The Overnight Report: Commodity Prices Surge

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By Greg Peel

Some Improvement

For once, the ASX200 opened higher from the bell yesterday and then went on with it, stumbling higher still towards the afternoon. We didn’t quite close on the highs but we did close above the initial opening rally, which is in stark contrast to the failed rallies and lack of interday volatility of the past week and a half.

The index only rose 19 points, compared with the run of low teen moves up and down recently, but there were fleeting signs the ASX200 may finally be able to move away from its 200-day moving average.

With commodity prices soaring overnight and the futures up 25 points this morning, today might be a more robust session. Albeit volumes might yet depend on how many in the market are off on school holidays.

And, of course, the financials are letting the side down. AMP ((AMP)) fell another -2% yesterday having fallen -5% on Tuesday on Royal Commission revelations and yesterday the declaration that Commonwealth Bank ((CBA)) was the gold medallist of charging for services never delivered had it down another -0.5%. All up the financials sector lost -0.2%.

The coin came up tails for Telstra and telcos lost -0.8%.

The resource sectors are dominating play at present, and it won’t be any different today. Yesterday Rio Tinto ((RIO)) delivered a quarterly production report featuring stronger iron ore shipments. The materials sector rose 0.8%.

Woodside Petroleum ((WPL)) also delivered a positive production report featuring stronger LNG sales. The energy sector rose 1.2%.

Importantly, Rio confirmed that it may have to curtail some of its aluminium production due to the sanctions placed on Rusal, with which Rio has JV interests in Queensland. Rio may lose production, but the resultant surge in the aluminium price this past week will no doubt more than cover the dollar loss.

Harvey Norman ((HVN)) received an upgrade from Ord Minnett yesterday, to Hold, and that stock rose 2.7% on a solid day for consumer discretionary, up 1.5%. Ords can’t actually see any upside for the retailer, it just thinks the share price has fallen far enough. The stock is over 8% shorted.

Big Black & Blue

Another low volume session on Wall Street last night saw the S&P close up slightly but the Dow lose -38 points. About -80 Dow points can be contributed to IBM, which fell -7.5% to mark its worst day in five years.

When earnings expectations are heightened, you don’t want to disappoint. IBM’s result appeared to be a beat, until the market realised it was all about a one-off tax gain.

IBM reported after the bell on Tuesday night, as did railroad company CSX. CSX shares leapt 8% last night, dragging up all railroads and the Dow Transports average, and sending Dow Theorists into a lather.

The strongest sector on US markets last night was nevertheless energy, given a 3% jump in the already elevated oil price.

Weekly data showed a surprise drop in US crude inventories (they’re always a surprise) and at the same time the International Energy Agency upgraded its global oil demand outlook. Oil prices are still carrying a geopolitical risk premium, and before week’s end OPEC and Russia are expected to meet to reconfirm commitment to production quotas.

With WTI pushing US$70/bbl, at its highest level in three and half years, why spoil things now?

The US materials sector is also riding high on commodity price strength and last night Wall Street largely saw rotation out of the likes of IBM and into resource sectors and transports – shuffling the deck on the day’s earnings results for a largely zero sum outcome.

The Fed was in the frame, not because of the Beige Book, which noted a “modest to moderate” pace of growth for about the thousandth time, but for various Fedheads touting ever more hawkish views.

Last night New York Fed president William Dudley suggested that while interest rate hikes will continue to be gradual, the desire is to move the funds rate to the neutral level of 3%. The bond market has “neutral” as a little lower than 3%, but the point is the Fed spent a decade touting an “accommodative” mantra, and now “neutral” is the new catchphrase.

The US ten-year bond yield rose 5 basis points to 2.87%.

That should be good for US banks, but last night Morgan Stanley’s earnings beat failed to impress Wall Street, as has been the case for all banks these past few sessions. MS shares closed flat.

Commodities

Late on Tuesday night, the PBoC surprisingly cut China’s bank reserve requirement ratio, meaning Chinese banks are free to lend more money into the market. This implies more funds flowing into the likes of steel production and manufacturing sectors, meaning greater demand for commodities.

The iron ore price jumped 3%.

But stealing the show last night were base metals.

Six months ago, the London Metals Exchange announced that on April 18, 2018, it would delist two brands produced by Nornickel as eligible for delivery against futures contracts. LME traders have known this day was coming for six months, but someone forgot to tell the Chinese.

According to LME traders, when the Chinese saw the Nornickel brands delisted they panicked. Nornickel is Russia’s biggest, and the world’s second biggest, producer of nickel. The Chinese assumed Nornickel had gone the way of Rusal — US sanctions had been extended to nickel from aluminium — and as a result the nickel price shot up 12%.

It settled back to be up a mere 7.5% by the close but given there has been speculation among analysts as to whether US sanctions might actually extend beyond aluminium, which is now up around 18% since Rusal was caught in the crackdown on Russian oligarchs, metals markets are on edge.

Aluminium jumped another 5.5% after Rio Tinto confirmed it may cut production. Copper and zinc were swept along in the tide.

Oil jumped 3% as noted earlier.

Strangely, as commodity prices soar, the Aussie slumbers on. It’s up a tad at US$0.7783.

Today

The SPI Overnight closed up 25 points or 0.4%. With oil up 3%, iron ore up 3%, nickel up 7%, aluminium up 5% and so on, this seems reasonable.

It may nevertheless come down to which bodies are unearthed in today’s session of the Royal Commission.

Australia’s March job numbers are out today. An eighteenth successive month of jobs growth is forecast.

It’s a big day for resource sector production reports, with BHP ((BHP)), Evolution Mining ((EVN)), Iluka Resources ((ILU)), St Barbara ((SBM)) and Santos ((STO)) all stepping up to the plate.

Challenger ((CGF)) will deliver its quarterly update while Computershare ((CPU)) will host an investor day and Australian Pharma ((API)) will post its earnings result.

Rudi will travel to Surry Hills and appear on Sky News Business from noon till 2pm.

The Australian share market over the past thirty days…

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