The Overnight Report: Triple High

Daily Market Reports | Sep 13 2017

By Greg Peel

The Dow closed up 61 points or 0.3% while the S&P gained 0.3% to 2496 and the Nasdaq rose 0.3%.

Batteries Included

On Monday we saw a 40 point rally for the ASX200 off the bottom of the range, following the relief rally on Wall Street. The move was relatively market-wide, although Friday night falls in metal prices had the materials sector going the other way and those funds found their way into the beaten-down banks.

Yesterday saw another 33 points added but this time it was much more of a mixed bag. Momentum continued for the banks, which posted a further 1.3% gain despite ASIC questioning their culture. This time materials also rallied, posting a 1.0% gain to mark a rare lack of bank-miner rotation.

Leading out the materials sector in percentage terms were moves by the battery-related stocks, being lithium miner Galaxy Resources ((GXY)) with an 11% jump and graphite miner Syrah Resources ((SYR)) with 4%. Syrah was of last week the most shorted stock on the market at 20.0%. Galaxy was eleventh on 11.7%. The moves were sparked by Beijing’s announcement it intends to set a deadline for the end of all fossil fuel-powered vehicle production.

Which begs the question, why did lithium miner Orocobre ((ORE)), the second most shorted stock on the market at 18.6%, only manage a 2% gain? Mineral Resources ((MIN)) added 1.6% to an already spectacular looking upswing from the July bottom.

In terms of big guns, South32 ((S32)) came in with a 4% jump thanks to rebounds in metal prices. And the materials sector rally was achieved against the tide of selling in gold miners, five of which made up the top ten worst performers yesterday.

If Monday’s rally was mostly market-wide, yesterday’s was more selectively “risk on”. The banks and materials were the biggest movers, while all of defensive sectors utilities, telcos and consumer staples posted losses.

And waddya know, the futures are up 25 points this morning which, if accurate, would put the ASX200 at 5771 by the close and yes, yet again eyeing off the 5800 brick wall of resistance.

In other news, conditions for Australian businesses are as strong as they’ve been since before the wheels fell off in 2008, but it’s all downhill from here. At least that’s the take-away, one assumes, from yet another rise in NAB’s business conditions index to 15.2 from 14.1 in July, and a plunge in confidence to 5.1 from 11.7.

A breakdown of the survey shows considerable strength in employment conditions, suggesting to economists Australia’s unemployment rate, which has barely moved from around the 5.8% mark for months despite strong jobs growth, may finally start to drop. But will this promote wage growth, which is currently absent? Because that’s what’s weighing on consumer spending, and thus confidence, along with fears regarding rising competition.

Oh come on, it’s just one company.

Today we’ll find out just how confident the consumer is feeling, or not, in Westpac’s survey.

What Issues?

It’s been six weeks since Wall Street last saw the triple – new record highs for all of the Dow, S&P and Nasdaq. In the meantime we’ve had North Korea testing missiles and bombs, Trump’s infamous Charlottesville rants, and two monster hurricanes, albeit the latter was thankfully not as damaging as had been feared.

Indeed, Wall Street is so thankful it appears to have now put the other issues out of its mind. Trump remains a time bomb that could go off at any moment, and I haven’t noticed any white flags being waved in Pyongyang. Indeed, the tightening of sanctions announced by the UN yesterday only has Kim riled up as ever.

But whenever those investors who didn’t jump on in time see even a hint of a pullback, they jump on, and that momentum carries through. All we need is another missile test and/or some delay to the process of tax reform and another opportunity is bound to present. For now, it’s all smiles.

Or perhaps a Fed rate rise or two will suffice. Many a commentator has noted that while the S&P500 is overvalued against its historical average PE, one needs to build in a premium for the benefit of historically low interest rates that shifts that neutral PE to higher ground. If global monetary policy begins to tighten, and we now have a rare instance of all OECD economies posting growth simultaneously, then that PE premium will begin to unwind.

On the other hand, the Treasury Secretary said last night he hoped to get tax reform through Congress by the end of the year and if so, new rates could be retrospectively applied to the 2017 tax year. That comment was worth a point or two on the stock indices.

In the red corner we have monetary policy and in the blue corner we have fiscal policy.

The Dow continued its rally last night despite a couple of drags, being recent stars McDonalds and Apple. The former has 2000 stores closed in Houston and Florida. The latter last night launched the iPhone 8, iPhone 8 plus, iPhone X, some new iWatch and some new Apple TV thingy.

Wall Street was underwhelmed. But then everyone jumped on the Apple bandwagon in the lead-up to the launch, so profit-taking on the fact is inevitable. There was some consternation, nevertheless, that the much vaunted tenth anniversary iPhone X will cost US$999 – a price point considered a bit stiff for average Apple fans.

Meanwhile, Irma has ensured a surge in the price of oranges.

Commodities

Base metal prices fell heavily in London on Friday night, rebounded somewhat on Monday night, and last night saw mixed moves. Aluminium rose 0.5%, lead 1% and nickel 2%, while copper fell -1% and zinc -0.5%.

Iron ore rose US60c to US$74.20/t.

West Texas crude is up US27c at US$48.37/bbl.

The exit of the safety trade stalled a little last night as North Korea issued its own fire & fury threats in response to tightened UN sanctions. Gold is up US$4.40 at US$1331.40.

The US dollar index is steady at 91.92 and the Aussie is -0.1% lower at US$0.8018.

Today

The SPI Overnight closed up 25 points or 0.4%.

As noted, Westpac’s consumer confidence survey is out today.

Brambles ((BXB)) and Seven Group ((SVW)) are included in today’s list of ex-divs.
 

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