The Overnight Report: Oil Breaks Down

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By Greg Peel

The Dow closed down -61 points or -0.3% while the S&P fell -0.7% as the Nasdaq fell -0.8%.

Technical Failure

The ASX200 did not manage to hold 5800. That’s largely the reason the index tanked -47 points yesterday despite Wall Street posting new highs. The market was not quite sure exactly why we rallied so sharply back up to 5800 last week and wanted to see if there was conviction behind the buying.

Clearly there wasn’t. All it took was a couple of negative triggers and the floodgates opened once more. The index appeared to be holding up to late morning, but gave way on the release of the RBA minutes. As far as I can tell, there was nothing in the minutes that looked any different from the month before, or the month before that.

The central bank is carefully monitoring the housing and labour markets, given concern over house prices, household debt and a lack of wage growth. We know that. And the RBA still sees 3% growth down the track. It was not a suddenly negative set of minutes.

But we also had, around the same time, confirmation the government intended to quarantine gas intended for export for domestic consumption – a policy that is at least a decade too late. If a weak oil price environment isn’t enough, that news set off the energy sector (-1.5%).

The question was raised yesterday as to how the market would respond to Moody’s downgrade of bank credit ratings, which, incidentally, are not expected to have much impact on bank funding costs. The banks fell -1.0%.

The standout sector on the day were the REITs. Five of the top ten ASX200 worst performers on the day come under this banner – Vicinity ((VCX)), GPT ((GPT)), Abacus ((ABP)) and ASX top twenty heavyweights Westfield ((WFD)) and Scentre ((SCG)). What set them off?

Morgan Stanley issued a rather gloomy in-depth report about owners of shopping malls, with downgrades to forecasts and valuations, plus the prediction that things can genuinely turn out worse than projected.

In the analysts' view, Slowing Consumer + Rising e-Commerce = downward pressure on growth in Net Operating Income (NOI) and on asset values. Investors got the message. This is both structural and Amazon-related. The report was released during the day and was included in yesterday's Australian Broker Call Report, see elsewhere on the website.

On the subject of Amazon, if we’re not yet sick to death of the subject, last night’s news was the leviathan is moving into fashion with a “try before you buy” home delivery and pick-up service. It was another nail in the coffin of US department stores, which all fell sharply last night. Watch out Australian equivalents today.

On the upside, news from Indonesia that 13 smelters had halted operations now the nickel price has fallen below the cost of production had two of the market's most heavily shorted stocks surging in a short covering scramble. Nickel miners Western Areas ((WSA)) and Independence Group ((IGO)) topped the boards yesterday with 9.2% and 4.9% rallies respectively.

Yet materials finished down -0.4%, with the lower gold price weighing. Interestingly, the nickel price is down -2% overnight. Selling was relatively consistent across all sectors bar info tech, which stood still, and consumer discretionary, which surprisingly bucked the trend with a 0.4% gain. As these were the first stocks to be Amazon-ed by the market, maybe there was some rotation out of REITs and into these beaten down names.

It could get ugly again today. The technical failure at 5800 suggests we’ll be headed back to retest 5680 support. The oil price had broken down overnight. Nickel, copper and iron ore are down. The retailers could well be hit again today. The futures are down -29 points.

Hard to Bear

The drop in the US consumer discretionary sector on Amazon’s latest disruption was one reason Wall Street came off Monday night’s highs last night. The other was oil.

There was no new news on the energy front that wasn’t known on Monday night when WTI started to give way. It was just a case of the sellers winning out, taking the price down through the prior bottom of the range at US$43.70 and all the way down through US$43.00 before recovering towards the close for a net -2% drop.

That officially puts oil in a technical “bear market”, if that means anything useful to anyone. A bear market seems to imply we have lower to go, but actually market watchers believe that once the nervous nellies are done, the low price will force marginal US shale producers to once again shut down. For once, the rig count should fall. A bottom in the oil price should be near, if it wasn’t already established below 43 last night.

It was also expiration day for the WTI July delivery contract. Expirations always bring volatility.

But as was noted last night, what Wall Street didn’t see is the type of wholesale spooking of the general market oil price plunges used to invoke. WTI is at its lowest level since August, but take out the falls in energy and discretionary last night, and Wall Street otherwise held up well, not far off the highs.

Although we did see weakness return to the Nasdaq. It will probably be a case of Big Tech now trying to consolidate around a new level.

Commodities

West Texas crude is down -US87c at US$43.23/bbl.

Copper was down -1% in London and nickel -2% with other metals flat.

Iron ore fell -US30c to US$54.40/t.

The US dollar index is up 0.2% at 97.75 but gold’s fall has stabilised somewhat, with only another dollar lost last night to US$1242.60/oz.

The Aussie is down -0.3% at US$0.7577.

Today

The SPI Overnight closed down -29 points or -0.5%.

Today is a quiet one on the economic and corporate front.

Rudi will host Your Money, Your Call tonight, when most will be watching the State of Origin game, 8-9pm.
 

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