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The Overnight Report: Hesitation At The Top

Daily Market Reports | Feb 26 2015

This story features NINE ENTERTAINMENT CO. HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: NEC

By Greg Peel

The Dow closed up 15 points or 0.1% while the S&P fell 0.1% to 2113 and the Nasdaq was flat.

Toppy Territory

Yesterday’s activity on Bridge Street was very similar to Tuesday’s trade, featuring a choppy session of ups and downs ultimately leading to a modest gain. The difference is that on Tuesday the index kicked towards the close, while yesterday it drifted.

“Alpha” movements were again provided by individual company earnings reports but we also saw some “beta” influence with the release of December quarter economic data.

Construction work done in the quarter fell only 0.2%, quarter on quarter, when 1.0% was expected. Construction fell 4.8% over the year. Residential construction rose a solid 12.7% in the year, underscoring the faith placed in a recovering housing market, while non-residential, mainly office blocks, fell 2.6%. Engineering, meaning mining construction, fell 12.3%. The 0.6% quarter on quarter fall in engineering was much smaller than economists were assuming.

Which provides a lift to expectations for next week’s GDP result. Does this imply the RBA won’t cut on Tuesday? Well it would not be a good idea simply to assume we would have seen a cut anyway, but supporting the case for a cut were yesterday’s wages data.

Wages grew by 0.6% in the quarter to be up only 2.5% for the year – the lowest growth rate in 16 years. Low wages growth means low inflation. While it keeps costs down for businesses, it means little support for consumer spending. And it gives the RBA plenty of space to cut if the central bank so desires.

So realistically the two data reports cancel each other out. And with the ASX200 trying to stumble its way towards 6000, unconvincingly at present, it should be remembered the RBA minutes from last meeting noted the decision came down to whether the cut should come in February or March, not and March. There’s only two more days left of earnings reports, so the alpha influence will dry up next week, just leaving the beta to offer a reason for the index to push on through.

Could that come from China? The market was surprised yesterday when HSBC’s flash estimate of China’s February manufacturing PMI came in at 50.1, up from 49.7 in January. The world was expecting China’s slow slide to continue, yet this independent figure suggests a return to expansion, just. It was enough to catch out the Aussie dollar shorts, sending the currency up 0.7% to US$0.7890.

Nasdaq Watch

Janet Yellen’s second day of testimony to Congress brought nothing new. The Fed will raise rates when it feels inflation is on course to reach the 2% target. Market watchers believe the Fed is not going to do anything too hasty and risk shocking financial markets into a sharp correction.

But everyone’s watching the Nasdaq. The tech index is beginning to look nervous on its approach to 5000, the number last seen in 2000. The Dow and S&P are also stumbling around all-time highs. Various sentiment indicators suggest the market is supremely bullish. This is usually not a good sign.

Nasdaq 5000 is very much a sentiment thing, given there are a lot of differences between now and 2000, and if you adjust for inflation the index would actually have to reach 6800 in 2015 to equate to 5000 in 2000. But the milestone is focusing Wall Street’s attention on just how far US stocks have run.

The focus is also on the strong US dollar, the impact which has become a bit lost amongst all the Fed speculation. Hewlett Packard last night issued downgraded guidance, blaming the strong currency. Talk now is of March quarter earnings forecasts perhaps being too ambitious, and not sufficiently accounting for the currency effect. Last night the US dollar index fell 0.3% to 94.21.

Like the local market, US stock indices posted a choppy session last night, without achieving much.

Oil Bottomed?

The other big talking point is of course the oil price, and last night a funny thing happened. The weekly US inventory data came out and the numbers were worse than expected, meaning supply was greater than feared, but instead of tanking again, as it has done on such data recently, the oil price surged. West Texas jumped US$1.64 or 3% to US$50.79/bbl and Brent jumped US$2.92or 5% to US$61.66/bbl.

The move suggests no one is prepared to sell oil down any further, whatever the news. That would tend to suggest a bottom, at least for now. The turnaround in China’s PMI may also have helped, and the fact the market has been very short.

If there is a hope the Chinese will return from their week-long festival and start their new year with commodity purchases then yesterday was not a particularly promising start, despite the improved PMI. Base metals were mixed on the LME on relatively small moves, while having stood still in the interim, spot iron ore fell US50c to US$62.90/t.

Gold is up US$4.20 to US$1205.20/oz.

Today

It’s been a while, but the futures are actually pointing to a down-day for the local market today. The SPI Overnight is down 19 points or 0.3%.

Today’s local December quarter data release is private sector capex and capex intentions, an important element of the GDP number and a focus of RBA policy consideration respectively.

Inflation will be in the spotlight in the US tonight with the release of the January CPI, along with durable goods data.

It’s another choc-o-block day on the local reporting season calendar today, as the light approaches at the end of the tunnel. Today’s reporters include Nine Entertainment ((NEC)), Qantas ((QAN)), Ramsay Healthcare ((RHC)) and Transfield Services ((TSE)), just to name a few.

Rudi will be on Switzer TV tonight, Sky Business, between 7-8pm to discuss the local reporting season.
 

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NEC QAN RHC

For more info SHARE ANALYSIS: NEC - NINE ENTERTAINMENT CO. HOLDINGS LIMITED

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