The Overnight Report: And Still The Records Tumble

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By Greg Peel

The Dow closed up 66 points or 0.3% while the S&P gained 0.5% and the Nasdaq 0.6%.

And Breathe Out

A 2.4% rebound for the financials sector rather sums up yesterday’s activity in the local market. We could just about leave it there.

It’s been three years since APRA warned Australian bank capital positions would have to be “unquestionably strong” to satisfy the regulator, without providing any quantitative detail. One reason was that the original idea was to wait for the decision on Basel IV international bank capital requirements and then add an extra buffer to account for Australia being a small fish in a big pond.

Basel discussions went on and on, and in the meantime analysts could only speculate as to whether the big Australian banks would require another round of capital raisings. The banks set about increasing their capital positions in preparation.

Basel talks were eventually abandoned and a decision postponed indefinitely. That meant APRA had to come up with its own number. Yesterday, finally, that number was revealed as 10.5%.

Given their sheer size, it’s not often you see a Big Bank on the ASX top ten leaders board in a session. Yesterday ANZ Bank ((ANZ)) came in at number two, Westpac ((WBC)) at three, National Bank ((NAB)) at five and Commonwealth Bank ((CBA)) at six. Of the four, only CBA is yet to scrape over the 10.0% capital mark, with ANZ currently strongest on 10.1%. Yet given APRA has set 2020 as the year of compliance, CBA will still be able to stroll it in.

There will be no need for capital raisings or dividend slashing. Now we can all get some sleep.

If only the same could be said for Telstra ((TLS)). Telcos fell -1.4% yesterday as the Telstra board itself hinted dividend policy was being discussed. The money had to come from somewhere to go back into the banks.

Materials fell -0.9% no doubt as another source of funds, but also on the yet stronger Aussie which impacts on all miners, but particularly gold miners when the AUD gold price is tanking.

Healthcare and consumer staples each gave up -0.4%, while having been trashed on Tuesday on the RBA’s 3.5% cash rate call, utilities bounced back 0.9%, presumably because the RBA did not mean by tomorrow.

It is also convenient that APRA chose to make its big announcement the morning after the ASX200 had again fallen to the bottom of the range at 5680. The banks took the index back over 5700 yesterday and this morning the futures are up another 30 points, thanks to another record-setting session on Wall Street.

And oil and iron ore are both up strongly again overnight.

Goldman Disgraced

On Tuesday night Goldman Sachs accounted for the bulk of the Dow’s decline following a weak earnings report featuring big losses in proprietary trading. Goldman blamed difficult markets during the quarter, failing to acknowledge that all US investment banks played in the same market and losses at other shops were not nearly as steep.

The closest lookalike to Goldman is Morgan Stanley, as neither have big commercial banking operations like the JP Morgans and BofA’s of the world. Last night Morgan Stanley rose 3% after posting the smallest trading loss of all the majors.

The weekly US crude inventory chocolate wheel was spun again last night and landed on a bigger than expected drawdown. WTI rose another 1.8%.

US earnings results to date have been solid on average, and last night the S&P500 and the Russell small cap hit new all-time highs. Most notably, so did the Nasdaq. The Big Tech sell-off has proven rather fleeting.

To drive home the rapid evolution of technology in the 21^st century, tech dinosaur and Dow component IBM beat earnings expectations but posted its 21^st quarter of revenue declines. A -4% fall in share price meant the Dow just missed out on also hitting a new high. IBM made its name last century by building mainframe computers. They are now museum pieces, given there are now fridges with the same computing capacity.

And the news from Washington…

Having appeared to have given up hope on ever coming up with a Trumpcare solution, a barrage of criticism of US Congress from all quarters has sparked Donald Trump into trying to appear to be playing president. Having declared on Tuesday night Obamacare would die on its own anyway, last night Trump gave the Senate an ultimatum: You cannot take your summer holidays until a majority-supported bill has been delivered.

It would seem that the means to achieving sufficient support is not a case of yet again drafting up a compromise that would only be rejected by a different bunch of Republicans, but simply to lean on the current dissenters and get them to capitulate, even if it has to be under protest.

Could be quiet in the Hamptons this summer.

The Washington soap opera is having little impact on Wall Street at present. US stock markets remain strong on the back of an imbedded assumption that eventually Trump will achieve at least some of his campaign promises and that will be a good thing. In the meantime, there’s little point responding to every day’s to-ing and fro-ing.

Right now, earnings are in focus. So far so good, but it’s early days.

Commodities

West Texas crude is up US84c at US$47.09/bbl.

Iron ore rose US$1.40 to US$69.50/t.

The US dollar index has ticked back up 0.2% to 94.85 which did not appear to help base metals prices. Aluminium and nickel fell -0.5% in London, copper -1%, zinc -3% and lead -4%.

Gold is steady at US$1241.00/oz.

The Aussie has kicked on with it, up another 0.4% at US$0.7950 despite a slightly stronger greenback.

Today

The SPI Overnight closed up 30 points or 0.5%. If we stick to the current script, presumably by next week the index will be back near 5800.

The Bank of Japan’s policy meeting today will likely be a yawn but global markets will be heavily focused on tonight’s ECB meeting.

The local jobs numbers are out today.

Alumina Ltd ((AWC)), Iluka ((ILU)) and Evolution Mining ((EVN)) release quarterly reports today.

Rudi will travel to Macquarie Park and appear on Sky Business today, noon-2pm.
 

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