The Overnight Report: Merry Christmas

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

By Greg Peel

The Dow closed up 55 points or 0.2% while the S&P gained 0.2% to 2684 and the Nasdaq rose 0.1%.

Offshore Influence

I’m guessing local proprietary trading desks were relieved yesterday the ASX200 reached expiry day for the futures and options at a level sufficiently clear of the gamma effect, for those of you who understand such matters, that would have kicked in closer to the crowded 6000 strike price.  We would have seen greater volatility lower down.

As it was, the index dropped straight to 6050 from the open on slight Wall Street weakness, suggesting a there were a few positions at that level to deal with, but the market managed to push higher and hold its position for the rest of the day.

Only three sectors finished in the green on the day, but by sufficient amounts to offset selling elsewhere for the most part. Materials gained 0.7%, energy 1.2% and consumer discretionary 0.9%.

We tend to think of the materials sector as being that of bulk and base metal producers and fair enough too, when the likes of BHP ((BHP)) and Rio Tinto ((RIO)) dominate in market cap terms. But it is also the sector for building materials companies, such as James Hardie ((JHX)), Boral ((BLD)) and Bluescope Steel ((CSL)), all of which have significant US exposure.

Bluescope was the first yesterday to upgrade guidance based on having to pay lower US taxes from next year. BHP is another major beneficiary, although the twist is BHP is in the materials sector but its major US operations are in oil. The energy sector was helped yesterday by a 1% jump in the oil price.

As for consumer discretionary, well, a 32% rebound for Retail Food Group rather stood out. The interesting thing here is that last week’s ASIC data showed short positions in RFG actually increased, to 13.4% from 11.9%, as the stock proceeded to lose two thirds of its value following the Fairfax expose. Looks like the shorters were going in for the kill, but yesterday were blindsided by buying support and very quickly moved to lock in profits.

The banks (-0.7%) copped some selling yesterday despite the likes of QBE Insurance ((QBE)) being another US tax beneficiary, and Fed rate hike beneficiary, but that stock has already had a bit of a run.

Otherwise, yesterday rather smacked of squaring up before Christmas as many a market participant begins his or her break on Christmas Eve to allow for travel time, and for the blokes, time to start doing some Christmas shopping. There’ll be few around this morning in the market and no one after lunch.

Next week will see a ghost town.

Rotation Scramble

The US September quarter GDP result was revised down to 3.2% growth last night when no change was expected from 3.3%. Nobody minded much – it’s not long to the first estimate of December quarter GDP.

More pressing is the need to reposition portfolios to account for the new corporate tax rate in 2018. Last night saw the US banks, energy and telcos among the leaders while utilities and tech were amongst the losers. No prizes for guessing – it’s a simple reflection of those sectors who win and those who lose, or at least don’t win much, from a lower tax rate.

The net effect is positive, so Wall Street slipped back into rally mode once more.

Is this the final push for the tax-related rally? Or will the missing element of retail investors provide the new catalyst to keep the bull market going through 2018? One suggestion is that Dow 25,000 may be a catalyst in itself for the moms & dads, and that’s now very close.

The December quarter earnings season will begin in the US in a couple of weeks with bottom line results based on the current tax rate. Guidance at the new tax rate will be the critical element, but it has been suggested that the top line is going to be even more important next year.

It’s one thing to grow earnings because you’re not paying as much tax. But if you’re not growing revenues to contribute to earnings growth then the benefit is a one-off adjustment in PE, before reassessing how the company is actually travelling. Wall Street will be looking very closely at December quarter revenues.

If there is to be a blow-off top early next year – and some brokers are suggesting there should be – a major correction is not anticipated. There are plenty of punters who’ve spent all of 2017 waiting for the Wall Street pullback that never came, and they will be impatient to get in at lower levels if the opportunity presents.

The Dow was up over 100 points last night before settling back to be up only 55 at the close, but then again, pre-Christmas squaring is likely in play, with one more US session to go.

Commodities

Lead coninued to slip in London, down another -1% last night, but all other base metals kicked on from Wednesday night with 0.5-1% gains.

Iron ore rose US80c to US$74.00/t.

The US dollar index is down slightly ay 93.26 and gold is up slightly at US$1267.80/oz.

West Texas crude is up US16c at US$58.26/bbl.

The Aussie is up a full 0.5% at US$0.7703, all of it occurring overnight, likely reflecting ever stronger commodity prices.

Today

The SPI Overnight closed up 13 points on the new March front month contract.

The US will see some important data tonight – durable goods, along with personal income & spending and the PCE measure of inflation, and the last fortnightly consumer sentiment reading ahead of Christmas.

There is nothing on the local calendar today.

Well, that’s it from me. Merry Christmas and Happy New Year to all. I’m off on my annual break from today and will be back with the Overnight Report in the week beginning January 22.

Happy trading.

****

World
DJIA	24782.29	+ 55.64	0.23%
S&P500	2684.57	+ 5.32	0.20%
Nasdaq Comp	6965.36	+ 4.40	0.06%
S&P500 VIX	9.67	– 0.05	– 0.51%
US 10-year yield	2.48	– 0.02	– 0.64%
USD Index	93.26	– 0.05	– 0.05%
FTSE100	7603.98	+ 78.76	1.05%
DAX30	13109.74	+ 40.57	0.31%

Spot Metals,Minerals & Energy Future
Gold (oz)	1267.80	+ 3.50	0.28%
Silver (oz)	16.13	– 0.03	– 0.19%
Copper (lb)	3.19	+ 0.01	0.43%
Aluminium (lb)	0.96	+ 0.01	1.21%
Lead (lb)	1.14	– 0.01	– 1.29%
Nickel (lb)	5.48	+ 0.04	0.81%
Zinc (lb)	1.46	+ 0.01	0.72%
West Texas Crude (Jan)	58.26	+ 0.16	0.28%

The Australian share market over the past thirty days…

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