The Overnight Report: State Of The Market

Daily Market Reports | Feb 06 2019

World Overnight
SPI Overnight (Mar) 5963.00 + 24.00 0.40%
S&P ASX 200 6005.90 + 114.70 1.95%
S&P500 2737.70 + 12.83 0.47%
Nasdaq Comp 7402.08 + 54.55 0.74%
DJIA 25411.52 + 172.15 0.68%
S&P500 VIX 15.57 – 0.16 – 1.02%
US 10-year yield 2.70 – 0.02 – 0.81%
USD Index 96.07 + 0.23 0.24%
FTSE100 7177.37 + 143.24 2.04%
DAX30 11367.98 + 191.40 1.71%

By Greg Peel

The Hayne Train

The financials sector rose 4.5% yesterday. It was up over 5% at one point. I would question whether such a move has ever been seen before in the sector.

Clearly the Royal Commission report was not as bad as feared, financials had already been seriously de-rated and as late as last week hedge funds were shorting the banks. The scene was set for a relief rally.

In percentage terms, the big wealth managers were the big winners, with a particular focus on a lack of any recommendation to ban vertical integration. AMP ((AMP)) rose 10% to be the second biggest ASX200 winner on the day, pipped only by insurance broker Steadfast ((SDF)), which scored 11.5%. IOOF ((IFL)) came in fourth at 8%, while the biggest winner among the Big Four, coming in at fifth, was Westpac ((WBC)).

Ausdrill ((ASL)) snuck into third with a 9.4% gain. But it was the big banks in particular that drove the 114 point rally for the ASX200. Gains ranged from Commonwealth Bank's ((CBA)) 4.7% to Westpac's 7.4%.

I suggest the last time Westpac went close to moving that far was the day Kerry Packer put in a takeover bid.

The big banks are deemed to be big winners from the Hayne report recommendation of shifting to borrower pays mortgage broking commissions. The big losers thus are Mortgage Choice ((MOC)), down -25%, and Australian Finance Group ((AFG)), down -29%. Neither is in the ASX200.

To read more on the Hayne report and what the brokers thought about it see Hayne Report: The Fallout.

We could wrap it up there, given yesterday was all about financials, but was caught my eye more so than the obvious was that every single sector rose on the day, with the one exception of healthcare (-0.2%), although at the peak of the market, healthcare was also positive.

Typically in such a situation one would expect to see selling in other large-cap sectors in order to fund buying in the targeted sector. For banks, very often the source is the resource sectors. But yesterday saw the energy sector up 0.8% despite a fall in the oil price. Materials rose 1.4%, which was admittedly supported by big gains in base metal prices, but BHP ((BHP)) rose 1%, Rio Tinto ((RIO)) 3% and Fortescue ((FMG)) 4.7% despite the iron ore price pulling back.

Telcos is another good choice for rotational funding, but it rose 0.8%.

Data released yesterday showed retail sales falling -0.4% in the critical month of December to net a mere 0.1% gain in the December quarter when 0.5% was expected. Yet consumer discretionary rose 0.7% yesterday.

There seems to be a theme here: buy everything (except maybe CSL). I suggest that the Royal Commission report has been hanging like a black cloud over Australia as an investment destination. That cloud has now blown away. The gates have been opened. The light is green. The metaphors have been mixed.

All while the outlook for the Australian economy darkens.

"The central scenario is for the Australian economy to grow by around 3 per cent this year," suggested Philip Lowe in his policy statement yesterday (that's down from 3.5% prior), "and by a little less in 2020 due to slower growth in exports of resources. As is the case globally, some downside risks have increased.

"The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities.

"Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected."

The RBA kept rates on hold (30 months and counting). This surprised forex traders, who habitually play the Aussie short, and who apparently expected a rate cut. The Aussie was sold off ahead of the statement release and then shot up to US$0.7260. It's back at US$0.7232 this morning, despite the US dollar rising.

Australia's trade surplus widened much more than expected in December. While this might seem good news, it was down to a balance of a fall in exports of -1.6%, including -5.7% for resources, being outweighed by a -5.7% fall in imports, mostly cars. Cars sales have been trending lower – a sign of a weakening economy.

So, after yesterday's sugar rush, how are we looking this morning? Surely we must see some settling of the dust, some taking of the profits, some consolidation after yesterday's frenzy?

The futures are up 24 points this morning.

More of the same

Wall Street continued to track higher last night as earnings reports continued to flow, and continued to be net positive. 2019 guidance has also provided relief to a market that late last year went into panic mode, when recession talk was rife.

Mind you, analysts scrambled to downgrade March quarter earnings growth forecasts during that period so "beats" have to be taken in that context. Net earnings growth for the S&P500 is proving only modest, but then the US is cycling Trump's tax cuts which saw consecutive quarterly earnings growth numbers of 20% plus last year.

So the score card is considered pleasing at this point. Also pleasing is US economic data, which is flowing rapidly at present given the amount of data catch-ups coming post the shutdown. On a net basis it, too, is positive. On a global comparison, America is hitting it out of the park.

Eurozone retail sales fell -0.6% in December. Worst result in years.

Yet despite the extent of Wall Street's rally from the depths of Christmas Eve, the S&P500 is only now just nearing its 200-day moving average. That line was first breached to the downside in October, and each attempt to break back up in November failed, subsequently leading to the December whitewash. The average currently sits at 2741. The S&P last night closed at 2735.

President Trump will deliver his previously postponed State of the Union address to Congress at lunchtime our time. Wall Street will be listening closely for hints on trade, walls and shutdowns, among other things. While often such annual addresses are merely perfunctory, this address is considered to be potentially market-moving on Wall Street tonight.

I suggest a break up through that 200-day average may require a break through in trade.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1314.00 + 1.10 0.08%
Silver (oz) 15.82 – 0.02 – 0.13%
Copper (lb) 2.80 + 0.06 2.23%
Aluminium (lb) 0.86 + 0.00 0.19%
Lead (lb) 0.95 – 0.00 – 0.51%
Nickel (lb) 5.78 – 0.04 – 0.60%
Zinc (lb) 1.25 – 0.02 – 1.63%
West Texas Crude (Feb) 53.75 – 1.03 – 1.88%
Brent Crude (Apr) 62.02 – 0.70 – 1.12%
Iron Ore (t) futures 86.65 0.00 0.00%

It was copper's turn to star on the LME last night while nickel and zinc gave a bit back. The short squeeze witnessed in nickel on Monday night was attributed to the Brazilian government ordering the close of eight of Vale's tailings dams. But last night traders cottoned onto the fact Vale produces most of its nickel outside Brazil.

Iron ore is unchanged, as is usually the case during Chinese New Year.

Oil price falls were attributed to "fears of slowing global demand", which at present is code for "I don't know why". Probably just profit-taking ahead of the weekly US inventory lottery.

The Aussie is up a net 0.1% over 24 hours at US$0.7232.

Today

The SPI Overnight closed up 24 points or 0.4%.

US trade numbers are due tonight.

Locally we have a slew of earnings reports, including those of Commonwealth Bank ((CBA)) and Insurance Australia Group ((IAG)), which should be interesting in the context.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ABC ADELAIDE BRIGHTON Downgrade to Sell from Hold Deutsche Bank
AFG AUSTRALIAN FINANCE Downgrade to Neutral from Outperform Macquarie
AHY ASALEO CARE Upgrade to Outperform from Neutral Credit Suisse
CVW CLEARVIEW WEALTH Downgrade to Neutral from Outperform Macquarie
ECX ECLIPX GROUP Downgrade to Equal-weight from Overweight Morgan Stanley
FMG FORTESCUE Downgrade to Sell from Buy UBS
GUD G.U.D. HOLDINGS Upgrade to Accumulate from Hold Ord Minnett
IAG INSURANCE AUSTRALIA Upgrade to Accumulate from Hold Ord Minnett
IGO INDEPENDENCE GROUP Downgrade to Underperform from Neutral Macquarie
MMS MCMILLAN SHAKESPEARE Upgrade to Overweight from Equal-weight Morgan Stanley
NAB NATIONAL AUSTRALIA BANK Upgrade to Equal-weight from Underweight Morgan Stanley
NVX NOVONIX Upgrade to Add from Hold Morgans
NWL NETWEALTH GROUP Upgrade to Buy from Hold Ord Minnett
RIO RIO TINTO Downgrade to Hold from Accumulate Ord Minnett
SGF SG FLEET Downgrade to Underweight from Equal-weight Morgan Stanley
SIQ SMARTGROUP Downgrade to Equal-weight from Overweight Morgan Stanley
Downgrade to Hold from Add Morgans
SYD SYDNEY AIRPORT Downgrade to Underperform from Neutral Credit Suisse
TCL TRANSURBAN GROUP Downgrade to Hold from Add Morgans
WBC WESTPAC BANKING Downgrade to Underweight from Equal-weight Morgan Stanley

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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.)

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