The Overnight Report: Oil In Focus

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By Greg Peel

The Dow closed down -39 points or -0.2% while the S&P was flat at 2629 as the Nasdaq gained 0.2%.

Commodity Crunch

One doesn’t have to look very far to find why the ASX200 fell -27 points yesterday – the materials sector lost -1.7% and energy -1.6%, following big falls in copper and nickel prices, a dip in iron ore, and a pullback in oil.

Rio Tinto ((RIO)) is big in iron ore and copper, and fell -2.6%, while BHP ((BHP)) is big in iron ore, copper and oil, and fell -2.0%. The Biggest Losers board on the day was all miners.

CSL ((CSL)) had an off session following its R&D day on Tuesday, leading healthcare down -1.2%, while the banks stopped falling for once and Telstra’s ((TLS)) recovery continued.

I said yesterday morning that the -26 point move the futures were suggesting seemed more realistic than the strange -30 point move the day before, which was completely recovered in the first hour. Yesterday we did close down -27 points. Nevertheless, the pattern was repeated.

The index fell -31 points from the opening bell and by midday had returned to square. Seems there are still plenty of buyers out there. But then the GDP data spoilt the mood.

Australia’s GDP grew by 0.6% in the September quarter, below 0.7% forecasts. Annual growth rose to 2.8% from 1.9% in the June quarter but below 3.0% forecasts. Economists point out that the jump in the annual rate lends much to the fact the last federal election was held in the September quarter 2016 and that acted to hold back growth at the time.

There was no surprise that trade made no contribution. Export growth was netted out by import growth, with strong bulk volumes balanced by weaker prices. Also no surprise that public spending is up 4.5% year on year, given the number of infrastructure projects underway, while 7.5% growth in private investment reflects the end of the decline of the mining investment boom.

The big surprise was household consumption, which grew only 0.1% in the quarter when 0.4% was expected, for a 2.2% annual rate. This is the biggest contributor to GDP. Economists put the miss down to negligible wage growth despite strong jobs growth, forcing households to back off their spending and to dip into savings when they do spend. Electricity and gas prices cannot be helping.

Wage growth remains the big stumbling block, and Australia is not alone in the world. No doubt because of the source of the issue – globalisation and technology growth. Not transitory.

The biggest victim of the GDP result was the Aussie, which is down -0.7% at US$0.7560. It’s the direction we want to see, but not for the reason we want to see it.

The bad news is iron ore has fallen -4% overnight and oil is down close to -3%. Base metal prices are mostly weaker again. Wall Street closed lower.

The good news is the futures are up 16 points this morning. Beats me.

Marking Time

The world is now fearing the potential ramifications of Trump’s recognition of Jerusalem as the capital of Israel, and plan to move the US embassy from Tel Aviv. The Arab world is incensed. The so-called “peace process” is supposedly in tatters.

Once upon a time markets would have responded to rising Middle East tensions, and an obvious response would be a jump in the oil price. But no, Wall Street appeared to ignore geopolitics yet again, and indeed WTI fell -2.8%.

The move was purely domestic-driven. While last week’s US inventory data showed a drawdown in crude as expected, the surprise was a big jump in gasoline and other product inventories, suggesting weaker demand. The drawdown in crude but build in products means US refineries are operating at full speed (possibly to make up for lost time during the hurricanes) but not finding consumers.

The fall in the oil price meant the energy sector was a drag on Wall Street last night, offsetting another attempt by Big Tech to recover. It was a quiet session overall, with the Dow spending most of the afternoon bumping along the flatline before fading away at the death.

Investors are not game to take a bet on the market while the process of reconciling the two tax reform bills is underway. And next week is the Fed meeting. Last night’s ADP private sector jobs report showed a better than expected gain of 190,000 jobs in November. Non-farm payrolls numbers are due on Friday.

Commodities

West Texas crude is down -US$1.64 at US$56.01/bbl.

The US dollar index continues to edge its way back, and is up another 0.3% at 93.58, adding pressure to commodity prices.

Aluminium fell -1.5% in London and nickel and zinc fell -0.5%, but copper held steady after Tuesday night’s big fall.

Gold is down slightly at US$1263.90/oz.

The Aussie, as noted, is down -0.7%.

Today

The SPI Overnight closed up 16 points or 0.3%.

In Australia we’ll see October trade numbers today.

Nufarm ((NUF)) holds its AGM.

****

World DJIA 24140.91 – 39.73 – 0.16% S&P500 2629.27 – 0.30 – 0.01% Nasdaq Comp 6776.38 + 14.16 0.21% S&P500 VIX 11.04 – 0.29 – 2.56% US 10-year yield 2.33 – 0.03 – 1.10% USD Index 93.58 + 0.26 0.28% FTSE100 7348.03 + 20.53 0.28% DAX30 12998.85 – 49.69 – 0.38%

Spot Metals,Minerals & Energy Future Gold (oz) 1263.90 – 2.40 – 0.19% Silver (oz) 15.95 – 0.12 – 0.75% Copper (lb) 2.96 + 0.00 0.15% Aluminium (lb) 0.91 – 0.01 – 1.60% Lead (lb) 1.14 + 0.00 0.36% Nickel (lb) 4.88 – 0.02 – 0.48% Zinc (lb) 1.42 – 0.01 – 0.74% West Texas Crude (Dec) 56.01 – 1.64 – 2.84%

The Australian share market over the past thirty days…

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