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The Overnight Report: Rates On The Rise

Daily Market Reports | Apr 20 2018

This story features ALUMINA LIMITED, and other companies. For more info SHARE ANALYSIS: AWC

World Overnight
SPI Overnight (Jun) 5844.00 – 10.00 – 0.17%
S&P ASX 200 5881.00 + 19.60 0.33%
S&P500 2693.13 – 15.51 – 0.57%
Nasdaq Comp 7238.06 – 57.18 – 0.78%
DJIA 24664.89 – 83.18 – 0.34%
S&P500 VIX 15.96 + 0.36 2.31%
US 10-year yield 2.91 + 0.05 1.64%
USD Index 89.89 + 0.27 0.30%
FTSE100 7328.92 + 11.58 0.16%
DAX30 12567.42 – 23.41 – 0.19%

By Greg Peel

Metallica

Australia added 4,900 jobs in March, well below forecasts of 20,000, but rarely do forecasts land anywhere near the pin. This is hardly surprising, given the numbers out of the ABS are somewhat of a guess and giggle, or at the very least a moveable feast.

Much has been made of the country’s 17-month run of consecutive jobs growth. Yesterday should have made it 18, except that the ABS revised down the February result on seasonal factors. Revised down? The initial 17,500 jobs added became -6,300 lost.

The unemployment rate, for what it’s worth, remained steady at 5.5%. The Aussie initially tanked on the revision news, before someone pointed at commodity prices.

Commodity prices were the overwhelming story of the day on the stock market. Not only did iron ore and oil prices rise overnight, and base metal prices soar, but yesterday’s news from various mining companies also added to a 2.3% leap for the materials sector.

The next best performance came from energy, which rose 0.7%.

A positive result from Alumina Ltd’s ((AWC)) JV partner Alcoa fed into yesterday’s strength. Iluka Resources ((ILU)) highlighted strong market conditions for zircon and titanium. South32’s Mozal aluminium mine marked record production, and the company’s manganese guidance has been lifted. BHP’s ((BHP)) production report was considered solid rather than spectacular, but the stock rose 2.8% anyway.

On the ASX200 top five winners board yesterday were four miners. It would have been five, if rumours hadn’t spread of Fairfax Media ((FXJ)) merging with Seven West Media ((SWM)). Fairfax snuck in with a 5.3% gain.

How to fund buying in resources stocks yesterday? Weakness was spread across healthcare, telcos and tech. The banks were soft again on revelations Commonwealth Bank ((CBA)) sees dead people.

For the ASX200 it was back to original script yesterday of shooting higher from the open before fading away to the close. Getting back to 5900, let alone the previous high, seems a bit of a Chairman Mao effort at the moment.

Today will likely see a breather, given base metal, gold and oil prices have eased slightly overnight, albeit iron ore is up 3% again. Wall Street closed weaker and the futures are down -10 points this morning.

Inflation

Will the surge in commodity prices prove fleeting or more entrenched? Actual demand aside, base metal prices have soared over the past couple of weeks due to sanctions that can always be lifted again, or overcome (Rusal is in talks with China regarding alumina supply). The oil price continues to be supported by OPEC production cuts that can be reversed.

Either way, commodity prices are beginning to impact on US inflation expectations. It’s not just sanctions but trade tariffs that are beginning to bite. US lumber prices have surged, sending the share prices of home builders tumbling. Consumer staples companies that consume commodities in their packaging were among the weakest on Wall Street last night. The US driving season is approaching, and oil prices are at multi-year highs.

The US ten-year bond yield rose another 5 basis points last night to 2.91%. A more hawkish tone from the Fed is a driver, but so are rising inflation expectations.

Banks fare well from rising rates, hence financials were one of only two S&P500 sectors to finish in the green last night. Despite a dip in the oil price, energy was the other, as the share prices of energy companies continue their lagged catch-up of oil prices.

Proctor & Gamble (Dow) disappointed by not blowing away earnings forecasts, as had been the case with Johnson & Johnson (Dow) earlier in the week. Commentators are beginning to suggest too much anticipation had been built into this earnings season. Phillip Morris posted a miss, and its shares fell -16%.

I must admit I didn’t realise fags were a staple in the US. Phillip Morris added to consumer staple weakness such that that sector was the worst performer on the day. Also not helping was the first ever divulgence of just how many Amazon Prime members there are in the world. Apparently a hundred million.

Another disasppointer on the day was Taiwan Semiconductor, TSMC, a company that makes parts for smart phones, which lowered guidance on slower growth in high-end phones, meaning the iPhone X. Apple shares fell, as did the share prices of all the other companies making phone parts.

The overriding factor of all of the above is that Wall Street is currently unable to operate under any sort of independent, fundamental theme. Why are earnings expectations so high? Trump’s tax cuts. Why are commodity prices so high? Trump’s tariffs and sanctions. Why does there remain a pervading geopolitical nervousness? Trump’s engagements with Russia and North Korea.

It is well known the man can spin on a dime.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1345.30 – 3.90 – 0.29%
Silver (oz) 17.22 + 0.05 0.29%
Copper (lb) 3.14 – 0.02 – 0.60%
Aluminium (lb) 1.12 – 0.02 – 2.07%
Lead (lb) 1.06 – 0.02 – 1.58%
Nickel (lb) 6.81 – 0.08 – 1.15%
Zinc (lb) 1.45 – 0.01 – 0.83%
West Texas Crude (May) 68.12 – 0.63 – 0.92%
Brent Crude (Jun) 73.60 – 0.20 – 0.27%
Iron Ore (t) 68.30 + 1.85 2.78%

It is of no great surprise the prices of aluminium and nickel in particular saw some profit-taking last night. A move up in the US dollar index, in line with rising US rates, provided some incentive.

Ditto oil.

Iron ore continues on its path back towards US$70/t nonetheless.

It’s been a wild 24 hours for the Aussie, but balancing weak jobs, strong commodity prices and a rise in the greenback, it’s down -0.7% at US$0.7729.

Today

The SPI Overnight closed down -10 points or -0.2%.

APN Outdoor ((APO)) and G8 Education ((GEM)) hold AGMs today.

The company soon to be formerly known as Macquarie Atlas Roads ((MQA)) releases a quarterly report while Sydney Airport ((SYD)) publishes monthly traffic stats.

The Australian share market over the past thirty days…

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