The Overnight Report: Double Double Dow

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By Greg Peel

Monday

What was the result of the French election worth to stock markets globally? Well, 1.4% in Japan, 2.1% in the UK, 3.4% in Germany, 4.1% in France and 1.1% in the US. Australia? A mere 0.3%.

The SPI futures had closed flat ahead of the weekend’s election but after reopening on Monday morning at 9.30am, they suggested a 30-odd point rally for the ASX200. When the index opened at 10.00am, it was up 40 points half an hour later. But that’s where it all ended.

By mid-afternoon, it looked as if the local market might even fall into the red. But a late flourish provided for a close of up 17. There were few signs of the exuberance that was to come when northern hemisphere markets opened. There were only signs of a single trading day frustratingly squeezed in between a weekend and a public holiday.

Many a trader will have simply taken another four-day weekend, while others would have been reluctant to play in what remains a still tense geopolitical climate when the local market was to be closed for a day. Trading was thin and volumes were low.

The banks (+0.7%) were the major driver of what strength there was on Monday. Westpac ((WBC)) joined the rush to yet again reprice investor mortgages. Energy (+0.6%) saw a turnaround following recent oil price-related weakness, probably reflecting some bargain hunting, as may also have been the case in Amazon-impacted consumer discretionary (+0.7%).

Do you get the feeling the more Gerry Harvey carries on about Amazon the more worried he must be?

Monday Night

No such lack of excitement on Wall Street. The Dow closed up 216 points or 1.1% while the S&P gained 1.1% to 2374 and the Nasdaq rallied 1.2%.

It was a uniform, buy-the-market session which simply reflected a risk-on response to the French election. Or more specifically the reversal of at least one of the pervading elements of the geopolitical risk-off trade, being the threat of the imminent disintegration of the EU had a pro-Frexit candidate got up.

The VIX volatility index on the S&P500 fell -25%.

The US ten-year bond yield rallied 4 basis points to return to the 2.27% level which previously had been long standing support, but now becomes resistance.

The surge in the euro which began in Asia on Monday had the US dollar index down a full percent to 99.03. On any other day this would have been good for USD gold, but as the safe haven trade, gold fell US$7.60 to US$1276.00/oz.

The Aussie watched from the sidelines, flat at US$0.7566.

Base metal markets were mixed. Nickel fell -1% and lead -2% while the others posted small gains.

West Texas crude fell -US41c to US$49.21/bbl.

Last Night

Wall Street backed up Monday night’s 200 point Dow rally with yet another 200 point Dow rally last night. The Dow closed up 232 points or 1.1%, for a period reclaiming the 21,000 mark for the first time in over a month, before settling a tad below. The S&P rose 0.6% to 2388.

The Nasdaq gained 0.7% to close above 6000 for the first time in history. The Russel small cap index also hit a new all-time high. Within the Nasdaq, one quarter of the year to date rally represents Apple alone.

The outperformance of the Dow against the S&P last night once again comes down to the distortions created by a price average. Monday night’s rally was all about the French election, and market-wide. Last night’s rally was all about corporate earnings results, and therefore far more stock and sector specific.

Caterpillar (+7.9%) and McDonalds (+5.6%) both posted strong beats on both top and bottom lines, and together accounted for around 100 Dow points. DuPont (+3.6%) was another Dow component to post a strong result.

With around half of the S&P500 now having reported, the earnings growth run-rate is a very healthy 11.4%, in line with forecasts. But most importantly, revenues are up 6.9%, marking the best performance in five years after a period of largely zero growth.

In the years following the GFC, many a US company (and companies globally) implemented cost-cutting programs that served to boost earnings results. Many a company took advantage of historically low interest rates to borrow money to buy back shares, thus inflating earnings per share. But revenues are the tell-tale of how a company is really performing, given they cannot be artificially boosted in the same manner.

The S&P500 has more than tripled since the GFC low. Only now is revenue growth returning.

The US housing market is on the move again, with house prices hitting their highest level in nearly three years in February and new home sales rising to their highest level in nearly a year in March. But Donald Trump may now have put a bit of a kybosh on US housing, last night announcing a 20% tariff on imports of Canadian lumber, of which the US imports a great deal for home construction.

The increased cost of lumber will be passed on to home buyers.

The US ten-year yield rose another 5 basis points last night, breaking through 2.27% resistance to 2.33%. The US dollar index fell another -0.2% to 98.84, but gold dropped a further -US$12.00 to US$1264.00/oz.

Gold is down around twenty dollars since the Australian market closed.

Base metal prices were mostly stronger last night, with copper’s 0.9% gain the stand-out.

Iron ore is down a net -US$1.80 since Monday, to US$65.60/t.

West Texas crude is little changed over two sessions at US$49.36, having risen slightly last night.

The Aussie fell -0.4% last night to US$0.7533.

Today

The SPI Overnight rose 17 points on Monday night and 25 points last night, to suggest a net 0.7% gain. That would take us the index safely through 5900, but to date the sellers have been lined up along that wall.

Australia’s March quarter CPI numbers are due out today. The market is looking for a 0.6% rise to mark 2.2% annual inflation.

BHP Billiton ((BHP)) will release its quarterly production report. Henderson Group ((HGG)) will hold its AGM.

Rudi will join others inside the Sky Business studios on Thursday, noon-2pm, and then linkup via Skype on Friday, 11.15am, to discuss broker calls.
 

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