The Overnight Report: Hold Your Breath

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World Overnight
SPI Overnight (Mar)	5807.00	+ 14.00	0.24%
S&P ASX 200	5855.90	+ 35.20	0.60%
S&P500	2662.94	+ 6.94	0.26%
Nasdaq Comp	7013.51	+ 31.55	0.45%
DJIA	24640.45	+ 39.18	0.16%
S&P500 VIX	24.97	– 0.64	– 2.50%
US 10-year yield	2.84	– 0.02	– 0.60%
USD Index	89.66	– 0.50	– 0.55%
FTSE100	7168.01	– 9.05	– 0.13%
DAX30	12196.50	– 86.27	– 0.70%

By Greg Peel

Back to the Real World?

The ASX200 jumped 20 points from the open yesterday and immediately fell into a hole. The drop was short-lived enough to assume one sell order washed through the market and once completed, the buyers were back in business.

It was not the sort of step-jump session one might expect following a 400 point rally in the Dow overnight, but rather a gradual climb to the afternoon high of up 40, before settling up 35 at the close.

It is heartening to see that outside of the initial panic witnessed early last week, the Australian market has settled down to take Wall Street’s wild ride into context and act more appropriately. With no reason to make our own adjustment to overvaluation, as was the case in the US, we held 5800 index support when we could have broken down on further Wall Street weakness, and we have rebounded in an orderly fashion while Wall Street has continued its wild ride.

Once upon a time one hundred Dow points would send shivers through the Australian market, now it’s more like one thousand.

Energy was the only sector to finish in the red yesterday, down -0.2%, despite the oil price stabilising. But -0.2% is a lot calmer than the -2% moves we saw last week. And having decided on Monday AGL was a sell, sending utilities down -2%, yesterday it was a buy, apparently, and utilities rose 2.1% to be the stand-out winner on the day.

It’s a small sector nonetheless, so the heavy lifting was done by the banks, rebounding 0.4% after falling -0.6% on the first day of the Royal Commission, while materials (+1.1%) and healthcare (+1.1%) provided support and the Telstra coin came up heads, so telcos rose 0.8%.

There’s been a lot of discussion about electric vehicles in Australia lately, or lack thereof, what the government should do about it, and what the naysayers therein will do to stymie any consideration of subsidies, as have been put in place by intelligent governments around the globe. Note that of the top five ASX200 gainers yesterday, four were lithium miners.

Providing added confidence for the buyers yesterday, in a “We’re not Wall Street” context, was NAB’s January business survey results.

NAB’s business conditions (now) index leapt to 18.9 from December’s 12.8, which itself was a slight dip from November’s 13.7. The business confidence index (ahead) index rose to 11.8 from 9.6, which is another gain from November’s 6.9.

Through mid-2017, confidence lagged behind conditions, suggesting businesses were concerned things might take a turn for the worse, but now confidence has all but caught up, and conditions saw the second highest reading since the GFC.

The mining sector is a significant contributor, given it has had to re-emerge from the depths of the “end of the mining boom” to find renewed vigour. Lithium is a new part of that, but everything from iron ore to copper and gold, and also oil (the energy sector is dragged in under the “mining” label) recovered during 2017.

The flipside is retail where confidence is understandably at its lowest, although even retail saw a post-Christmas pick-up in confidence, from minimal levels.

The numbers bode well for ongoing employment growth, while not yet suggesting a spurt in inflation, which is somewhat of a sore point across the Pacific at the moment.

Calm Before the Storm?

It was an interesting session on Wall Street last night, in the current scheme of things. The Dow opened down around -180 points and then a funny thing happened. It banged around a bit, but basically did not move all the way to 1pm. (These days moving up and down within a hundred point range is simply moving sideways.)

At 1pm, the Dow took off and rose 280 points in half an hour, to be up around 100. Thereafter, it banged around again, all the way to a close of up 39, which, again in the current climate, we could call “square”.

There were no announcements or news releases at 1pm that have seen fit to feature in market reports, so we can only conclude a big buy order must have hit the market at 1pm. Perhaps that order was given a green light when after falling on the open, Wall Street did not fall any further. Was the selling finally over?

We have seen a classic three-session pattern – the big turnaround from the low (200-day moving average on the S&P500) on Friday, the big relief rally on Monday, and last night, the dust settling breather of a square close.

The script would suggest the next move is down. The low needs to be retested, but the script is a little different in this case given (a) while shocking in its ferocity, this was the correction all of Wall Street had been screaming out for, rather than a complete surprise, and (b), volatility was exacerbated by an exotic derivative product few had heard of before last week, that will probably be regulated against in due course.

Okay I know – never say “this time it’s different”. But we do have, by simple coincidence of the calendar, a reason to call a potential inflexion point tonight. Tonight’s CPI data release will determine whether the low will indeed be retested in the short term.

I suggest the odds are somewhat binary. If the CPI comes in hot, goodnight Irene. If it comes in at or below expectation, we may see more bottom-pickers re-emerge. But then, there are likely still forced sellers waiting for such a response.

Pass the popcorn.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1329.20	+ 6.00	0.45%
Silver (oz)	16.57	+ 0.03	0.18%
Copper (lb)	3.15	+ 0.07	2.31%
Aluminium (lb)	0.97	+ 0.00	0.42%
Lead (lb)	1.16	+ 0.02	1.55%
Nickel (lb)	6.07	+ 0.18	2.98%
Zinc (lb)	1.59	+ 0.04	2.38%
West Texas Crude (Mar)	59.16	– 0.15	– 0.25%
Brent Crude (Apr)	62.74	+ 0.07	0.11%
Iron Ore (t)	77.85	+ 1.30	1.70%

The rebound in the greenback, sparked by that wage inflation surprise over a week ago, is over. A post-correction shift into the “safe havens” of the yen and Swiss franc has the US dollar index down -0.6% at 89.66.

One might ask whether a snap correction from overvaluation in the equity market would actually derail global demand for commodities. With the dollar no longer being short-covered, base metals have enjoyed their own sharp rebound.

One might argue oil had become a bit overbought as well, and newfound stability might suggest a de-rating to a level of supply/demand balance.

China shuts down tomorrow, suggesting a last hurrah for iron ore for the next week.

The Aussie is uneasily calm, up only 0.1%, at US$0.7860.

Today

The SPI Overnight closed up 15 points or 0.3%.

Westpac releases its consumer confidence survey today.

Japan releases its December quarter GDP result.

Then it’s all eyes on the US CPI.

In the local market today, earnings reports are due from Computershare ((CPU)), CSL ((CSL)), Domino’s Pizza ((DMP)), Insurance Australia Group ((IAG)), and Woodside Petroleum ((WPL)).

The Australian share market over the past thirty days…

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