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The Overnight Report: Steady Again

Daily Market Reports | Mar 23 2017

This story features BRICKWORKS LIMITED. For more info SHARE ANALYSIS: BKW

By Greg Peel

The Dow closed down -6 points while the S&P recovered 0.2% to 2348 and the Nasdaq bounced 0.5%.

Pneumonia

The old adage used to be that if Wall Street sneezes, Australia catches a cold. While there’s little doubt the health or lack thereof of the world’s biggest economy remains important to Australia or any other developed economy, such a correlation has diminished in recent times, particularly as the world’s second biggest economy has become Australia’s primary driving force.

So what was going on yesterday?

The US healthcare bill appeared to have reached a stalemate in Washington. Bang, down Australia goes by -1.6%. The S&P500 only dropped -1.2%.

The stalling of the healthcare bill means Wall Street won’t get its much longed for corporate tax cut as soon as hoped. That’s the real reason Wall Street fell on Monday night. Granted, there are a handful of ASX200 companies that pay tax in the US, but surely the longer Australia maintains a tax rate lower than that of the US, the better? If Trump does ultimately get his way, US headquartering will be very tempting.

But this was not what was on the minds of those investors blindly following Wall Street down in Australia yesterday. It was simply a capitulation trade. In the US, it was all about impatience – all-time highs had been established but suddenly Trump was getting nothing done, and at some point it was going to be sensible to lock in some profits until such time as he did.

In Australia it was all about the ASX200’s triple failure to breach the 5800 mark this year, despite massive rebounds in commodity prices. A market that won’t go up will eventually go down. Wall Street’s failure to kick on with it had a lot to do with holding back the local index. Investors began to fear a pullback. Yesterday the trigger was provided.

The ASX200 dropped the -1.2% the S&P had fallen from the opening bell. As more and more investors began to fear a larger correction could be possible on Wall Street in coming sessions, and thus in Australia, more selling followed. Among the sectors, nothing was spared. There was no sign of rotation out of the high-beta banks and miners and into the defensive yield plays of utilities and telcos, as there had been on Wall Street.

Within the financials sector, there was some rotation into REITs. And with materials, there was some buying of gold stocks on the back of gold’s resurgence. But you wouldn’t know it. In a market where four banks make up some 25% of capitalisation, the financials sector led the index down with a -2.1% drop, just as US banks had led down Wall Street. What’s the correlation? Very little, fundamentally. Materials also dropped -2.1% and indeed the top ten losers board was dominated by miners and mining-related stocks. A -3% fall in the iron ore price and a -2% fall in copper didn’t help.

The “outperformers” on the day were industrials and utilities, but they were both still lower by -0.4%. It was a sell everything kind of session – get out now and then we’ll worry about repositioning once the dust settles.

The 5800 mark is now just a speck in the distance. Having crashed through 5700 to 5684, the new level in play is support at 5650. If that level is breached, suggest the chartists, then thoughts of reaching 6000 give way of thoughts of testing much lower levels.

The good news is Wall Street didn’t go on with it last night.

Bring out the Whips

It’s a sad indictment of the world in which we now live that a terror attack in London has no impact on market sentiment, so inured are we to such tragedies.

Trump’s healthcare bill is set to go to Congress and as anyone who ever watched The Thick of It or Veep or the iconic Australian comedies, Rudd-Gillard-Rudd and Turnbull-Abbott-Turnbull would know, backroom negotiations will currently be fierce and the numbers will flip-flop right up to the vote.

At this stage it still doesn’t look like the bill will pass as is, but the situation is, as ever, fluid, and no one can be certain at this stage. Why do we in Australia care so much? Because if the bill doesn’t pass then Wall Street already priced that in by tumbling on Monday night. If it gets nowhere close, we might see more of the same. But if perchance it does get through, then Wall Street will no doubt tumble right back up again.

And right now we’re tethered to Wall Street.

To that end, Wall Street went back into stasis last night. The indices did open lower but quickly turned around. The Dow, which had fallen the least on Monday night, made it back to square, while the S&P, which had fallen further, posted a small recovery and the Nasdaq, which fell the most, posted a more solid rebound.

It is here Wall Street will likely remain until the outcome of the healthcare bill vote is known.

Nothing much else seems to matter at present.

Commodities

The lead price jumped 4% last night in London due to a surge in “cancelled warrants”, which means holders of contracts over warehoused material have decided not to make that inventory available for delivery against futures contracts, thus implying lower warehouse stocks up for grabs. Traders suggest it’s just a “paper play” intended to push the price up.

Otherwise, nickel fell -1.8% and no other metal moved by more than a percent.

Iron ore dropped another -US$3.20 to US$84.20/t.

West Texas crude has rolled over into the May delivery front month and it is down slightly at US$48.15/bbl.

Gold is up another US$3.00 at US$1247.70/oz.

The US dollar index is relatively steady and the Aussie is down 0.2% at US$0.7679.

Today

The SPI Overnight closed up 18 points or 0.3%.

Retail sales data in the US will draw some attention away from Washington tonight while Janet Yellen is also set to make a speech.

Locally, Brickworks ((BKW)) will release its earnings report.

Rudi will appear twice on Sky Business today. First between midday-2pm and again at around 7.15pm on Switzer TV.
 

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