The Overnight Report: Relief

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By Greg Peel

The Dow closed up 259 points or 1.2% while the S&P gained 1.1% to 2488 and the Nasdaq gained 1.1%.

Rotation

As is so often the case recently, just when it looked like this time the local market might truly break down through the bottom of the range it bounces back hard. Mind you, every time in recent months it looked like the break-out might finally be through the top, the reverse has been true.

There were three elements to consider in yesterday’s trade: no North Korean missile test, Hurricane Irma downgraded and tracking away from the more populated areas of Florida, and Friday’s slightly disappointing trade numbers from China.

The latter sparked a sharp sell-off in metal and mineral prices on Friday night after solid runs up to levels analysts had warned looked overblown. The result for the Australian market was a materials sector down -1.1% yesterday.

But that was the only sector to finish in the red. The other pieces of news otherwise suggested a relief rally would be forthcoming on Wall Street in particular and globally otherwise, so what to buy? Materials is a heavyweight sector that’s had a good run of late, so another heavyweight sector that’s performed poorly of late would be the answer.

Despite around one third of Australians lying in their mortgage applications (you could knock me down with a feather), yesterday the financials surged 1.6%. The Big Four alone contributed 22 points to the 40 point rally for the ASX200. Commonwealth Bank’s ((CBA)) woes were forgotten.

And it wasn’t just the Big Four. Macquarie Group ((MQG)) came out with what amounted to a guidance upgrade, while insurance companies saw some relief on the Irma front.

Another sector struggling of late, and containing a heavyweight or two, is healthcare, due to the strong currency. The Aussie is still above US80c but healthcare jumped 1.0% yesterday, mostly thanks to CSL ((CSL)). The biggest move (+1.7%) was posted by the smallest sector of IT. If we join the dots of safety trade unwinding and US yields rebounding, we come up with a buy case for Computershare ((CPU)).

Every other sector was up yesterday to a varying degree, including small gains for the defensive sectors.

The index snuck safely back above 5700, and all that needed to happen was for Wall Street to come to the party last night. It did. The futures are up another 31 points this morning. Soon we’ll be talking 5800 again.

Until we’re not.

New Record

It’s hard to believe that with all that’s been going on in the US and the world of late, the S&P500 can suddenly just turn around and post another new all-time high. But that’s what happened last night. North Korea hasn’t gone away, Tropical Storm Irma continues to track a destructive path through other states, and there’s no sign of any progress on tax reform. But the buyers don’t care.

The Dow is back over 22k but not quite at the previous high, and ditto the Nasdaq, but last night saw the biggest one-day rally on Wall Street since March.

Aside from missile relief, which surely must only be fleeting, a downgrading of the expectations of the cost of Irma was arguably the most significant catalyst last night. It’s not just about that figure but the flow-on implications into all sorts of sectors from insurers to airlines, tourism companies and building material companies. Commentators all tried last night not to sound too cheery when there are still people who have been badly hurricane affected.

The other positive fallout from Irma harks back to Trump’s deal with the Democrats to push out the debt ceiling issue. That compromise was as a result of needing to pass a costly relief bill in the wake of Harvey, and while Irma’s cost will not be as significant as first thought, another bill will still need to be passed. Again Trump will likely turn to the opposition.

The implications are nevertheless wider than just funding for relief. After nine months, Trump has come to accept that dealing with a completely polarised Republican party is a bet to nothing. For eight years the Republicans railed against Obamacare and swore to repeal it at the first opportunity, yet division within the ranks has meant this has not happened. Try to compromise one way and run into one factional brick wall. Go the other way and get the same result.

One would expect tax reform would be something the Party for Capitalism would easily agree upon but after the healthcare debacle, no one expects an easy ride. So, perhaps the only possible route to take is a Congressional compromise – get enough Democrats interested to offset the handful of Republicans that will likely cause gridlock on one particular aspect or other.

Will it work? We’ll have to wait and see. But Wall Street is starting to think that maybe it might just.

And investors, as so often has proven the case of late, have been willing the market down simply so they can buy at a better price. When any opportunity arises, in they pile. And when it looks like it will be another opportunity missed, they all jump over themselves and another record is posted.

The safety trade was notably unwound last night. A shift back out of the safe havens of yen and franc has the US dollar index up 0.7% at 91.94. Gold is down -US$19/oz. The US ten-year yield is up 6 points at 2.12%. The VIX is down -12%.

It would be interesting if Kim chose today to test another missile.

Commodities

Gold is down -US$19.00 at US$1327.00/oz.

Having tipped over on Friday night on the slow reopening of Texas refineries, West Texas crude is up US56c at US$48.10/oz.

After big falls on Friday night due to the disappointing Chinese data, all base metals regained some of that loss in London last night. Aluminium, copper and lead all rose around 1%, nickel 1.5% and zinc 2%.

Iron ore is nevertheless down another -US10c at US$73.60/t.

The Aussie is down -0.3% at US$0.8026.

Today

The SPI Overnight closed up 31 points or 0.5%.

NAB’s monthly business confidence survey is out today.

Boral ((BLD)) will host an investor day.

Today’s list of ex-divs includes Cimic ((CIM)), News Corp ((NWS) and CSL.

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

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