The Overnight Report: Onward, Ever Upward

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By Greg Peel

The Dow closed up 63 points or 0.3% while the S&P gained 0.2% to 2503 and the Nasdaq rose 0.1%.

As You Were

The ASX200 yesterday recovered some of the loss it suffered on Friday in anticipation that Wall Street would react poorly to the latest North Korean missile test. The selling had been relatively market-wide on Friday, so given Wall Street actually rose on Friday night, yesterday saw a largely market-wide reversal.

The index was up 36 points at lunchtime but a tepid response to Telstra’s ((TLS)) investor day saw telcos fall -0.8% to ensure a lower close.

Otherwise, the banks led the way with a 0.8% gain and most other sectors fell roughly into line. Materials only managed 0.2% but that was a good result in the face of lower iron ore and gold prices. The only other losing sector was utilities, again, down -0.1%.

The Australian three-year bond yield, in case you’re wondering, is now at its highest level since December 2015, at 2.16%. It has risen 8% in a week. Since December 2015, the RBA cash rate has fallen to 1.50% from 2.00%.

Rising bond yields should be good for Australian banks, as they offer the opportunity for wider interest rates margins, but the caveat in Australia’s case is stretched mortgages and high levels of household debt in general. What impact will the RBA’s inevitable tightening cycle have?

The case is clearer for yield-paying stocks. As bond rates rise, the yields on utilities, REITs and other yield stocks look less attractive on a comparative basis.

The index is now back into what we might consider neutral territory at 5720, somewhere towards the middle of the longstanding range. We should remind ourselves that September is the month for ex-dividends and that flood will continue until it peters out in early October, continuing to drag on the ASX200 without actually altering anyone’s wealth position.

September is historically the worst month of the year. Well, tell that to Wall Street. October is the historical month of shocks.

Dow Turns 40

Last night saw the fortieth record high for the Dow in 2017, following five consecutive daily records in a seven-day winning streak.

Of course, we should expect a run of records when in blue sky territory but forty in nine months underscores just how incremental the rally has been, with very few down days in between and also very few surging up-days. It’s just been a slow grind.

I am reminded that when I first began this Overnight Report, back before the GFC when all we cared about was China and the commodity super-cycle, it was not a daily feature. I only wrote a report when the Dow moved 50 points in either direction – a benchmark below which one could safely say nothing much happened. Of course, the Dow is now a bit shy of three times its level at the GFC bottom and a bit shy of twice its level from the pre-GFC peak.

So we could call the 50 points back then at least 100 now. If Trump has managed to do anything it is to kill off Wall Street volatility, once the dust settled on his shock victory. The last five days have seen increases that have not much exceeded 60 points each.

It has been variously described as “climbing the wall of worry”, “lava flowing uphill” and probably more accurately, the TINA trade. Investors continue to buy stocks because they don’t know what else to do with their money. This has a lot of people worried, yet calls for a sharp pullback continue to come and go without result.

The US economy is quietly improving, and the world economy is quietly improving. Wall Street has now apparently stopped worrying about North Korea. Hurricane Maria is now threatening to be another Irma, and there are two others behind her. But already Wall Street is getting excited about the earnings to be made in the rebuilding of Texas and Florida.

The expectation is for rising interest rates, but not so fast as to be a shock to the system. The Trump trade is “back on”, it is being noted, and that can only be a good thing. Now that Trump has become a Democrat he might actually be able to achieve something.

There is no reason to sell, and even if there is, those investors who have been waiting for a pullback jump in quickly to ensure there is no pullback. The only way is up, it seems.

One day it won’t be, but no one can see that coming.

US financials are back in vogue now that US bond yields are heading north once more and the yield curve is widening. US energy stocks are being supported by an oil price that looks comfortable near US$50/bbl. Other commodity prices have surprised by either rising or simply hanging in there. Big Tech remains the world of growth opportunity.

It’s only the US retailers who are suffering in the second half of 2017. The latest company to be Amazon-ed is the once ubiquitous Toys’r’Us, which is reported to be about to file for bankruptcy.

The other 2017 impetus for Wall Street has been the US dollar which, like interest rates, has not done what anyone expected it to do back in January. The greenback has weakened, thus supporting America’s multinationals. Bond yields have fallen, thus not dragging on valuations.

Maybe if the Trump trade does really enter another leg (See: tax reform) and these elements turn, maybe then the pressure might be on.

Commodities

Traders are increasingly giving up on the gold safe haven story. It’s down another -US$12.10 to US$1307.10/oz with the US dollar index up 0.2% at 92.04.

Despite the stronger greenback, all base metal prices are marginally higher. Zinc stands out with a 2% gain.

Iron ore fell -US10c to US$70.80/t.

West Texas crude is up US10c at US$49.93/bbl.

Ahead of today’s release of the RBA minutes, the Aussie is down -0.5% at US$0.7958.

Today

The SPI Overnight closed up 7 points.

Aside from today’s minutes, locally we’ll see a look-back at June quarter house prices.

TPG Telecom ((TPM)) and New Hope Corp ((NHC)) release earnings results today.

Cochlear ((COH)) and Sigma Healthcare ((SIG)) are among those stocks going ex today.

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

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