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The Overnight Report: Brick Walls

Daily Market Reports | Mar 17 2017

By Greg Peel

The Dow closed down -15 points or -0.1% while the S&P fell -0.2% to 2381 and the Nasdaq was flat.


Be in no doubt, Australian resource stocks are back in fashion following a brief period of profit-taking. Why? Because the Fed might only raise three times in 2017 instead of four. Or realistically it could be two, or five. The FOMC is not obliged to commit to its predictions, which is why they have not been accurate for the past two years.

The suggestion of a slower pace of Fed tightening sent the US dollar plunging on Wednesday night and hence commodity prices all shot up in response. The producers of those commodities were hot property on the local market yesterday, with materials closing the day up 2.5% and energy up 1.9%.

Yet the ASX200 only managed a net 11 point gain. The futures had suggested 36 points but the market managed only 26 from the open, before drifting back all day. We can cite three reasons for the seemingly muted performance.

Slower Fed tightening is not good for US banks, so they were sold down on Wednesday night. For some reason, investors in Australian banks seem to believe they should follow the leader, even though higher US rates increase Australian bank funding costs. Hence the banks closed down -1.1% yesterday, which is worth -20 index points. Traders likely raided the banks to fund their resource sector purchases.

Secondly, when the ASX200 jumped on the open yesterday it ran smack into 5800 – a level that has provided staunch resistance these past months. We saw failures at 5800 in both January and February. Technical selling would have been in play yesterday.

And to reinforce this, it was expiry day for quarterly SPI futures and index options. 5800 would have been a popular strike price.

So with a quarterly expiry now out of the way for another three months, perhaps the coast is now clear for a breach of 5800, as chartists keep telling us is likely. It won’t be today though.

Also basking in the afterglow of a less hawkish Fed yesterday, predictably, were utilities (+0.4%) and telcos (+1.2%). Yield payers stand to lose from rising rates.

The February jobs numbers were released yesterday, and provided all sorts of confusing signals.

The total number of jobs fell by -6,400 when economists had predicted a gain of 16,000. While the last time economists got anywhere close to a correct prediction, Socrates was playing fullback for Athens, the actual miss in direction is disturbing. Without any move in the participation rate, the unemployment rate jumped to 5.9% from 5.7%.

But the unemployment rate is meaningless, as one only has to work for about an hour a week to be counted as having a job, even though that worker might be desperate for more hours. What was most noticeable about yesterday’s number is that it broke down into a gain of 27,100 full-time jobs against a loss of -33,500 part-time jobs.

We don’t have the “hours worked” statistics, but I would hazard a guess adding 27k full-time jobs at the expense of 33k part-time jobs just might have affected an increase. That would actually be good. But we’ve seen these monthly blips in the trend before. The trend remains very much towards more part-time work and less full-time, ensuring anaemic wage growth.

Budget Blues

The Bank of Japan made no changes to its negative-rate monetary policy stance yesterday despite the Fed hike. The Bank of England cited inflationary pressures that might suggest a rate hike, but also Brexit risk that demands an on-hold stance for the time being.

There’s only one Donald Trump, it seems. On early count it appears the incumbent Dutch government will be returned.

These were the factors at play among major currencies last night. The yen was weak, the euro was strong and in between, the US dollar index ticked lower again. But for Wall Street, much attention was paid to Trump’s initial budget blueprint.

It’s just a blueprint at this stage, Camp Trump was at pains to point out, but it does have implications for various industries, for example good for defence contractors and not so good for healthcare. So there was some shifting around in sectors on Wall Street last night.

Otherwise, a -15 point drop in the Dow is neither here nor there after a 120 point rally the day before. But it was a choppy rise to get there.

The Dow initially opened another 50 points higher on a Fed hangover but there hit a wall, unsurprisingly smack on 21,000. This story is starting to sound familiar. It then fell over -100 points, bounced back to the flatline, and drifted to a slightly weaker close.

The choppiness likely is a reflection of trying to interpret Trump’s budget, but also the repositioning of those investors who prefer to wait until after volatile Fed days to make their measured decisions.


It would not have been surprising to see base metal prices surge in London last night, given LME did not have enough time to respond to the Fed on Wednesday night. But despite the US dollar index falling another 0.3% to 101.26, metal prices moves were tepid, with only zinc managing a 1% gain.

Iron ore added another US50c to US$92.60/t.

Gold is up another US$6.20 to US$1226.00/oz.

The oils are slightly lower.

With help from the weak local jobs number, the Aussie is down -0.5% at US$0.7675.


The new June front month SPI Overnight closed down -8 points.

The US will see industrial production and consumer sentiment numbers tonight, but more importantly it is a quadruple witching expiry of equity derivatives. Such sessions can be volatile.

Rudi will link up via Skype with Sky Business today, later than usual at around 11.30am, to discuss broker calls.

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