The Overnight Report: So Much To Consider

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

World Overnight
SPI Overnight (Mar)	5934.00	– 5.00	– 0.08%
S&P ASX 200	5935.30	– 39.40	– 0.66%
S&P500	2749.48	– 15.83	– 0.57%
Nasdaq Comp	7496.81	– 14.20	– 0.19%
DJIA	24758.12	– 248.91	– 1.00%
S&P500 VIX	17.23	+ 0.88	5.38%
US 10-year yield	2.82	– 0.03	– 1.09%
USD Index	89.77	+ 0.04	0.04%
FTSE100	7132.69	– 6.09	– 0.09%
DAX30	12237.74	+ 16.71	0.14%

By Greg Peel

Ongoing Fallout

On Tuesday night the S&P500 fell -0.6%. Yesterday morning the futures suggested the ASX200 would open down -0.6%. It opened down a bit more than that, but ultimately closed down -0.6%.

The selling was conducted entirely in the morning. Then the market went to sleep for the rest of the session until very late, when a few buyers emerged.

With a couple of exceptions, all sectors fell by amounts either side of -0.5% in a fairly uniform manner. The exceptions were the banks (-0.8%), the telcos (-2.4%) and materials, which fell less than -0.1% to be the outperformer on the day.

It was National Bank’s ((NAB)) turn in the naughty chair yesterday at the Royal Commission and the resultant public grilling was worth -1.2%. It’s Commonwealth Bank’s ((CBA)) turn today. But bank weakness is not just about the Commission, as we may deduce from a -2.6% fall for Telstra ((TLS)).

Not all investors had cottoned on on Tuesday, it would seem, to the implications of Labor’s announced policy to scrap dividend imputation cash refunds to non-tax payers. Retirees paying little or no tax face losing a substantial part of their income stream if they are relying on safe high yield investments, such as the Big Four and Telstra.

It’s not often that an Opposition policy announcement has such an impact on the market, particularly when the government does not need to call an election until May next year. But the Coalition has now racked up 28 straight poll losses, implying an election held today would result in a change of power. We’re also reminded that Turnbull called Abbott out on 30 polls.

There might also be a feeling that deciding not to hand out taxpayer-funded cash to people who don’t pay tax is not so hard a policy to defend to the masses.

In the case of materials outperformance, there would have been a sigh of relief that the iron ore price bounced back towards the US$70/t market overnight rather than falling in a hole having breached that level the night before.

It should also be noted that the -0.7% fall for healthcare yesterday was net of CSL ((CSL)) paying a chunky dividend.

In other news, Chinese industrial production grew by 7.2% year on year in February when 6.1% was forecast. Retail sales grew 9.7% against a 9.8% expectation, but are up on the 9.4% rate of 2017. Fixed asset investment year to date rose 7.9% when 7.0% was forecast.

Better numbers than economists had feared, which perhaps provided a little extra help for the local materials sector yesterday, but still subject to the distortion of the post New Year break period.

Westpac’s consumer survey showed confidence has risen 0.2% this month after falling -2.3% last month. As is the case with the earlier business confidence numbers, February has to be considered in light of the stock market correction of the time. Consumer confidence is up 3.3% on a year ago but at 103 on the index, it’s just a tick above the line between pessimism and optimism.

Moving Parts

CNBC television “personality” and former Reagan advisor, Larry Kudlow, has been appointed Donald Trump’s new economic advisor, as had been tipped. While perhaps not quite as exalted as the outgoing Gary Cohn, Kudlow still commands a lot of respect on Wall Street.

In terms of the issue du jour, Kudlow is anti-tariffs in general but pro doing something about China, which “deserves a tough response” to its trade indiscretions. To that end, the suggestion is Trump is already preparing a list of more products that he plans to place tariffs on, specifically directed at China.

But we’re still waiting for details.

Investors are not prepared to wait. It seems increasing likely Trump’s tariffs will be all about China and not much else, hence those US companies exporting to China are bracing for any tit-for-tat response. One of those is Boeing, which was the Dow’s highest flyer earlier this year. Selling in Boeing continued last night, given one in every four planes the company builds is presently going to China.

Boeing also has the highest nominal share price in the Dow Jones average, making it the most influential. Half of last night’s Dow fall was Boeing alone.

US retail sales fell -0.1% in February to mark a third straight decline. Despite those three months coming in the wake of three surprisingly solid months late last year, and the fact that if auto and gasoline sales are stripped out, sales rose a more respectable 0.3%, retailers were hammered on Wall Street last night.

US wholesale inflation rose by 0.2% in February. While this was above the 0.1% gain expected, it was below January’s 0.4% rise. Having suffered a -10% correction in February on inflation fears, we’ve since seen the February wage growth number, CPI and PPI all suggest there is no need to fear rising inflation.

And that’s a funny thing. Last Friday, the prospect of weak inflation sent Wall Street surging. By last night, traders were beginning to wonder whether the story was starting to go a bit too much the other way. Add in a third weak retail sales result, and maybe, just maybe, a rate hike at next week’s Fed meeting is not such a sure thing after all, or at least, maybe there won’t be three this year.

Hence, US banks, which benefit from rising rates, were also sold last night. The US ten-year bond yield, which many had tipped to hit 3.00% by now, fell -3 basis points to 2.82%.

Of more concern to the bond market than rising rates is just how big the US deficit is going to become as each month passes under the new, much lower, tax rates.

The one saving grace last night was the relative outperformance of the Nasdaq. On Tuesday night the Nasdaq underperformed, and indeed tech led the market down after profit-takers swept in following a new record high. But it seems there are always those sitting below the market who missed out on buying the FANGs when they should have.

Thus one sharp down-day was met, last night, with willing FANG buyers.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1324.50	– 1.20	– 0.09%
Silver (oz)	16.51	– 0.05	– 0.30%
Copper (lb)	3.15	+ 0.03	0.85%
Aluminium (lb)	0.94	– 0.01	– 0.56%
Lead (lb)	1.10	+ 0.01	0.62%
Nickel (lb)	6.26	– 0.02	– 0.28%
Zinc (lb)	1.47	– 0.03	– 2.06%
West Texas Crude (Apr)	60.90	+ 0.26	0.43%
Brent Crude (May)	64.83	+ 0.29	0.45%
Iron Ore (t)	71.75	+ 1.80	2.57%

It was zinc’s turn last night to suffer from a jump in LME inventories, but despite a resultant -2% fall, analysts point to the widening gap between inventories held in London and inventories held in Shanghai. The latter is much depleted due to Beijing’s forced winter shutdowns, hence a period of restocking is expected from here.

It appears iron ore’s dip below US$70/t was just a head fake.

Which is possibly why the Aussie is up 0.3% at US$0.7879 when the US dollar is steady.

Today

The SPI Overnight closed down -5 points. The futures this morning are not matching the S&P500 overnight.

The seemingly underdone futures move may have something to do with the fact the March quarter contract expires today, as do ASX index options. Resultant volatility is not guaranteed, but may manifest. The last close on the ASX200 is a split between the 5900 and 5950 strike prices.

There are no CSL-style heavyweights among today ex-dividends, but still a decent list.

Rudi will appear on Sky News Business today, noon-2pm.

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