The Overnight Report: Grinding Back

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By Greg Peel

The Dow closed up 43 points or 0.2% while the S&P rose 0.2% to 2398 and the Nasdaq gained 0.1%.

Weak Signs

A strong rally on the open in the local market yesterday took the ASX200 up 24 points and suggested a run at resistance at 5800 was nigh, following on from Monday’s strength. But 5795 was as far as the index got before the sellers moved in.

They then dominated the rest of the session, turning the index around to an -11 point drop by the close, not quite the low of the day but close enough to it. Such weakness has disappointed commentators, and technically the suggestion now is 5600 looks more likely than 5900.

The big banks had been bought up on Monday on the advantage they gained from not having their credit ratings downgraded. They are still being levied nonetheless, and combined with ongoing selling in the regionals, the financials index proved the worst performer on the day with a -0.5% fall.

Materials rose almost 2% on Monday but yesterday closed down -0.5% despite no particular weakness in commodity prices. Combined, banks and miners provided the major source of weakness yesterday.

On the flipside, the sectors that did not participate in Monday’s rally were the winners. Consumer discretionary rose 0.5% and healthcare 0.5%. Staples remained flat.

“Sell in May” appears to be having too great an influence, but that expression is derived from Wall Street rather than Bridge Street and Wall Street has continued to regain the ground lost on the one-session Trump Dump last week. The US market has quickly forgotten the Russia probe and looked to Trump’s overseas jaunt instead.

On Bridge Street, the market doesn’t really seem to know what it wants to do at present, and policy stasis in Canberra provides no great help.

Non-Budget

A New Foundation for American Greatness is the title of Trump’s proposed budget document. For observers, it’s a new foundation for a complete waste of time. Suggestions are that of lot of what Trump said he would do in his campaign – what he would cut spending on and what he would boost spending on – has not manifested in this proposal.

Therefore it is likely that with Democrat resistance assumed, discord among the Republican ranks will likely make this budget dead in the water before it even gets to Congress.

Meanwhile Trump flits about the world doing all the right things and looking presidential.

And Wall Street continues to grind higher, regaining the ground lost last week. It’s not that the possibility of impeachment has evaporated, it is just understood that it will take a lot of time before that might be the case. Life goes on in the meantime, and with the June Fed meeting rapidly approaching, attention is returning to economic data.

On Monday night it was revealed the Chicago Fed national activity index hit a three-year high in April. Last night saw the release of the Richmond Fed activity index for May, which was expected to pull back from a solid +20 in April to a steadier +15 this month. It came in at +1.

A flash estimate of the US manufacturing PMI for May suggested a drop to an eight-month low 52.5 from 52.8 in April. On the other hand, the flash services index surged to 54.0 from 53.1 to a four-month high.

Sales of new single homes fell -11% in April, the biggest fall in two years. Forecasts suggested a -1.8% fall. April is spring in the US – prime time in real estate. It should be noted, nevertheless, that this number can be very volatile.

Either way the data are hardly convincing, and it will be interesting to see whether the revision of the March quarter GDP result, due on Friday night, can offer some improvement. But with June around the corner, that number’s getting a bit old. The Fed called the weak first estimate “transitory”.

How long can “transitory” last? Recent June quarter data have been mixed. But it is assumed the Fed is intent on raising next month irrespective of the latest numbers. Only if next week’s jobs numbers are a shocker would that assumption change.

Commodities

Having fallen fairly steeply of late, the US dollar was due some buying last night. The circumstances which prompted the turnaround were nonetheless disquieting. The pound and euro weakened on news of the Manchester tragedy.

The dollar index rose 0.4% to 97.37 and this was enough to halt gold in its tracks. It’s down US$9.70 at US$1250.70/oz.

Base metals were very flat in London. There was likely little inclination to trade.

Iron ore fell -US80c to US$61.90/t.

West Texas crude rolled over into the July delivery front month and rose another US36c to US$51.49/bbl.

The Aussie is flat at US$0.7476.

Today

The futures would like to have another go at it. They closed up 11 points.

The minutes of the April Fed meeting are due out tonight but are unlikely to provide any new clues.

Australia will see numbers for March quarter construction work done.

Programmed Maintenance ((PRG)) will report earnings today, Boral ((BLD)) and WorleyParsons ((WOR)) will host investor days and OZ Minerals ((OZL)) is among those companies holding AGMs.
 

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