The Overnight Report: Another Milestone Approaches

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By Greg Peel

The Dow closed up 85 points or 0.4% while the S&P gained 0.2% to 2557 and the Nasdaq gained 0.3%.

Break Out

On May 1 this year the ASX200 hit a post-GFC closing high of 5956. By May 17 it had fallen back through 5800 and continued on down to around the 5650 mark. In the following five months, the index has done nothing but bounce up and down within that range, occasionally threatening to break out to the topside but more often threatening to break down.

Yesterday it broke up, closing at 5846. The closest we came to a break-up previously was on June 14, when the index closed at 5833. So we can’t quite count those chickens just yet, and 5850 is the new hurdle to clear before 6000 can be realistically considered once more. The futures are up 11 points this morning, with some help from Wall Street, iron ore, copper and oil, so if that proves accurate we will clear 5850 today.

The run-up from the lows of this latest rally has featured market-wide buying. Yesterday was no different, with all sectors finishing in the green. Materials stood out with a 1.6% gain thanks to a revived iron ore price, and a jump in nickel, while energy helped out with a 1.1% gain thanks to the oil price.

Next best was telcos, or at least one stock in particular, while all the big banks posted gains to send financials up 0.4%. Consumer staples did well with 0.6%. Big miners, big telco, big banks, big supermarkets. It was a day for the ASX Top 20.

Only just scraping into the green were healthcare, as investors pondered the government’s new health insurance model, and the small IT sector.

In the time transpiring between the fall back through 5800 on May 17 and yesterday’s close, the S&P500 has gained 8.5%. But then we don’t have FANG.

We do have China. Having bottomed out late last year following a multi-year decline, China’s wholesale inflation has since rebounded strongly. Yesterday’s September PPI release showed a greater than expected 6.9% year on year, up from 6.3% in August, marking a six month high. China’s year-long construction boom, led by government infrastructure spending, is the driver.

It is also the driver of recent rallies in base metals, supported by the government’s capacity closures on environmental grounds. Beijing is manufacturing its own wholesale inflation. Meanwhile the CPI met expectations at a tepid 1.6% annual, down from 1.8% in August. Beijing is controlling the supply side but the consumer-led demand side is not responding as hoped.

On Thursday we learn China’s latest GDP result.

The Chinese PPI result has been credited for the 3.6% jump in the copper price overnight. That should feed into the local market today, along with another 4% jump for iron ore, and 5850 could be toast.

All is Forgiven

Late last week the major US money centre banks all posted earnings beats, bar Wells Fargo, which had scandal issues, but their share prices fell. Investors were wary that trading profits were weak, leaving mortgages and credit cards to carry the can. It looked like this US earnings season might result in a lot of “sell the fact” from elevated valuations.

But investors have rethought their bank views, and all of the majors are now at least back to where they were. This helped Wall Street to post another session of gains last night.

Another session, another triple-index record.

Energy was another driver of last night’s rally. Energy stocks jumped on the news of the invasion by Iraqi government forces of Kirkuk in the country’s north – the centre of most of Iraq’s oil production previously held by Kurdish fighters. Having finally begun to win the battle against ISIS, Iraq has now responded emphatically to the Kurdish independence referendum.

We now have oil production from both Iran and Iraq under a cloud of uncertainty – the former given Trump’s plan to scrap the nuclear agreement and the latter given the possibility of production disrupted by fighting. The market also learned last night of an explosion on a natural gas platform in a lake in Louisiana, which appears to have resulted in one death.

While US energy stocks had a strong session, the less than 1% equivalent gain for the WTI price seemed more timid in contrast. Analysts continue to point out that while the world is in surplus, OPEC is holding back on production and US shale can easily make up any difference, the oil price has limited upside.

Also supporting sentiment last night was the October reading for the Empire State  manufacturing index, which jumped to a three-year high.

Speaking of FANG, Netflix reported after the bell and is up over 1% in the aftermarket. Goldman Sachs (Dow) and Morgan Stanley report tonight. Traders are bracing for weaker results from the two in comparison to JP Morgan et al given both are weighted towards investment banking and away from consumer banking, and it was the investment banking businesses which disappointed in last week’s results.

Otherwise, the Dow has closed only 44 points shy of yet another milestone, being 23k.

Don’t mention ’87.

Commodities

Iron ore has jumped another US$2.40 to US$62.40/t.

Copper appears to be the major beneficiary of the Chinese inflation data, rising 3.6% in London. Nickel rose 1.5% and other moves were smaller, with zinc posting a fall.

West Texas crude is up US47c at US$51.88/bbl.

Curiously, gold is down -US9.50 at US$1293.80/oz. While we can point to the US dollar index, which is up 0.2% at 93.29, we might have expected a further geopolitical premium to be built in. But gold is not the safe haven it once was when it comes to geopolitics, and likely we simply saw profit-taking at the 1300 level.

The Aussie is down -0.4% at US$0.7849.

Today

The SPI Overnight closed up 11 points or 0.2%.

The minutes of the October RBA meeting are out today, but are unlikely to contain any bombshells.

The US sees industrial production numbers tonight.

On the local stock front, Telstra ((TLS)), Cochlear ((COH)) and Orora ((ORA)) hold AGMs while Rio Tinto ((RIO)) and Oil Search ((OSH)) post quarterly production numbers.

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

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The Australian share market over the past thirty days…

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