbers were the driver. The trend, nonetheless, is ever so slowly higher. West Texas crude is up US87c at US$54.41/bbl.

As noted, LME traders fear a March Fed rate rise. Last night saw aluminium down a percent and the others all down two percent or more.

Iron ore fell -US$3.20 to US$90.40/t.

The US dollar index is -0.2% lower at 101.00 on creeping monetary and fiscal uncertainty and gold is up US$12.30 at US$1239.50/oz, citing “the weaker greenback”, which is not that weak.

The Aussie is a little higher at US$0.7719.

Today

The SPI Overnight closed down -9 points or 0.2%.

The RBA governor will provide a mandatory testimony to parliament today.

It’s another big day on the earnings season calendar although, blissfully, not as big as yesterday’s marathon. After today, the last two days of the month next week will still see earnings reports, but many fewer.

Rudi will link-up through Skype with Sky Business this morning, around 11.15am, to discuss broker calls.
 

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