The Overnight Report: Conviction Waning

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

By Greg Peel

The Dow closed down -138 points or -0.6% while the S&P lost -0.6% to 2564 and the Nasdaq fell -0.5%.

Lack of Resources

Australian wages grew by a mere 0.5% in the September quarter, managing to lift the annual rate from its historical low of 1.9% in June to only 2.0%. Economists had forecast 0.7% growth for 2.2% annual.

Economist forecasts were more bullish because as of July 1, the minimum wage as determined by Fair Work Australia was lifted by 3.3% – much higher than last year’s 2.4% increase and the largest since 2011. ANZ economists calculate this alone was worth 0.15ppt, hence the net wage growth result suggests non-award wages actually went backwards in the quarter.

This despite a period of strong jobs growth. The RBA will be disappointed. While the central bank has for many months suggested in its statements “Wage growth remains low. This is likely to continue for a while yet,” it goes on to say “although the stronger conditions in the labour market should see some lift in wage growth over time.”

Not yet.

Forex traders didn’t muck about – the Aussie is down -0.7% at US$0.7580. A rate hike is now even further away, and those economists still believing the next move will be another cut are looking more vindicated.

Aside from a near-flat result for the IT sector yesterday, consumer discretionary was the only sector to close in the green with a 0.2% gain. The biggest employer? Or is it a case of investors anticipating that, somewhere over the rainbow, the multi-faceted marriage industry is about to enjoy a very big boost?

Elsewhere it was again a sea of red but the real damage was done by materials (-1.4%) and energy (-1.6%). After a strong run of late, Tuesday’s weaker Chinese data tipped base metal prices over on Tuesday night while a downgrade to global demand forecasts from the IEA had oil retreating from recent solid highs.

Otherwise, weakness was also felt in consumer staples (-0.5%), industrials (-0.6%) and the banks (-0.4%). It was likely Tuesday’s Woodside-related rout prompted not only technical selling, but selling from those who missed out on Tuesday or who were held up on order-matching platforms.

Only two sessions earlier the question was one of whether 6000 would now hold as support for the ASX200 following the break-out through that longstanding barrier up to 6050. Now we’re back looking at 5900 as the likely support level.

But if this morning’s futures are any guide, we’re hoping to push back up towards 5950. They’re up 14 points with the Dow down -138 and despite no bounce in commodity prices.

If this plays out, we can assume there are investors looking at the past two sessions as a clean-out of the over-exuberant, triggered by an exogenous event in Shell dumping its Woodside stake and aided by a healthy pullback in commodity prices following strong runs. In other words, a more attractive entry point in an ongoing uptrend.

Not This Time

In the prior three sessions, the Dow has opened down by triple-digits before quickly spinning around and grafting back to a less imposing close. Once again, last night, the Dow opened down around -160 points. Once again it bounced, but this time the recovery appeared less robust.

This time the Dow only made it back to around -90 before selling came in once more, to provide for a close of -138. The S&P and Nasdaq followed the same path. During October we were witnessing many a session on Wall Street in which the four major indices, including the Russell small cap, were often moving in different directions. Earnings season is one reason why this can happen, and there’s the matter of the Dow being a lumpy price average, but sector rotation was also plainly evident.

Not this week. This week the indices have all been moving in tandem under the one banner – tax.

Now we have Ben & Jerry and bunch of similarly wealthy Americans saying they’d rather pay more tax than less if the proposed tax bill means taking from the poor. The Senate version of the proposed bill is attempting to link in a change to healthcare policy as one of the “pay fors” and in the wake of the Republicans’ dismal failure to agree on a healthcare reform package.

In isolation, part of the cut to the high-end personal tax rate will be funded by removing access to health insurance for more low-income Americans, as was provided by Obamacare. This does not sit well with the ice cream kings and their like-minded peers.

Suffice to say a smooth passage of a tax reform bill appears still a way off, despite the House being set to vote on its version this week. And the longer it takes, the more the failure to repeal and replace Obamacare will be writ large in investors’ minds.

Oil was also down again last night, this time due to the traditional fun and games that have been in the background of late, being the weekly US inventories counts. Domestic crude inventories rose 1.9mbbls last week, according to the EIA’s version of the numbers, when a fall of 1mbbls was forecast.

US economic data were also in the frame last night.

The headline CPI rose only 0.1% in October and the annual rate fell to 2.0% from 2.2%, but this was put down to lower fuel costs following the hurricane-related spike. The core CPI rose 0.2%, taking the annual rate up to 1.8% from 1.7% to mark the fastest growth since April. No impediment to a December rate hike there.

Retail sales rose only 0.2% in the month, following a 1.9% surge in September, but again these numbers reflect hurricanes and post-hurricanes.

Otherwise, Wall Street has the wobbles. There is no panic, yet, and there is no lack of commentators suggesting a pullback would be healthy at this point. There is also no lack of those believing the buyers will be back again before too long.

Commodities

Nickel was down another -1% in London last night and lead fell -1.5%, while aluminium rose 1% and the others were quiet.

The US dollar index is steady at 93.81 and gold little changed at US$1278.40/oz.

West Texas crude is down -US42c at US$55.29/bbl.

Today

The SPI Overnight closed up 14 points or 0.4%.

The local October jobs numbers are out today.

The US will see industrial production data.

It’s a big day for AGMs today, with BHP ((BHP)), Commonwealth Bank ((CBA)), Goodman Group ((GMG)), Mirvac ((MGR)), News Corp ((NWS)), Ramsay Health Care ((RHC)), Seven Group ((SVW)), Vicinity Centres ((VCX)) and Wesfarmers ((WES)) all in the frame, just to name a few.

****

The Australian share market over the past thirty days…

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)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms