The Overnight Report: Fedspeak Returns

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By Greg Peel

The Dow closed down 84 points or 0.5% while the S&P lost 0.6% to 2178 and the Nasdaq fell 0.7%.

The Big Loser

The mass media, it seemed, was prepared to call a state of emergency last night after BHP Billiton ((BHP)) posted its biggest loss in history and slashed its dividend. Of course the market has had plenty of time to anticipate such a result, and as such BHP shares closed up 0.5% yesterday.

Much was also made of the massive write-down of US shale oil assets bought, it can now be said with hindsight, at the top of the market. It may be the Not-So-Big Australian’s biggest ever loss but it’s certainly not the first time the company has spent big on expansion and subsequently crashed and burned.

Yesterday saw another session in which the macro played very little part, leaving individual stock moves on earnings results to dominate proceedings. Domino’s Pizza ((DMP)) underscored the reality that when you’re priced for perfection, you’ll be punished for falling short. The market sliced 4% off Domino’s but saved the big selling for another popular growth stock, G8 Education ((GEM)). It lost 12%.

InvoCare ((IVC)) is as about as defensive as a stock can be and hence is subject to overpricing in today’s low interest rate world, so no one sent flowers as its shares fell 4%.

On the winners’ side of the ledger, Challenger ((CGF)) showed retirees are prepared to lock in low interest rates for their lifetime and as such its shares rose 1.5%, while apartment builder Mirvac ((MGR)) gained 3% on its earnings beat.

The ASX200 hovered around the flatline for most of yesterday’s session but there was a bit of a stumble when the minutes of the August RBA meeting were released.

“In coming to their policy decision, members noted that the recent CPI data had confirmed that inflation was likely to remain low for some time. They also observed that while prospects for growth were positive, there was room for stronger growth, which could be assisted by lower interest rates.”

This excerpt from the minutes is the nutshell explanation of why the board cut the cash rate to 1.50%. There was nevertheless nothing in the minutes to suggest the RBA will be cutting again in a hurry, nor any suggestion otherwise. Investors in yield stocks were likely hoping for a hint of the next rate cut, and subsequently we saw telcos down 1.1% and utilities down 0.8% in the session.

These were the biggest sector falls on the day, other than consumer discretionary which fell 1.1%. Misses from both Domino’s and G8 had investors reassessing other high-flying names in the sector trading at elevated PEs.

Providing the balance to the upside were the resource sectors, thanks to ongoing oil price strength and a rebound in base metal prices. Energy rose 1.1% and materials 0.8%.

Hawks Fly

A new triple-high for arguably the most unloved bull market in the history of Wall Street will always represent a point at which downside risk becomes elevated, and likely to manifest in the slightest little thing. Of particular note is the fact the consistent leaders in the US market over the course of 2016 have been the yield plays, particularly telcos and utilities.

At historically rich PEs, yield plays are very much open to interest rate scares so when New York Fed president and FOMC member William Dudley said last night said he thinks a September Fed rate hike is a possibility, nervous investors bailed.

Wall Street is relatively inured to Fedheads babbling on and making suggestions that never come to pass, or at the very least are ultimately overridden by queen of the doves, Janet Yellen. But just as oil prices have been rising on the potential no one gives any credit to, of Saudi production cuts, yield stocks fell last night on the potential of a September rate hike no one believes will happen.

Certainly there was nothing in last night’s July CPI release to suggest a rate hike is imminent. The headline CPI rose by only 0.1% to be up a mere 0.8% for the year, still impacted by low oil prices and food deflation. Take these out, and the annual core rate fell to 2.2% from 2.3% in June.

The Fed prefers the PCE measure of inflation to the CPI, but the CPI suggests little inflation-based support for a rate hike nonetheless.

That said, US industrial production rose 0.7% in July to mark its biggest gain in 20 months and housing starts rose by 2.1% to the second highest rate since the GFC.

The drop in yield stocks overwhelmed yet another strong night for the energy sector as the rally in the oil price continued. Another 1.5% gain suggests perhaps the shorts are not yet out of the market. But then there was the small matter of the US dollar to impact on commodity prices last night.

On Fedspeak, stocks fell and bonds rose a couple of basis points but the US dollar index did completely the opposite of what a rate hike suggests in falling 0.9% to 94.79. The reason for the counter-intuitive drop was a sharp rally in the pound.

US inflation may be benign but a surprise jump up in the UK CPI brought into question the scope the BoE may have of further combatting Brexit fallout with monetary easing.

Commodities

West Texas crude is up US70c at US$46.41/bbl.

The US dollar drop provided no support for base metals. Copper stood still again but lead, nickel and zinc all fell close to 1%.

Iron ore rose US$1.80 to US$61.80/t.

The dollar certainly impacted on gold, given it rose US$7.00 to US$1345.60/oz when a rate rise would have it going the other way.

Today

The SPI Overnight closed down 6 points.

Australia’s June quarter wage price index is out today and will be watched closely in the context of possible further RBA rate cuts.

The minutes of the July Fed meeting are out tonight.

Locally, today is the biggest day in the earnings season so far in terms of volume of stocks, and tomorrow will be that much bigger. Highlights today include CSL ((CSL)), QBE Insurance ((QBE)), Stockland ((SGP)) And Health Cares Primary ((PRY)) and Sonic ((SHL)).

Note that Commonwealth Bank ((CBA)) goes ex today.
 

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