The Overnight Report: Hail The Dealmaker

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By Greg Peel

The Dow closed up 121 points or 0.7% while the S&P gained 0.9% to 2123 as the Nasdaq added 1.5%.

Deconstructed

I suggested yesterday that given the fall on Wall Street on Tuesday night was largely driven by expectations a Fed rate rise is looming we would likely see yield stocks giving back some of their rebound gains in yesterday’s session, and that did come to pass. But it was a game played in two halves.

The initial response to Wall Street’s drop was not too severe and it was clear the bargain hunters were still out looking for value when the ASX200 was hanging at only 20-odd points down mid-morning, but the mood changed on the release of the Australian March quarter construction work done numbers, shifting the focus back to domestic issues.

The volume of construction fell in the quarter by 2.4% when economists had forecast a fall of 1.4%. Construction is down 8.8% year on year. No surprises that ongoing falls in mining investment are leading the numbers lower, but at 7.8% last quarter’s engineering volume reduction was greater than expected.

Hooray for residential construction which rose 4.8% and would be a cracker of a result on a standalone basis. But given non-residential managed only 1.0% growth and the public sector contributed a fall of 0.3%, housing alone is not enough to overcome the ebbing tide of mining construction. Overall resource sector construction is still being supported by the massive LNG projects underway in WA and Queensland but these are one by one reaching completion, and by 2017 will be adding to the general “mining investment” decline.

The bottom line is the rest of the Australian economy needs to pick up, beyond just housing, if the Australian economy is going to transition without too much pain. Federal infrastructure spending is set to pick up as is spending in the big non-mining states of NSW and Victoria, but the mining states are on a sharp path southward. That just leaves non-residential, meaning office blocks, shopping malls and industrial complexes, which are representative of the wider non-mining economy.

At this stage economists are forecasting next week’s GDP result to show 0.5-0.7% growth, having trimmed the numbers after yesterday’s data release. Today sees the all-important private sector capital expenditure numbers, which will add further colour.

By the end of the session all sectors finished in the red on the ASX bar tiny info tech, with resources, the banks, the supermarkets and the yield plays all giving up the ground regained on Monday.

Greek God

Greek prime minister Alexi Tsipras was door-stopped by media last night as he left another bail-out negotiation meeting and he announced to the world that the negotiations are in their “final stretch” and that a deal is imminent. He warned the Greek people that some might suggest otherwise, but that they should be relieved to know the deal would “guarantee security and stability for the Greek economy”, that there is “absolutely no danger for salaries or pensions, for banks or deposits” and indeed that the deal would be “positive for the Greek economy”.

Perhaps he didn’t have time to add that there will be peace and goodwill among all people, wealth and happiness for all, and that no Greek child will be living in poverty.

It took about two heartbeats after the door-stop for European Commission insiders to insist Greece is not on the brink of a deal and for Reuters to publish an official statement from the EC vice president that “we are still not there yet”.

But Pollyanna was happy to take the Greek prime minister’s word over the EC and hence the German DAX rose 1.3%, the French CAC rose 2.0% and the London FTSE rose 1.2%.

The exuberance then spilled over into Wall Street.

Rebound

Having fallen sharply on Tuesday night, Wall Street was primed for at least a small recovery last night but the Greek news seemed a good enough excuse to kick things on a little further and regain the bulk of Tuesday night’s losses.

That said, a good deal of the move could also be attributed to Apple, which announced it is developing a major new operating system initiative to rival Google Now, which apparently is something that allows your phone to run your life for you, and apparently worth a 1.9% rally in Apple shares. Given America’s biggest company is by far the biggest cap weighting in the Nasdaq, that index jumped 1.5% to hit a new all-time high last night.

Given Apple is a lesser weighting in the broader S&P 500 but still the biggest, that index jumped 0.9%. And given Apple is now in the Dow, but at an equal-weight price average, that average jumped 0.7%.

The Greek news also sparked a rebound in the euro, which might have meant a pullback in the US dollar index but for a drop in the yen. The minutes of the last BoJ policy meeting, released yesterday, indicated doubts amongst policy makers the Japanese economy would hit its growth and inflation targets.

The US dollar index is thus steady at 97.26 which means the Aussie is also this morning steady at US$0.7731. Gold is also steady at US$1187.80/oz.

Commodities

The stall in the rise of the US dollar last night translated into mostly small and mixed moves on the LME, albeit aluminium suffered technical selling in falling 1% and nickel rose 1%.

The iron ore recovery marches on, with the price up another US50c to US$62.60/t.

The oils have suffered this past couple of sessions on the stronger greenback but were still sold down again last night despite a steady currency. West Texas fell US71c to US$57.65/bbl to mark its lowest level this month while Brent fell US$1.68 to US$62.29/bbl.

Aside from forecasters assuming only a modest reduction in US weekly inventories, oil traders are looking ahead to the next OPEC meeting, scheduled for next week in Vienna. There is no expectation OPEC will waver from its chosen path of squeezing out excess US shale production but given oil prices have rebounded sharply from their lows, it is safer to square up.

Today

The SPI Overnight closed up 11 points or 0.2%.

As noted, local economists will be salivating ahead of today’s release of March quarter private sector capex and capex intentions numbers. The former represents a critical component of next week’s GDP result and the latter is one of the RBA’s most valued predictive indicators for growth in the coming year.

The US has been enjoying solid housing data releases this month and tonight brings pending home sales.

On the local stock front ALS Ltd ((ALQ)) will release earnings reports today.

Rudi will appear on Sky Business' Lunch Money at noon.
 

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