The Overnight Report: The Good Oil

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

And We’re Back

The investor exit from Australian banks we’ve witnessed for the past few sessions, since Commonwealth Bank’s ((CBA)) update, reversed last night because Jerome Powell was renominated as Fed chair. This led the financials sector up 0.9%.

To join the dots, the US ten-year yield jumped 9 basis points on the news on Monday night and our equivalent rose 7 points yesterday to 1.87%. Higher rates are seen as the only saviour for the banks as they suffer margin pressure, and higher rates are also positive for insurers.

The energy sector has also been under pressure as oil prices have sunk on planned government reserve releases and rising case counts in Europe. On Monday night oil prices bounced a little and the energy sector reversed by 2.5%. Prices were up strongly last night – more on that below.

But the really big news of the day was a move by Beijing to ease restrictions on steel production, which have been a primary cause of iron ore’s halving in price. By the close in Singapore, iron ore was up 5%. BHP Group ((BHP)) jumped 4.0% and Rio Tinto ((RIO)) 3.6%.

Fortescue Metals ((FMG)) topped the index winners with a 9.8% gain. Hydrogen and iron ore. Champion Iron ((CIA)) took the silver with 8.0%. The materials index rose 2.3% and could have been more if not for a fall in the gold price.

Put it all together and what looked like being another soggy session on the ASX turned into the complete opposite.

Higher bond yields should be bad for defensive yield-payers but only telcos (-0.8%) played to that script, with utilities up 1.8% (the oil factor), property up 1.5%, industrials up 1.0% and staples up 0.5%.

The side was let down by a -3.5% fall in technology, on a -6% drop for Square (and general Nasdaq weakness).

Consumer discretionary was left out after Bapcor ((BAP)) fell -9.6% to top the losers’ board on the resignation of its CEO.

But otherwise, the ASX200 has a spring in its step once more. As to whether it can kick on is another matter, as the S&P500 was up 0.2% last night but our futures are up just the one point this morning.

Release the Hounds

President Biden last night announced a release of 50m barrels of oil from the Strategic Petroleum Reserve, coordinated with releases by China, India and other countries. “I will do what needs to be done,” said Biden, “to reduce the price you pay at the pump”.

The WTI crude price rose 2.8%, Brent 3.8%, and US gasoline futures 3.5%. The S&P500 energy sector rose 3.0%.

The reason is the release has been the worst kept secret for about a month, and oil prices had already adjusted to the expectation. Covid issues aside, last night simply saw a “buy the fact” after a -10% pullback.

Never mind that energy analysts have been warning the release will make only the slightest bit of difference to pump prices, and Biden’s accusations of profiteering by gasoline retailers overlooks price lag (refiners buy their crude well before it becomes gasoline and reaches gas stations), a labour shortage increasing wages at gas stations, and big differences in state taxes.

California has the highest tax, the highest gas price (US$4/gal currently) and is the biggest buyer of Teslas by a margin.

Biden is also ready for the Republican backlash, in which he’ll be blamed for stymying US production growth with his tree-hugging climate policies. The president defended his policy along with the release announcement last night, saying the shift to renewables will create jobs.

The other problem is that having released the biggest amount of reserves in history – an action usually reserved for wars and natural disasters – at some stage the White House will have to restock.

The other S&P sector to outperform last night was financials (+1.6%) as the US ten-year yield added another 4 points to 1.68%, kicking on from Monday night. Once again banks and energy are leading the charge while investors rush out of tech growth stocks.

Zoom Video – you may have heard of it – picked a bad day to release its earnings report and dropped -15%, to be down -50% from its high.

While it was a second session in a row in which the Dow outperformed, the Nasdaq underperformed and the S&P split the difference, Monday night saw a rush of late selling after what had been a strong session up to that point, and last night saw buying in the last hour that pushed the Dow higher and trimmed the Nasdaq loss.

It’s the fourth time this year the Nasdaq has swooned. It never lasts long – investors take the opportunity to move into the tech mega-caps at more reasonable prices and before you know it the Nasdaq is back making new highs.

Commodities

Iron ore is up on the prospect of increased Chinese steel production and given steel can also be stainless or galvanised, nickel and zinc are winners too.

Another increase in bond yields is another hit for gold.

Oil I think we’ve covered.

The Aussie is steady at US$0.7229.

Today

The SPI Overnight closed up one point.

The RBNZ is meeting this morning.

Locally we’ll see numbers for September quarter construction work done, ahead of next week’s GDP release.

It’s a big night tonight for US data releases, given tomorrow night’s holiday. Durable goods orders, new home sales, PCE inflation, consumer sentiment and the minutes of the November Fed meeting are all ready to drop.

In the local market, there’s another good handful of AGMs today, including Harvey Norman ((HVN)), Ramsay Health Care ((RHC)) and Shopping Centres Australasia ((SCP)).

Virgin Money UK ((VUK)) and Webjet ((WEB)) report earnings.

The Australian share market over the past thirty days…

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