The Overnight Report: The Big ‘V’

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

By Greg Peel

Tale of Two Markets

The local market had been playing it safe earlier this week, eyeing Wall Street cautiously. We did not ultimately fall as far as Wall Street in the rout so there was no need to match the magnitude of the S&P500 bounce off its low, but local investors knew full well that if Wednesday night’s US CPI release came in hot, that low could be retested.

The CPI headline was strong but digging into the data revealed there was no sudden spike in inflation. Wall Street kicked on, and Bridge Street was given the green light. Thus the ASX200 rose 1.2% yesterday, with all sectors closing in the green.

It looked for all the world like a typical “buy the market” session, on Wall Street relief. But there was a lot going on under the surface, with results season very much playing a part. We saw macro influences and micro influences.

The US dollar plunged when it was revealed the US need not yet fear inflation, sending commodity prices surging. Materials (+2.5%) and energy (+2.4%) were thus the stars of the session. On the macro theme, we had the banks up 1.0% and consumer staples up 1.4%.

On the micro theme, no need to toss the coin yesterday because Telstra ((TLS)) reported positively, sending telcos up 0.6%.

Elsewhere among reporters, positive results had positive impacts on outdoor advertiser and legacy media company HT&E ((HT1)), which jumped 13% to win the day on the ASX200. Origin Energy ((ORG)) was in for a good session anyway on the oil theme, but it reported well and rose 7%. Gold, coal and oil filled out the top five winners.

Origin’s result turned peer AGL Energy ((AGL)) around, so utilities rose 1.2%.

On the other side of the ledger, intellectual property lawyers IPH ltd ((IPH)) bemoaned a tough market and fell close to -20% after missing badly. Domino’s Pizza ((DMP)) again left punters wanting more, and it fell -7.5%. It had to be a bad report from diversified miner South32 ((S32)) to fall -5.4% when materials won the day. And perennial disappointer Healthscope ((HSO)) played to script, down -4.8%.

The beat/miss ratio of reports to date (of stocks covered by FNArena brokers, see Result Season Monitor) is running at 1.4, which is the high end of the historical scale. Only 67 stocks have been covered so far, nevertheless, out of what will be in excess of 300, but if that sort of level can be maintained, and Wall Street behaves itself, we might see new highs ahead for the ASX200.

Yesterday we recaptured 5900, so only about another 120 points to go.

Something extremely rare happened yesterday. The January jobs number came in quite close to economist expectation. Kill me now, I’ve seen everything.

Australia added 16,000 jobs when 15,000 were expected, down from December’s 33,500. There was some surprise that it took the addition of 66,000 part-time jobs to offset a -50,000 fall in full-time, against the recent trend, but after sixteen straight months of net gains there is no need for concern, economists suggest, and the unemployment rate fell to 5.5% from 5.6%.

As You Were

The Dow reclaimed 25,000 last night, as inflation fears eased. The US ten-year yield slipped back -2 basis points to 2.89%, and suddenly everyone decided that a little inflation is not such a bad thing after all.

Even a good thing, perhaps.

Wall Street has posted five straight sessions of gains after bouncing hard off the 200-day moving average of the S&P500. All agree that if it were not for one category of exotic derivative blowing up – the leveraged short volatility play – the pullback on the initial inflation scare would have been a lot less dramatic.

The question now is, as always, as to whether the low still needs to be retested, as is typically the case. So far we’ve seen a V-bounce, and that’s not typical.

But V-bounces are not without precedent, and occurred most notably in October 1987 and in March 2009.

It will probably come down to whether or not the selling related to the aforementioned short-vol plays is over, or whether there’s still more to clear out. The general feeling is there probably is. It is worth noting that the VIX has settled around 19 and barely moved last night, despite the fifth straight rally, suggesting caution persists.

Dow component Cisco Systems reported a beat after the bell on Wednesday night and last night jumped 4.5%, helping to rekindle the tech sector and ensure outperformance from the Nasdaq. Co-component Apple rose 3% when it was revealed Warren Buffet increased his stake in December.

The US earnings season has been another very solid one, and that’s before the US tax cuts make their initial mark. Wall Street nevertheless now has to reconfigure their valuation models to accommodate higher interest rate expectations.

It’s a simple step-down, as higher rates reduce the value, in today’s dollars, of future earnings expectations. However, the trade-off is that higher rates reflect a stronger economy, and a stronger economy suggests increasing earnings expectations.

Commodities

The US dollar index plunged another -0.6% last night. However, metals prices took a breather, after some big moves up in the past couple of sessions.

WTI crude had another strong session nevertheless, gaining another 1.3%.

 The Aussie is up 0.2% at US$0.7936.

Today

The SPI Overnight closed up 20 points or 0.4%.

Today’s list of reporters includes IOOF Holdings ((IFL)), Medibank Private ((MPL)), Primary Health Care ((PRY)), Star Entertainment ((SGR)), Super Retail ((SUL)) and Whitehaven Coal ((WHC)).

Rudi will connect with Sky Business around 11am today, via Skype, to discuss broker calls and reporting season.

The Australian share market over the past thirty days…

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