The Overnight Report: Getting Defensive

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This story features COLLINS FOODS LIMITED, and other companies.
For more info SHARE ANALYSIS: CKF
The company is included in ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 89 points or 0.4% while the S&P rose 0.5% to 2394 and the Nasdaq gained 0.8%.

What Goes Around…

Standard & Poor’s yesterday downgraded the credit ratings of Australian banks, citing the risk of credit losses from a house price pullback given the level of household debt. The ratings agency cut the ratings of 23 banks including the listed regionals and wealth manager banks, but not the Big Five. For they are covered by government guarantees, and for that they must now pay the Bank Levy.

The imposition of the levy provided a competitive advantage to the smaller banks in a mortgage market the big banks all but control. Downgraded ratings mean a higher cost of funds. There goes that advantage.

The market cap clout of the big banks ensured the financials sector rose 0.6% on the local market yesterday. But it was the resources sectors that stole the show, following solid gains in commodities prices.

“Confirmation” that OPEC would extend its production cuts sent WTI back over US$50/bbl and the local energy sector surging 2.2%. Easing concerns over China’s economy and a falling greenback supported all of bulk, base metal and gold prices, boosting the materials sector by 1.8%.

But investors did not play “risk on” by funding their resource buying out of defensive stocks. Telcos rose 1.5% and utilities 0.9%. Instead they flogged the increasingly beaten down consumer sectors once more – those which suffer from both foreign competition and low levels of consumer spending at a time of elevated household debt. Staples fell -0.3%, discretionary was flat, and healthcare fell -0.4%, on a day when the index rose 0.8%.

Commodities prices are once again positive overnight. News has also come through that Adani is postponing its plans for the controversial Carmichael coal mine. This is presumably good news for incumbent coal producers, but not so for mining services and logistics companies.

A Call to Arms

The US materials sector also enjoyed a rally overnight but the star sector on the day was defence stocks, as opposed to defensive stocks. It was echoes of American glory days past as Trump announced a major US arms supply deal with Saudi Arabia.

Making such deals on his first overseas trip as president provides a distraction from the scandal currently haunting the White House. That scandal still has to play out, but in the meantime Wall Street can put it in back of mind and carry on in the real world.

Big tech continued its rally last night as well – an issue that continues to worry many. The Nasdaq once again outperformed the more diverse indices.

The Saudis confirmed last night that OPEC members are all on board for a nine month extension to production quota cuts, which will be officially announced on Thursday night at the OPEC meeting. Assuming this is the case, attention now turns to what the level of cuts will be.

Presumably the same quotas will be maintained, but there are calls for steeper cuts to production in order to support oil prices. This sets up the possibility of the oil price taking a tumble on Thursday night after having already bounced back into the 50 zone ahead of the meeting. Meanwhile, last night saw WTI edge higher, without getting too carried away.

Fed watchers were particularly drawn to last night’s release of the Chicago Fed national activity index. This index for some reason doesn’t seem to get as much attention as do the Philly and New York regional indices each month, but a rise to a three-year high in April didn’t go unnoticed. Not all US data have been as hot of late, and concerns linger over soft consumer spending.

The result has reinforced expectations of a Fed rate rise next month.

Commodities

The US dollar index continues to tumble nonetheless, largely due to ongoing strength in the euro. Europe seems to be everyone’s favourite story at the moment as it shakes off both economic and political break-up concerns. The dollar index is down another -0.2% at 96.97.

This is helping commodity prices. Gold is up another US$4.80 at US$1460.40/oz.

West Texas crude is up US22c at US$50.73/bbl.

Base metals were mostly positive in London, albeit only slightly.

Iron ore rose US$1.00 to US$62.70/t.

As the greenback drifts lower, the Aussie drifts higher, up 0.2% at US$0.7473.

Today

The SPI Overnight closed up 12 points or 0.2%.

Earnings will again be in focus on the local market today, with all of Collins Foods ((CKF)), Ozforex ((OFX)) and TechnologyOne ((TNE)) releasing their numbers.

Woodside Petroleum ((WPL)) will hold an investor briefing today while Challenger ((CGF)) is among those companies holding AGMs.

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