Overnight Report: Not Quite
The Dow closed up 40 points or 0.2% at 22,997 while the S&P rose 0.1% to 2559 and the Nasdaq was flat.
The break-out run continued for the ASX200 yesterday as the index raced towards 5900 following last Friday’s conquest of 5800. A high of 5896 was marked at 3pm before a slight ease to the close.
The materials sector was the predictable leader on the day, rising 1.0%. Big moves up in iron ore and copper overnight supported the sector, following big moves up in iron ore and nickel the session prior. A positive update from nickel miner Independence Group ((IGO)) on its Nova project put that stock onto the Top Five leaders’ board to support moves in the big caps.
Nickel miners are also at the top of the ASX most shorted list, along with lithium/cobalt miners. There must be some pain in that space at present.
It was also a big day for financials, rising 0.8%. The sector was boosted by Challenger ((CGF)), which also found itself in the Top Five following a positive update on annuity sales.
Beyond these two standouts, the rest of the sectors rose a very uniform 0.5% or so, once again underscoring that this is a market-based rally. Only utilities let the side down with a -0.2% drop, having previously joined in the break-out surge.
The eight-day run-up for the index is the longest since 2015, but it is likely we won’t clock another gain today. Aside from the technical trade, the rally all the way from the bottom of the range through the top and beyond has been well supported by commodity prices. Overnight, all base metals prices bar aluminium are down -1-4%. Iron ore is down, gold is down again and oil is only up a tad. The futures are down -6 points this morning
It could be time to lock in some profits. Typically when a breakout occurs there is a burst of enthusiasm that lasts as long as the first-movers hold off on cashing in. When they start to sell, usually a pullback to the prior resistance level, which now becomes support, follows, before the market consolidates to prepare for a genuine run at the next milestone.
All assuming no left-of-field events in the meantime of course, negative or positive.
The minutes of the RBA’s October meeting, released yesterday, held no surprises. The board believes the economy will “increase gradually over the coming year, supported by the current stance in monetary policy”. But the risks remain of a stronger Aussie, which would “result in a slower pick-up”, and high levels of household debt vis a vis slow wage growth. On the last point the minutes noted:
“Members discussed the importance of continuing to assess the various risks in household balance sheets.”
So, the economy will grow if the RBA leaves rates alone and were it to raise rates it would risk a stronger Aussie and household debt distress. No rate rise for a while then.
Which is of course, supportive of a rising stock market.
The constant grinding rally on Wall Street has to be supported by more than just faith in a tax reform package that may yet take months to years to bed down. Currently US stocks remain supported by low interest rates, which are set to rise but only slowly, and a subsequently weak US dollar. They are the underpinings, but companies have to prove they are making the most of it through actual numbers.
At around 11am on Wall Street, the Dow hit 23,000. It didn’t stay there long – such milestones are classic profit-taking triggers – but by session-end it was a case of almost but not quite regaining that level.
Goldman Sachs (Dow) posted an earnings beat but its share price fell, for the same reason shares in JP Morgan (Dow) and Citigroup have initially fallen last week. Low volatility had led to weak trading profits. Morgan Stanley also suffered weaker trading profits but its earnings beat led to a share price gain, and JPM and Citi, along with BofA, have only seen their share prices rise these past couple of sessions.
Dow stocks Johnson & Johnson and United Health both posted strong earnings results and are enjoying rallies, with United’s 6% gain a standout for a mega-cap insurer. Shares in Netflix had rallied in the aftermarket yesterday but last night dipped, as traders tried to get their heads around the company’s plan to make no less than 80 movies in a year. That’s more than one movie every working week.
Economic data also provided support last night, with US industrial production showing a rebound of 0.3% after two months of declines.
Everything is pointing in favour of the Dow having little trouble in conquering 23k, just as it has conquered the three prior 1000 point milestones so far this year. There may need to be some consolidation first, nonetheless.
It’s funny, you know, in the context of this week’s significant anniversary. I remember the Dow doing exactly the same thing back in 1987 right up to October, except that back then the milestones were each 100 points, not 1000. Oh how we marvelled as each level was breached.
Before anyone starts to panic, we’ll also recall that interest rates were in the teens back then, everyone was up to their eyeballs in debt (think Bond, Holmes-a-Court, Skase), and there was no such place as China.
Copper and nickel fell -1% in London, lead -2% and zinc -4%. Aluminium was steady.
Iron ore fell -US70c to US$61.70/t.
Global markets keenly await the outcomes from the Chinese Congress, which begins today. For commodity markets the focus is on further capacity constraints and environmental shutdowns.
West Texas crude is up US13c at US$52.01/bbl.
The US dollar index rose only 0.2% to 93.51 but the selling in gold is proving more than just profit-taking at the 1300 level. Gold is down another -US$8.20 at US$1285.60/oz.
The Aussie is steady at US$0.7844.
The SPI Overnight closed down -6 points.
One presumes in the latter case the mood will be sombre. That is not the way anyone would like to see their competition falter.
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