The Overnight Report: Magical Mystery Tour

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

By Greg Peel

The Dow closed up 41 points or 0.2% while the S&P rose 0.1% to 2508 and the Nasdaq fell -0.1%.

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On Tuesday the local market jumped over 20 points from the open before drifting off all day to close down -6. Yesterday it opened down -30 before grafting back all day to close -4. The bounce came predictably off our old friend 5680. The market is pedalling very fast on a stationary exercise bike.

The morning’s coin toss came up tails, so traders sold Telstra ((TLS)). The company’s investor day bandwagon rolled into Melbourne and failed to excite. Traders also decided that despite an Aussie stuck over US80c, CSL ((CSL)) was worth buying yesterday (on the back of two positive broker reports, see Australian Broker Call Report yesterday).

Telcos thus finished down -1.5% and healthcare up 1.2%. Other sector moves were mixed and of less magnitude.

It is of little surprise materials fell -0.4% on a sharp drop in the iron ore price but it seems the constant creep-up of the oil price is not reflected in the energy sector, which fell -0.6%. This likely reflects a joke that’s been going around in the industry lately – Canberra.

Adding to weakness in telcos was a -7% fall for TPG Telecom ((TPM)) after jumping a similar amount on Tuesday on the company’s earnings release. Tuesday was all about knee-jerk short-covering on an FY17 result beat. Yesterday came after analysts pointed out there will now be no earnings growth for at least two years.

Seven Group ((SVW)) won the day with a 10% pop after announcing it will acquire the other half of Coates Hire it doesn’t own. The market sees this as a good way to ride the upcoming construction boom, and a good fit with the company’s Caterpillar distribution. Pity about the ancient media assets.

Seven helped industrials up 0.8% while the banks were again soft (-0.3%) and utilities continue to fade away (-0.4%) as more economists decide the RBA will raise in 2018, maybe twice.

All up another lacklustre day on a close to close basis and probably some reflection of squaring up ahead of last night’s Fed statement.

Hawkish Tone

The Fed believes it was able to explain away low US inflation in past years but on the strength of the labour market in 2017 and steady growth in the economy, persistently low inflation in 2017 is a “mystery”, to quote Janet Yellen at her press conference.

I would suggest to Ms Yellen she and her colleagues are working on economic models created and refined in the twentieth century and they have no way of making allowance for a little thing called the internet.

So, if you can’t figure out why inflation is low, best just ignore it. As assumed, the Fed will begin to unwind its balance sheet, beginning next month, by tapering repurchases of maturing bond positions. Bernanke gave us QE and now Yellen is giving us QT — quantitative tightening. QT will be gradual, as was also expected.

What was not expected is that it will also be “predictable”. In other words, the Fed will set the targets and stick with them whatever happens, and otherwise use funds rate changes as their monetary policy tool. This idea does not sit well with some economists.

Moreover, the answer to the question of a December rate hike, yes or no, is not blowing in the wind. Yellen acknowledged that the impact of Harvey, Irma and Maria will be a drag on September quarter GDP but that will be countered by a boost to December quarter GDP in the reconstruction phase. Net-net, no difference. Hence the FOMC still expects to raise again this year.

The odds of a December rate hike have now leapt to 72% from 52%.

So how did Wall Street respond?

The Dow was up around 30 points ahead of the statement release. It then fell -60 points because the computers saw hawkish words. A close of up 40 reflects the fact that while the tone was to the hawkish side, nothing came out of the Fed meeting that hadn’t already been anticipated by the market.

So it was back to the entrenched slow grind upward. Seven straight record closes for the Dow, 42 for the year. We will nevertheless want to wait to see what happens tonight as the smarter investors who step aside from typical Fed day headless chook volatility, take their time to assess the situation overnight.

In other markets, the US two-year yield jumped 5 basis points to 1.45% to mark its highest level since November 2008. The ten-year rose 3 points to 2.28%. The US dollar index jumped 0.7%. Gold fell another ten bucks.

The Nasdaq was lower with a bit of help from a weak day for Apple. Apparently the new Dick Tracy watch has issues.

The latest retail victim is manchester specialist Bed, Bath & Beyond, which dropped -16% on an earnings miss. The company blamed the hurricanes but also said it is “undertaking a number of transformational initiatives”.

I wonder why.

Commodities

Trading on the LME always closes just as a Fed statement is released, hence traders don’t have time to respond. So it was without knowing the US dollar was about to jump 0.7% that traders bought aluminium up 3%, lead and nickel 2% and zinc 1%.

Base metal prices have had a solid run lately as Beijing moves to rein in processing for environmental reasons. Some 80% of illegal lead smelters have now been shut down. Last night China’s biggest aluminium producer, Chinalco, announced it would pare back production two months ahead of new regulations kicking in.

Iron ore fell another -US30c to US$68.00/t.

Gold is down -US$10.20 to US$1300.50/oz with the US dollar index up 0.7% at 92.46.

West Texas crude rose US55c to finally scrape over the 50 mark at US$50.41. This usually signifies a short term top. OPEC meets on Friday.

One might expect a 0.7% pop in the greenback to mercifully send the Aussie lower. The problem is, exchange rates are all about interest rate differentials and both central banks are signalling rate rises ahead, even if the RBA is looking further out.

The Aussie is up 0.2% at US$0.8026.

Today

The SPI Overnight closed up 3 points.

On that last subject, Philip Lowe will speak today.

The Bank of Japan will hold a policy meeting today.

With their incumbency seemingly under threat at this weekend’s election, the NZ Nats will be hoping for a winner with today’s GDP result.

Brickworks ((BKW)) will release its earnings result today, while Suncorp ((SUN)) will hold its AGM.

Today’s list of ex-divs includes Automotive Holdings ((AHG)), Carsales ((CAR)), Crown ((CWN)) and Fletcher Building ((FBU)).

Rudi will appear on Sky Business twice today. First from 1-2pm and later on again for an interview on Switzer TV.
 

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