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The Overnight Report: Sell The Fact

Daily Market Reports | Apr 27 2017

This story features SEVEN GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: SVW

By Greg Peel

The Dow closed down -21 points or -0.1% while the S&P lost a point to 2387 and the Nasdaq was flat.

Catch-up

With the Dow over four hundred points higher since last the ASX closed, it was always going to be a positive session on the local market yesterday. The question was only as to how positive. As it was, the ASX200 opened around 40 points higher and pretty much tracked sideways for the rest of the day.

The index closed a little above the 5900 resistance level. We’ll now see how much work it has to do to convincingly leave 5900 behind. May approacheth.

The banks led the charge with a 1.1% gain, boosted not only by the Wall Street influence but also by the news global regulators have decided not to implement any new initiatives until 2019, so to assess how things are going under current reforms. We’ve been waiting, with dread, for Basel IV regulations for years now yet the regulators have failed to find any agreement. So we’ll wait some more.

What this means is APRA’s on its own. It was APRA’s plan to wait for the Basel IV outcome before then deciding how much, if any, of an additional capital requirement buffer would be imposed on local banks to ensure they were “unquestionably strong”. Now the local regulator has to define unquestionably strong by itself.

Among those stocks directly affected by goings on in the US, the building materials companies with US exposure had a good day thanks to Trump’s announced tariff on Canadian lumber. Seven Group ((SVW)) jumped 11% thanks to its ownership of Caterpillar dealer WesTrac. Caterpillar blew the Street away with its earnings result and is considered a bellwether for global growth.

Otherwise, all sectors had a positive session bar materials, which was dragged down by losses among the gold miners. Gold lost -US$20 while the market was closed. BHP Billiton’s ((BHP)) quarterly production numbers were strike- and weather-affected as expected, but the market was pleased with the news the company is looking to offload some of its US shale acreage.

Australian headline inflation grew by 0.5% in the quarter to mark 2.1% annual. It was a whisker below expectations but well up on the prior quarter’s 1.5%, and supposedly now within the RBA comfort zone of 2-3%. Except that the RBA prefers the underlying measure, which rose 0.4% to 1.8%.

The bottom line is nevertheless that while inflation remains low, it is now moving up from its nadir. Given a lack of wage growth, it will be a very slow grind up from here.

Forex traders were looking for a stronger CPI result. The Aussie is down -0.8% at US$0.7472.

Taxing Times

The number of personal tax brackets in the US will be reduced to three from seven, being 10%, 25% and 35%, not counting a zero tax threshold of US$24,000 of income. The corporate tax rate will be reduced to 15% from 35%. There will be a one-off tax discount rate, probably of 10%, charged on revenues repatriated back to the US.

This is what Wall Street has been waiting for. But there are some issues.

Just about all tax deductions will be abolished. Even with this trade-off applied, the Administration has deflected questions of how the government will pay for the reforms. There is as yet no mention of what the 10%, 25% and 35% income thresholds will be. The corporate tax cut is seen as a big winner, particularly for smaller businesses, but on the personal level, there may be plenty of American salary earners actually worse off.

It has been suggested that every US professional should become a company.

There was no mention of a border tax, which either remains a separate issue or is quietly fading into the sunset. And while there may be plenty of detail yet to be known, the bottom line is Trump still has to draw up official legislation and then get it through Congress.

Representatives and Senators are just the sort of income bracket professionals that may find themselves paying a lot more tax. So good luck.

It had long been suspected that the response to the actual unveiling of the tax plan would more likely lead to a sell-the-fact response, given Wall Street began pricing in tax reform in November. And given a four hundred point rally in the Dow over two days, and new all-time highs for both the Nasdaq and Russell, consolidation was always on the cards last night.

That said, the Dow was up 74 points initially on the news, before fading in the afternoon. The S&P500 traded at a new all-time high in that period but couldn’t hold onto it. The Nasdaq was at a new ATH before closing flat. The Russell, on the other hand, defied the trend with a 0.6% gain to yet another new ATH. The Russell 2000 is the index of the small caps, which stand to benefit most from a 15% tax rate.

Speaking of how one might pay for such tax cuts, there remains the small issue of the US government possibly shutting down on Friday. Debt ceiling negotiations are being held up by issues with The Wall and how to pay for it. Wall Street assumes a last minute compromise, but a shutdown is not without precedent.

And Trump was back upsetting the neighbours again last night, suggesting the next executive order will be a US withdrawal from NAFTA. It is unclear whether the president actually has this authority, but meanwhile the peso and the CAD are diving.

Commodities

The US dollar index managed to claw back 0.1% last night but gold, too, recovered slightly, up US$5.00 at US$1269.00/oz.

In London, lead shot up 4% and zinc 1%, while nickel fell -1% and copper and aluminium were little changed.

Iron ore rose US$1.00 to US$66.60/t.

West Texas crude is a tad lower at US$49.21/bbl.

Today

The SPI Overnight closed down -1 point.

The RBA governor will be speaking today while the Bank of Japan and ECB both hold policy meetings today/night.

In the US, durable goods orders data will be closely watched.

It’s a relatively busy day on the local stock front today. We’ll see production reports from Beach Energy ((BPT)) and South32 ((S32)), quarterly updates from Computershare ((CPU)), Mirvac ((MGR)) and Stockland ((SGP)), and earnings reports from both ResMed ((RMD)) and Ten Network ((TEN)). And MYOB ((MYO)) will hold its AGM.

Rudi will travel to Macquarie Park to co-host Trading Day on Sky Business, noon-2pm.
 

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