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The Overnight Report: Oil Still Falling

Daily Market Reports | Jun 22 2017

This story features QBE INSURANCE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: QBE

By Greg Peel

The Dow closed down -57 points or -0.3% while the S&P was flat at 2435 as the Nasdaq rose 0.7%.

Ugly Indeed

“It could get ugly again today,” I said yesterday. “The technical failure at 5800 suggests we’ll be headed back to retest 5680 support”.

Except I wasn’t necessarily suggesting it would all come in one session – the worst session since Trump’s election and, no doubt thankfully for some, the shortest day of the year. The ASX200 closed at 5665.

It’s also not often you see an ASX Top 20 company plunging -10% in one day, as was the case yesterday with QBE Insurance ((QBE)), thanks to lower margins, higher claims, and bad weather. Invest in insurance companies at your peril. Retail Food Group ((RFG)) was another to fall -10% following yet another profit warning. Can’t seem to sell cakes.

The bulk of the selling was among the banks (aided by insurers), big miners and big oil. Energy’s -2.6% fall was unsurprising given the breakdown in the oil price. A -2.5% fall for materials seemed overdone against commodity prices but of course BHP Billiton ((BHP)) is a cross-over into oil. For the banks, it’s likely just foreign investors being spooked by ratings downgrades and constant housing bubble and household debt warnings.

On Tuesday, news of Indonesian smelter shutdowns had heavily shorted Western Areas ((WSA)) and Independence Group ((IGO)) jumping 9% and 5%. Then nickel fell -2% overnight. An “oops” moment? Western fell -7% and Independence -6% yesterday.

Nickel was up 2% last night.

Falls in other sectors were more in the order of -1% or less yesterday, with two exceptions. Utilities and healthcare have both been outperforming sectors on Wall Street this week and yesterday the local utilities sector held steady while healthcare gained 0.4% against the tide. This was mostly due to Cochlear ((COH)), which jumped 3% on news of approval of its new device.

The run-up to EOFY is typically a volatile time. Aside from infamous “tax loss selling”, fund managers are shuffling around their portfolios, ditching stuff they don’t want to carry into the new FY. This implies there’s also some buying going on in the process, but technical failure, leading to psychological stress, and a tide of foreign investors finding Australia more domestically risky and internationally less appealing as China manages only to plod along, is proving too much for the index to handle.

But…

While oil is down again overnight, copper, lead, nickel and zinc all posted strong gains on a general theme of tightening inventories. Iron ore is up a dollar. The futures are up 18 points this morning. If accurate, that would take us back above 5680. We held that level a couple of weeks ago. Can we hold it again?

How Low?

WTI is down another -1.6% at US$42.53/bbl. This despite news of lower weekly US inventories which on any other day would have sparked a rally. The oil price is now below where it was when the OPEC production cut deal was initially announced last year. The Saudis are now talking about deeper cuts.

As to whether other OPEC members, and Russia, have the stomach for it is another matter. Meanwhile Nigeria and Libya are pumping like mad and the US rig count keeps climbing. It would only take one rebel pipeline attack in Nigeria or one militant invasion of a Libyan oil terminal to spark a short-covering scramble. Such events are not unheard of.

But really the swing factor is US shale. The question now is what is the breakeven level for shale production? Usually US$50/bbl is considered the line in the sand but as technology and efficiencies continue to improve, that level continues to quietly fall. We will only really know where that might be when the first rig shuts down.

In the meantime, energy led Wall Street lower last night.

An interesting point about this round of oil price collapse, compared to what we saw early last year, is that the ramifications are not flowing into US financials. Last year US banks were trashed as the oil price fell on the assumption of loans to the sector turning bad as smaller oil producers hit the wall. This time we are not seeing that, presumably because there’s been enough time in between for the banks to sort out their exposures.

What Wall Street did see last night was another session in which the Nasdaq, which has little exposure to oil, bucked the trend in rising 0.7%. This time it was not so much about Big Tech however but about biotech. Trump is apparently drafting an order that would ease regulations in that space.

And we couldn’t let a day go by without news on the Amazon front.

Last night’s news was that Nike (Dow) will now sell its shoes directly on Amazon’s platform as opposed to indirectly through third parties as has been the case up to now. The result was a small rise in Nike shares, and a dumping of US footwear retailers such as Foot Locker and others. Australian equivalents beware.

Commodities

West Texas crude is down -US70c at US$42.53/bbl.

Aluminium was down -1% in London but copper rose 1.5%, nickel 2%, lead 2.5% and zinc 3%.

Iron ore rose US$1.00 to US$55.40/t.

The US dollar index is down -0.2% at 97.54 helping gold up US$3.70 to US$1246.30/oz.

An interesting element to watch in the commodity space are commodity funds. Oil is the biggest component of commodity indices and this latest plunge in oil may well prompt investors to bail. If so, fund managers have so sell the other commodities in the basket as well on redemptions.

The Aussie is down -0.3% at US$7555, despite the weaker greenback, likely reflecting foreign equity selling yesterday.

Today

The SPI Overnight closed up 18 points. Fingers crossed.

The RBNZ kept its cash rate on hold at 1.75% as expected this morning. Beyond that, the economic and corporate calendar is another rather blank one today.

Rudi will travel to Macquarie Park to co-host between noon and 2pm on Sky Business today.
 

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