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Overnight: S&P Joins In

The Dow closed up 25 points or 0.1% while the S&P gained 0.2% to 2480 and the Nasdaq rose 0.5%.

Material Gains

As the ASX200 neared the bottom of the recent range on Friday, someone turned the record over and played the A-side again, hence we’re now back towards the top of the range.

Or at least that’s the way it seems. Realistically we can attribute yesterday’s sharp rally, which involved every sector bar utilities, to several factors.

Wall Street provided a strong opening lead, although the Australian market is in no way following Wall Street at present (otherwise we’d have broken to the upside long ago). Commonwealth Bank ((CBA)) declared its money laundering/terrorist funding issue to be the result of one small coding error, and the market liked the excuse. Metal prices surged in China over the course of the day.

Even a smaller rally would have appeared, from a technical perspective, to be a break to the upside of a wedge forming on the chart since late last month, when there was concern the downside might be more likely. And finally, the market was very thin and volumes low with NSW enjoying a bank holiday.

The Chinese metal price story is the most concrete of the above. The Chinese government has called on steelmakers in four northern provinces and the cities of Beijing and Tianjin to halve production during the peak winter heating months of February to November. Steel futures leapt 7% in Shanghai in response.

Rising steel prices typically translate into rising iron ore prices, although lower steel production also suggests the offset of lower demand. Nevertheless, iron ore futures also jumped 7%, before spot iron ore posted a more modest 3% gain in Singapore. Galvanised steel needs zinc. Zinc was up 2% in London last night. But stainless steel needs nickel, and the nickel price didn’t move.

Separately, Beijing is looking to restrict the number of Chinese aluminium smelters. Aluminium, which has been the quietest of the base metals of late, jumped 2.5% in London. Copper rose 1%, seemingly in sympathy.

In yesterday’s local trade, ahead of London base metal trading, the materials sector rose 1.5% after balancing the drag of a lower gold price. The oil price was higher overnight, so energy jumped 1.5%, helped along by Woodside Petroleum ((WPL)) announcing it had found gas off the coast of Burma.

CBA managed only to claw back 1% but the other banks were supported on the day, and financials rose 1% as a whole. Telcos suddenly found favour (+1.3%) at the expense of utilities (-0.4%).

That’s most of your big names accounted for. The biggest winner on the day was, unsurprisingly, BlueScope Steel ((BSL)), with a 6% gain.

On the economic front, ANZ’s job ads series rose 1.5% in July to be up 6.5% year to date and 12.8% year on year, up from 10.8% in May. Positive signs for employment, which also translates into positive signs for consumers coping with their mortgages.

The SPI futures closed up 12 points this morning, which if accurate puts the index close to the 5800 level yet again. The New South Welsh are back today so we’ll see how they respond. There’s a swag of earnings results out today and if we are to break up through 5800 we’ll need the results flow to be positive.

To date only a handful of stocks have reported and the trend so far – if you can call it a trend at this stage – is misses far outweighing beats. Maybe this week, which features a couple of handfuls, can improve the early score line.

Not Really Moving

The US earnings season is now around 85% complete, in terms of S&P500 stocks. The run-rate for earnings growth year on year in the quarter remains just over 10%. Of those companies reporting, a better than average 70%-plus have beaten earnings estimates. But most notable is that the same figure has been achieved in revenues.

For so long, Wall Street was posting earnings gains in the post GFC environment by cutting costs and exploiting zero interest rates to buy back shares, thus inflating earnings per share. Revenues remained flat, quarter after quarter after quarter. This trend began to turnaround in the March quarter, and now the June quarter is indicating US companies are making more money by actually selling more stuff.

But the question remains, is such success already priced in? Much focus of late has been on the Dow, which has now posted its tenth consecutive up-day for its ninth consecutive record high. The S&P500 finally hit a new record high last night, but the index that is most representative of the US stock market has not posted a daily move of more than 0.5% in thirteen sessions. Any new record is merely an incremental move after the S&P has risen 11% year to date.

What it all means is that the two best back-to-back quarters post GFC in terms of corporate earnings has Wall Street at a point at which there’s no great incentive to go higher. But it’s not safe to sell either.

The S&P posted a record last night despite a drag from the energy sector, which reflected a drop in the oil price. The OPEC/non-OPEC team have begun a two-day meeting in Abu Dhabi to discuss compliance to production quotas, which of late has not been apparent.

Oil traders are understandably a little cautious. There is always a chance at any of these now regular meetings that the whole thing falls apart. But there’s also now pressure on Nigeria and Libya to join in on production caps, given there’s no sign of rebel troubles in either country and thus exemptions from the quotas are harder to justify.


West Texas crude is down -US21c at US$49.31/bbl.

Iron ore rose US$2.20 or 3% to US$76.10/t.

As noted, aluminium rose 2.5% in London, zinc 2% and copper 1% while lead and nickel trod water.

The US dollar index is little changed for once, at 93.44. Gold is also relatively steady at US$1257.30/oz.

The Aussie is down -0.2% at US$0.7912.


The SPI Overnight closed up 12 points or 0.2%.

China will release July trade numbers today.

Locally, the NAB business confidence survey is due.

Today’s earnings reporters include IOOF ((IFL)), Janus Henderson ((JHG)), James Hardie ((JHX)), Shopping Centres Group ((SCP)) and Transurban ((TCL)).

Rudi will connect with Sky Business via Skype today to discuss broker calls at 11.15am.

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