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The Overnight Report: Confidence Returns

Daily Market Reports | Mar 29 2017

This story features STRATA INVESTMENT HOLDINGS PLC. For more info SHARE ANALYSIS: MTR

By Greg Peel

The Dow closed up 150 points or 0.7% while the S&P gained 0.7% to 23587 and the Nasdaq rose 0.6%.

Meanwhile, back home…

Finally yesterday the local market was able to snap itself out of the hypnosis of Trumponomics and go it alone. While there may have been some lingering element of the US healthcare response being overdone, the 1.3% rally in the ASX200 boiled down to three home grown elements: earnings, M&A and dividends.

The banks big and small have all been playing follow the leader in raising their mortgage rates these past few days in “out-of-cycle” moves, meaning not as a response to an RBA rate rise. While the spectre of rising funding costs on the other side of the equation looms when next the banks roll over five year bonds issued in the US, in the near term repriced mortgages equate simply to increased earnings.

Bank analysts have been doing the numbers and the conclusion is repricing will add 2-3% to bank earnings, all things being equal. Yesterday the financials sector led the market higher with a 1.8% gain and a hefty contribution in terms of index points. Assurances from insurance companies that Cyclone Debbie claims will be covered by reinsurance removed any potential drag.

Speculation over M&A interest fired up some of the beaten down and volatile smaller names in the market yesterday such as Mantra Group ((MTR)) and Ardent Leisure ((AAD)). Details around the surprise resignation of the Quintis ((QIN)), formerly TFS Corp, CEO led to a rebound in that heavily shorted name, while the biggest short of the market, Aconex ((ACX)), also benefitted from covering.

But perhaps the most influential element from a market-wide perspective were dividend payments. Over the past month, all relevant companies reporting in February have gone ex-dividend, with only a handful to go, and there is a timing gap between “ex” and actual payment. The flood of “exes” earlier in the month has now tuned into a flood of cash hitting fund manager accounts, and that money has to be redeployed expediently. Yesterday was one of the biggest cash payment days on the calendar.

The reality is, of course, that it’s all somewhat of a zero sum game in terms of index points. When the flood of exes hit the market, the index was handicapped by the equivalent index points represented by those dividends. Now that the cash is being redeployed, index points are effectively being put back in.

And so it is that we are back over 5800 once more. Nice to have you back, where’ve you been? At 5821, and following a strong session on Wall Street, it might be that maybe, just maybe, this time we can actually leave 5800 behind. That’s the technical prediction anyway, for what it’s worth. And 5821 is a new high for 2017.

The futures are only up 13 this morning nonetheless despite a 150 point rally in the Dow. Not surprising, given yesterday’s surge. We may yet need to do a bit of work but with the end of quarter approaching at the end of this week, there is incentive among fund managers to make it a good one.

Sentimental

I noted at the end of yesterday’s report that US consumer confidence data were due out last night, but that no one seemed to be paying much attention to data at present given the dominance of fiscal considerations. Well I’m happy to say I was dead wrong.

The Conference Board’s monthly measure of US consumer confidence has leapt in March to its highest level in sixteen years. This is not what Wall Street had expected, and as such traders were jolted back into the reality of the world going on outside Washington. Suddenly the healthcare failure sell-off looked a bit isolated.

House prices have also jumped sharply, to a three year high. And the news from Camp Trump is that there’ll be no sulking over healthcare, it can go back to the drawing board but now is the time to press on with tax reform. This is definitely what Wall Street wants to hear.

The Fed was back in play again too, most specifically Fed vice chair Stanley Fischer being the latest of the high-end FOMC members to reinforce the expectation for two more rate hikes this year, making three all up, as being “about right”.

Fed policy is a bit of a two-way street for the Street at the moment, basically coming down to the banks and everyone else. The banks want four rate hikes and were sold off from the last FOMC meeting when that appeared not the case, but they can at least live with three. The fear was even three was looking a stretch following Trump’s policy failure, on the assumption all reflationary policy pledges would hit a Congressional brick wall.

So three is good. The banks led Wall Street higher last night. Outside of banking, nobody else likes the idea of four rate hikes and indeed would probably prefer no rate hikes, but that would imply the US economy remains in trouble and nobody wants that either. So again, three rate hikes is a nice balance of economic strength and not-too-rapid monetary tightening.

Thus on the back of surging consumer confidence, an “about right” policy approach from the Fed, and Trump moving on to tax reform, Wall Street decided to break an eight day losing streak for the Dow last night and all indices finished solidly in the green.

Commodities

Another year, another takeover of Libyan oil pipelines by armed militia. While such disruptions to Libyan production have become so common the oil market doesn’t get too carried away anymore, there is greater significance this time in the context of the OPEC production cuts.

Libya has no quota. And let’s face it, Libya doesn’t really have a government either. There was a fear that when other OPEC members obligingly cut production in line with quota agreements, Libya would simply amp up its own production and fill the void. But any intentions in that direction have for now been derailed.

West Texas crude is up US61c at US$48.37/bbl.

In metal markets, the same sentiment was felt regarding Trump’s pledge to move on to those policies that are seen as the real economy movers. Tax reform is the main one, but infrastructure spending is in there too. Aluminium rose 0.5% in London, copper and lead 1.5% and nickel and zinc 2.5%.

Iron ore fell -US10c to US$80.70/t.

The US dollar index also rebounded on renewed optimism, up 0.5% to 99.71, hence gold is down -US$3.30 at US$1250.90/oz.

The Aussie is nevertheless up 0.2% at US$0.7635.

Today

The SPI Overnight closed up 16 points or 0.2%.

Theresa May will pull the trigger tonight.

Rudi will host Your Money, Your Call Equities on Sky Business tonight, 8-9pm.
 

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