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The Overnight Report: Damn The Torpedoes

Daily Market Reports | Aug 15 2017

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

The Dow closed up 135 points or 0.6% while the S&P gained 1.0% to 2465 and the Nasdaq rose 1.3%.

Relief

The Australian market followed Wall Street and global markets down on Friday on the North Korea sell-off to once again sit poised at the bottom of the longstanding range. The question was as to whether the dam was set to break in the US, or whether the tumble was to prove a temporary scare.

On Friday night Wall Street held its ground. It was sufficient signal for the Australian market to feel relieved, and from rock solid support, start buying again.

There followed a fairly straightforward rally in which everything that was sold down on Friday was bought back again at least to some extent. The banks led the charge, up 1.0% with Ian Narev’s announced retirement from troubled Commonwealth Bank ((CBA)) adding some fuel, while all other sectors moved up relatively evenly. It was a market-wide sell-off and a market-wide relief rally. Only utilities bucked the trend in falling, haven risen as a safe haven on Friday.

Wall Street has bounced back overnight so it was a good call.

Relief allowed the market to also focus on the matter at hand, being the unfolding result season, which yesterday provided its usual winners and losers. Stars of the day were outdoor advertiser oOh!media ((OML)) and Bendigo & Adelaide Bank ((BEN)), both up around 8%. Disappointers included JB Hi-Fi ((JBH)), down -4%, and Ansell ((ANN)), down -3%. Newcrest ((NCM)) fell -1%.

Also in focus was the Chinese economy.

China’s industrial production grew 6.4% year on year in July, down from 7.6% in June and missing 7.2% forecasts. Retail sales rose 10.4%, missing 10.8% forecasts. Fixed asset investment rose 8.3% year to date, missing 8.6% forecasts. Among the numbers, notable was low production from Chinese oil refineries due to excess inventory.

Once upon a time such data had the power to substantially move the Australian market on the day. These days the numbers seem to wash over. The bottom line is the Chinese economy may not be shooting the lights out anymore but it’s not careering downhill either. More important to Australia of late has been the specific matter of Beijing fiddling about with metals and minerals production and refinement, with infant formula imports and other things. Otherwise, we’re happy the Chinese economy is muddling along.

More local earnings results are due today ahead of very big sessions on Wednesday and Thursday. If we’re all now going to chill out about North Korea then earnings should be the focus of attention.

Caps Back On

The failure of Wall Street to extend its North Korea-related sell-off on Friday night and instead consolidate was sufficient enough a signal for the buyers to return last night. There had been no further exchange of threats between the two clown princes.

The Dow managed to regain the 22,000 mark, jumping straight up from the open and forcing everyone on the NYSE to put their 22k caps back on (literally). Thereafter it was largely a sideways session, although a peak of up 170 points faded a bit in the afternoon for a close just below the milestone.

More notably, the S&P500 outperformed the Dow in rising 1.0% — the first such gain in three months and only the third in 2017. While a solid rally in financials aided the Dow and a return to favour for tech stocks helped the Nasdaq up 1.3%, the S&P’s move suggests the rally was broad-based. Investors saw Thursday night’s sell-off as providing an opportunity to get in at lower levels.

Clearly fear subsided, given the VIX index fell back 20% to 12. Gold dropped seven bucks and the US ten-year yield regained 3 basis points to 2.22%. Safe haven currency buying unwound, sending the US dollar index up 0.4% to 93.44.

What, exactly has changed in the meantime is unclear, other than Guam survived the weekend and experts have mostly suggested even Kim Jong-un is not stupid enough to be completely suicidal. But that remains to be seen.

Either way, Wall Street has shown that with valuations at questionably high levels, a major correction may be only one tweet away.

Commodities

Back to China. That particular bit of data yesterday regarding low Chinese refinery output was enough to spark a -2.6% drop in oil prices. West Texas crude is down -US$1.27 at US$47.50/bbl, with the longstanding 45-50 range remaining very much intact.

Zinc (+0.5%) was the only base metal not to suffer weakness on the Chinese data, with copper down -0.5%, aluminium -1% and lead and nickel down -1.5%.

Iron ore nevertheless remains unchanged at US$74.30/t.

Gold is down -US$7.10 at US$1281.60/oz.

Chinese numbers and greenback strength have the Aussie down -0.5% at US$0.7852.

Today

The SPI Overnight closed up 21 points or 0.4%. Next stop 5800?

The minutes of the July RBA meeting are out today, but are unlikely to provide any revelations given the governor’s testimony on Friday rather summed things up.

US retail sales numbers are out tonight.

Challenger ((CGF)) and Domino’s Pizza ((DMP)) feature among today’s earnings reporters while it’s the turn of ANZ Bank ((ANZ)) to provide a quarterly update.

Rudi will connect with Sky Business via Skype at around 11.15am to discuss broker calls.
 

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CHARTS

ANN ANZ BEN CBA CGF DMP JBH NCM OML

For more info SHARE ANALYSIS: ANN - ANSELL LIMITED

For more info SHARE ANALYSIS: ANZ - ANZ GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED

For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: OML - OOH!MEDIA LIMITED