Overnight: Bank Revival

By Greg Peel

Gold For Australia

Surging resource stocks finally put an end yesterday to the “risk off” theme for the ASX200 this week. If we say the IT sector was flat, thanks to a weak Nasdaq, the banks were the only sector to close in the red. After a week of selling, a mere -0.1% seemed like outperformance.

Gold miners were the star yesterday on a combination of a stronger US gold price, thanks to the Italy scare, and a weaker Aussie. Every one of the ASX200 top five winners yesterday were gold miners. Sector gorilla Newcrest ((NCM)) couldn’t make the top five with a 3.3% gain.

Other miners also had strong sessions, with BHP ((BHP)) rising 1.1% after an announced agreement with the Brazilian government with regard the Samarco disaster. The other diversifieds also had solid sessions, but Fortescue Metals ((FMG)) missed out after two major brokers moved to Sell ratings, citing expectations of an extended period of discounts for lower grade ore. Fortescue fell -4.1% to be the second worst ASX200 loser.

Energy (+0.8%) chimed in to partner materials (+1.2%) despite overnight oil prices not shooting higher for once (they did last night), with the falling currency no doubt an additional driver.

The Aussie is down -1.1% this morning, part of which we can blame on a 0.6% jump for the US dollar index, but earlier weakness came down to some shock economic data released yesterday.

Australian building approvals fell -9.4% in August, following a -4.6% fall in July. The market had forecast a 1.0% rebound. The big drop came in apartment approvals, down -18%, as tighter credit conditions weigh and all talk is of oversupply. Non-residential approvals also disappointed in -24%, but this segment is very lumpy and approvals had risen 31% in July.

Total residential approvals are down -14% year on year, split into houses (-4%) and apartments (-24%). If the trend continues, one presumes a floor must be found in house prices.

AGL Energy ((AGL)) is as much a resource stock as any but it helped utilities up 1.4% yesterday. Other sector moves were more muted, but green nonetheless.

Overnight we’ve seen more strength in oil prices, a big jump in aluminium and strength across the board in US stocks. Gold, however, gave back half of what it gained on Tuesday night.

US banks had a Phoenix session last night and typically Australian banks tend to blindly follow their US counterparts, except there’s no RC going on in the US. Perhaps, nonetheless, it will be an excuse to buy the beaten-down sector today.

The futures are up 9.

Bonds, US Bonds

Aston Martin listed on the stock market for the first time last night, falling -4% amidst the spectre of short-selling. The carmaker has been rescued more times than a Chinese tourist at Bondi, including by Sean Connery, and must be hoping it can emulate the success of recently listed Ferrari, despite negative earnings.

But the real focus last night on Wall Street was on the before-the-bell release of the ADP private sector jobs report for September, which showed a much higher than expected 230,000 additions in the month. It was the straw that broke the US bond market’s back.

Having been unable to sustainably breach the 3.0% mark for years, despite Fed tightening, the US ten-year yield leapt 11 basis points last night to 3.16%, smashing through resistance at the most recent high of 3.12%. The jobs report was a primary incentive, but news that the Italian government is prepared to yield ground to EU demands with regard budget deficit intentions also paved the way for the breakthrough.

All year long the US yield curve has become flatter (two-year to ten year spread), splitting the market into two camps. The old school camp insists an inverted yield curve signals recession 12 to 18 months down the track, while the “this time it’s different” camp scoffs at such an anachronistic view, pointing instead to persistently low bond rates in the rest of the world. “How can an economy growing at 4.2% be about to go into recession?” they chant.

Whoever may prove correct is irrelevant to US banks, which require a positive yield curve spread to be able to borrow short and lend long at a profit. That’s a bank’s bread and butter. Hence for the last several months, US banks have wallowed in the mire despite new records being constantly set by the various US stock indices.

Last night they arose from the ashes. The two-ten year yield spread jumped to 30 basis points having recently threatened to fall below 20.

Wall Street shot up on the open, led by the banks, and stayed there all the way to around 2.30pm when sellers moved in. The Dow was up 178 points at its peak, but not everyone likes the look of a surging US dollar and higher interest rates.

Interestingly, the rotation that has been a feature all week – switching out of successful tech and small cap trades and back into the big industrials and other cyclicals – ended last night. All four major indices rallied. The Dow hit another new record, the S&P did so intraday but fell back, and the Nasdaq and Russell both had positive sessions as well. The Russell rebounded 0.9%.

Buy America.

And now, on to Friday night’s jobs report.

Commodities

The aluminium price jumped close to 4% last night after Norsk Hydro announced it would halt production at its Alunorte alumina refinery in Brazil. The market has been waiting to learn the refinery’s fate since an outage earlier this year.

Other base metals were relatively quiet but gold succumbed to both the stronger greenback and some relief on the Italian front. Gold had jumped on Tuesday night on the Italian scare.

Oil prices were up again due to the US weekly crude inventory lottery.

The Aussie is down -1.1% at US$0.7107.

Today

The SPI Overnight closed up 9 points.

Australia’s August trade numbers are out today.

Bank of Queensland ((BOQ)) will report earnings and ASX ((ASX)) and Magellan Financial ((MFG)) hold AGMs.

Sims Metal Management ((SGM)) is among a small group of index stocks going ex today, as is Nufarm ((NUF)).

Rudi’s weekly appearance on the channel formerly known as Sky News Business, nowadays called Your Money, will start at 1pm today, and last for an hour.

The Australian share market over the past thirty days…