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The Overnight Report: Smooth Transition

Daily Market Reports | Nov 03 2017

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

By Greg Peel

The Dow closed up 81 points or 0.4% while the S&P gained 0.1% to 2575 and the Nasdaq rose 0.4%.

More Work To Do

The ASX200 spiked up 24 points form the open yesterday to hit 5961 but was quickly slapped down again. A choppy period saw the index back to 5929 late morning, or -8 points down on the session.

There was some reprieve when the September trade numbers were announced but not enough to prevent the index trundling along to a close of -6. It seems getting through the 5950 level is going to be a tougher assignment than 5850, which was conquered in a blink.

Australia’s trade surplus doubled in the month to $1.75bn, well above $1.2bn forecasts. A surge in iron ore exports was the primary driver. Total exports rose 3.3% and imports rose 0.6%. CBA’s economists expect the trade balance to remain in surplus for the next few years. Chinese environmental curtailments will drag but this will be offset by the growth in LNG exports.

The numbers were clearly positive for the materials sector, which won the day with a 1.4% rise. Energy was also strong (+0.9) as the oil price continues to hang in there. Oil Search ((OSH)) managed to recover somewhat from Wednesday’s Alaskan avalanche.

On the flipside were the telcos (-1.4%) and the financials. National Bank’s ((NAB)) result was not well received and a -3% fall triggered selling in peers. Throw in Bank of Queensland ((BOQ)) going ex and financials were down -0.7%.

While 5950 is proving a barrier from the technical perspective it is quite possible yesterday saw traders taking profits and squaring up ahead of two major announcements expected in the US last night, being the release of the tax plan and the nomination of a new Fed chair.

More of the Same

The details of Trump’s tax reform package were released early in the session. On the corporate side, the major elements are an immediate cut of the corporate tax rate to 20% from 35%, and a repatriation rate for cash held offshore, in what are currently lower tax jurisdictions, of 12%.

On the personal side, income tax rates and thresholds have been tweaked. The jury is still out on whether these favour the middle class or the rich. But the main stumbling block ahead will not be the rates, but the so called “pay-fors”. The tax cuts are estimated to cost the government roughly -US$3trn in revenues. The planned offsets are expected to retrieve some US$2trn, and the boost to the economy is supposed to make up the difference, and some.

There has already been much debate as to whether the economic growth assumption is accurate. Meanwhile, certain “pay-fors” such as an elimination of state tax deductions and a reduction in cap levels on mortgage deductions remain contentious issues that will ensure this plan will not sail smoothly through Congress. The question is as to how much wriggle-room Mnuchin and his team built into the plan to ensure some potential for compromise to appease upset Republicans and still get basically what Trump wants.

The target is for a bill to be passed in the first quarter next year. Let the games begin.

Wall Street initially sold off on the release of the plan, with the Dow falling around -85 points. There was likely a “sell the fact” element going on here, alongside doubts over the possibility of the plan actually ever getting through given aforementioned contentious issues. However the sell-off was brief, and Wall Street quickly recovered to be flat on the session by late morning.

Around 3pm, President Trump announced Fed governor Jerome Powell as his nomination for Fed chairman. By the time of the announcement it was a poorly kept secret.

Powell is seen as a safe choice by Wall Street – sufficiently Yellenesque in his views as to not upset the apple cart by charging ahead with rate hikes and derailing the stock and bond markets. He is not an economist a la Yellen and Bernanke, rather his background is in capital markets, a la Paul Volcker, which is a positive for Wall Street. He has also sat on the FOMC for some time now hence his transition should be smooth.

Powell was worth over 50 Dow points into the close.

Lost in the wash of last night’s major announcements was news US productivity (GDP per man-hour) jumped 3% in the September quarter, to mark the strongest level in three years. Average productivity over the period 2007-16 was just 1.2%. However, once again the result has to be considered with the caveat of the impact of the hurricanes.

Also taking a backseat was the news the Bank of England had increased its cash rate for the first time since the GFC.

The move to 0.5% from 0.25% has nevertheless been seen as a “dovish hike”. It merely reverses the snap cut the BoE enacted post the Brexit vote when the pound collapsed and inflation jumped to 3%. The rhetoric suggests a “one and done” move, with further rate hikes unlikely in the foreseeable future – a future clouded by Brexit.

To underscore the dovishness, the pound dropped another -1%.

Commodities

It was doves all around, with Powell considered perhaps a tad more hawkish than Yellen but a lot more dovish than a couple of the other early frontrunners for the position. The US dollar index is down -0.1%. The US ten-year yield fell -3 basis points to 2.35%.

Base metal prices came off in London, but that’s hardly surprising given recent strength. Nickel and zinc fell -1%, lead -1.5% and aluminium -0.5% while copper’s drop was minimal.

Iron ore rose US80c to US$59.30/t.

Gold stood still at US$1275.50/oz.

West Texas crude is up US50c at US$54.77/bbl.

On the strength of yesterday’s trade numbers, the Aussie is up 0.6% at US$0.7717.

Today

The SPI Overnight closed up 19 points. Another shot at 5950 is upon us now two major issues are out of the way in the US.

Tonight nevertheless brings US jobs numbers.

Locally we’ll see retail sales data. Across the globe it’s services PMI day, other than in Japan which is closed today.

Genworth Mortgage Insurance ((GMA)) will provide a quarterly result today while Boral ((BLD)) is among those holding AGMs.

Note that the US comes off summer time this weekend, hence as of Tuesday morning the NYSE will close at 8am Sydney time, as will the SPI Overnight.

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

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