Overnight: Too Much Oil

By Greg Peel

Straightforward

A 500 point Dow jump overnight suggests our half percent gain yesterday for the ASX200 looks a bit weak, but we did rally ahead of the US midterms so on a net basis we’re still pretty much in line.

At the macro level the session was pretty straightforward – we opened up over 30 points and then closed over 30 points. All sectors finished in the green bar three, and only one of those did not have an excuse to join in the rally.

Yes the coin came up tails, and it seems increasingly Telstra ((TLS)) likes to go the other way to the rest of the market amidst big moves. Telcos closed down -0.6%.

The best performer on the day was IT – not just because the Nasdaq enjoyed a strong comeback but because Afterpay Touch ((APT)) provided a positive trading update which was worth an 11.1% rally, while sector stablemate Appen ((APX)) jumped 9.4% in line with the Nasdaq or Afterpay or both.

The worst performer was utilities, and for once not just because AGL was down on the day. The Treasurer has used his veto power to block the takeover of pipeline manager APA Group ((APA)) by a Hong Kong-based company, for being contrary to national interest. There is a hope that a local fund manager might step in instead but no one had to date offered anything like the CK Group price.

APA fell -9.9% as a result and the utilities sector -4.5%. And that was still not the biggest stock move on the day.

James Hardie’s ((JHX)) quarterly result came with downgraded guidance and given current sentiment, you do not want to upset the market. James Hardie fell -14.6% and materials closed down -0.5%. (Don’t forget building materials are indeed materials, like rocks.)

Domino’s Pizza ((DMP)) had been chugging along nicely when the company issued a trading update that revealed slowing momentum, plus UBS decided it had run far enough for now and pulled back to Neutral. The stock fell -10.7%.

On the flipside, EclipX ((ECX)) announced a tie-up with peer McMillan Shakespeare ((MMS)) that was worth +16.1% for EclipX and -6.4% for McMillan.

EclipX is a financial, but of little influence in a sector which yesterday gained 1.0% thanks to rallies in the banks, despite National Bank ((NAB)) going ex.

Volatility has become customary now for Corporate Travel Management ((CTD)) which has countered the predator short-side hedge fund’s accusations with a report from accountants EY. It jumped 14.8%.

REA Group ((REA)) reported overnight in the US and it rose 8.0%. Housing crash?

We note that on any other day, Chinese trade data, released yesterday might have had our market surging further. Exports rose 15.6% year on year in October, up from 14.5% in September and ahead of 13.0% expectation, while imports rose 21.4%, up from 14.3% and smashing 12.8% expectation.

This time it’s not about smoke and mirrors, it’s about ongoing front-loading by the Chinese in case Trump’s final all-in tranche gets the green light when talks break down in Buenos Aires. Data dismissed.

With Wall Street taking a breather after Wednesday night’s big rally it looks like we’re set to do the same today, given the futures are down -9 points this morning.

Breather

Wall Street gave a little back last night after Wednesday night’s big rally, which had taken the S&P back up 7% from its correction low. A breather was in order.

The Fed issued its statement and there was no rate change as expected, and basically no change to the rhetoric. The US economy is strong, the labour market is tight and inflation is around target. There was a nod to signs of weakening business investment but no change, by implication, to expectations of further rate rises to come.

The market has a December hike at over 80% probability and 60% for a follow-up next March.

The US ten-year yield rose 2 basis points to 3.23% to regain its prior closing high, which may have provided an excuse for stock market weakness. The US dollar jumped 0.7% which is another net-negative for stocks.

One big talking point on the day was oil, as another -1.3% slide for WTI takes the futures into “technical bear market territory”, ie -20% from the peak. The second of the two weekly production and inventory reports, released last night, showed US daily production now exceeds that of both Saudi Arabia and Russia.

OPEC/Russia meets this weekend to discuss quotas, but the discipline of recent times has now given way to something more akin to the free-for-all we had become accustomed to from OPEC, as the Saudis, along with the Russians, use “lost” Iranian barrels as an excuse to make up the difference. The problem is sanction exemptions mean not much is being lost, if at all, so if OPEC/Russia wants to get the oil price heading back up towards US$80/bbl then they’ll have to return to production cut quotas.

And hand over their markets to the US? Not likely. One respected commentator last night called oil in the forties again soon.

Of course only one sector benefits from a strong oil price while most all else suffer, and lower prices at the pump are seen as a boost as we head towards the annual consumer spending frenzy.

Commodities

Outside of oil, not much to report other than a 3.5% jump for the often volatile lead price and some strength in iron ore.

The Aussie has come off -0.4% on the greenback rally to US$0.7255.

Today

The SPI Overnight closed down -9 points.

China reports inflation data today and locally we’ll see housing finance numbers. The RBA will release its quarterly Statement on Monetary Policy.

REA and News Corp ((NWS)) have reported quarterly earnings, CSR ((CSR)) goes ex-div today and Nanosonics ((NAN)) and Hub24 ((HUB)) are among those companies holding AGMs.

The Australian share market over the past thirty days…

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