Overnight: Release The Doves

By Greg Peel

Well Resourced

The local materials sector closed up 2.1% yesterday and energy closed up 1.0%. The ASX200 closed up 0.2% with every other sector closing in the red.

The index shot up 37 points from the open but an hour later the rot set in. The resources sectors held their gains, which were driven by Brazil and Venezuela respectively, but all about faded away to take the index back to square ahead of a late rally.

The Australian December quarter CPI numbers came in largely as expected and failed to have any impact on the stock market. Headline inflation rose at a 1.8% annual rate against 1.7% expected and core inflation rose 1.7% as expected.

Outside of the resource sectors, the story was again one of micro moves.

Bellamy’s ((BAL)) milked a 9.1% gain after Morgan Stanley initiated coverage with an Overweight rating and $11 price target. Fortescue Metals ((FMG)) rose 7.8%, being the pure-play beneficiary of Vale’s iron ore production cuts. Rio Tinto ((RIO)) came in fourth on the ASX200 leaders’ board with a 4.5% move.

On the flipside, graphite miner Syrah Resources ((SYR)) fell -13% on the release of its quarterly production report, which cited equipment problems, and GUD Holdings ((GUD)) fell -9% on its earnings result, falling short of forecasts.

Air New Zealand ((AIZ)) is not in the ASX200 but certainly made its mark yesterday. The airline slashed 2019 guidance due to forced scheduling changes brought about by problems with Rolls Royce engines, and its share price fell -14%. As a result, Qantas ((QAN)) fell -5.1% and Webjet ((WEB)) -5.5%.

The biggest sector falls (outside of IT, down -1.2%, but not of any great influence) were for consumer discretionary, consumer staples and industrials which all fell -0.6%. All other moves, outside of resources, were small. It was a case of a collective offset across the board to resource sector good fortune.

That good fortune is expected to be maintained for a while, at least for metals, even as China slows. Besides the tragedy in Brazil, the US dollar now appears to have topped out and this is helping to support commodities prices. Gold is the obvious case in point, except that as the greenback falls, the Aussie rises, providing a counterbalance.

Indeed the Aussie is up a full 1.4% overnight, in the wake of the Fed statement release and press conference, proving forex traders are still trying to play the short side. The US dollar index is only down -0.4%. The Aussie move may be a reason why our futures are up only 18 points this morning when the Dow has shot up 400 points.

Wait and Watch

The change in tone from the Fed from two FOMC meetings ago to last night is stark. Two meetings ago the Fed was still signalling four rate hikes for 2018 and a possible three in 2019. The December meeting brought the fourth 2018 rate hike, but Jay Powell did sound a little less hawkish, suggesting rates were now close to neutral.

As of last night, we can assume no Fed rate hikes in the foreseeable future. Due to the cross-currents of a global slowdown, a US shutdown, tightening financial conditions and, between the lines that which the Fed rarely alludes to – the fact the ECB, BoJ and BoE are all firmly on hold – the Fed will now take a “wait and watch” approach to policy and be very much beholden to the data.

Assuming there’ll be some data.

Powell has been both cheered – S&P up 1.6% — and derided. Powell’s statement and press conference hinted that market movements played a part in the Fed’s decision making, which suggests the Fed is now on hold because it was spooked by December stock market carnage, part of which was attributed to fear of a too-aggressive Fed. Hence the derision.

As for the Fed balance sheet, which has been the subject of much speculation leading into this meeting, no new news. The FOMC is thinking about it.

Wall Street was already in rally mode ahead of the Fed release, which was all about earnings. And specifically, earnings results from companies who had suffered most in the late 2018 sell-off.

We recall Apple reported after the bell on Tuesday night, and rose around 3% in the aftermarket. It closed up 6.8% last night.

Boeing and Caterpillar are the two big US industrials that bore the greatest brunt of US-China trade war uncertainty. Last week Caterpillar’s result reflected such an impact, so the same was expected from Boeing last night. The fact the stock closed up 6% suggests otherwise.

Chip-makers had been the hardest hit among the tech stocks, as one by one they warned of slowing demand from manufacturers who use their chips (such as smart phone makers). All the hype of the “Internet of Things” faded in the second half of last year, at the same time the crypto-currency boom went bust.

Last night Advanced Micro Devices’ earnings result was worth a 17% rally.

Earnings results, on a net basis, continue to surprise to the upside. But a lot of that surprise relates to just how oversold the market had become late last year, a lot of recession talk, and the subsequent winding back of expectations.

Now that Fed fear can be taken out of the equation, and earnings fear is abating as the season progresses, that leaves us only with trade fear. On that front, no news last night. Presumably the talks are ongoing. There’s also fear of an endless government shutdown, but we’ll have to wait and see about that one.

For now, Wall Street is “out of correction territory”, for what that statement is worth. The Dow is back over 25,000, and big round numbers make people happy.

Commodities

Brazilian iron ore miner Vale has announced significant production cuts as it moves to decommission 19 dams in the wake of the weekend’s disaster. Operations around 10 dams will halt altogether. The iron ore price has shot up into the eighties and will likely not reverse anytime soon, even with China closed next week.

Vale does not just mine iron ore. It also mines nickel. Hence nickel was up 2.5% last night in London. All base metals were firmer, but the LME closes just as a Fed statement is released. Hence the impact of subsequent US dollar weakness is yet to be felt.

Gold is stronger again, but from a local perspective the 0.6% gain is offset by the 1.4% jump in the Aussie, to US$0.7250.

Weekly US crude inventory data showed only a modest increase, hence WTI is up 2%.

Today

The SPI Overnight is up a timid 18 points or 0.3% to the S&P500’s 1.6% gain.

Locally today we’ll see December quarter import/export prices and monthly private sector credit numbers.

China will release its January manufacturing and services PMIs.

The first estimate of eurozone December quarter GDP is out tonight.

Not sure whether US PCE inflation data will be released.

Fortescue Metals, Beach Energy ((BPT)) and Infigen Energy ((IFN)) release production reports today.

The Australian share market over the past thirty days…