Overnight: And We’re Back

By Greg Peel

Exuberance Restrained

The ASX200 shot out of the blocks yesterday, following Wall Street’s recovery surge, jumping 61 points on the opening rotation. Then immediately the sellers arrived to send the index back down steadily to lunchtime for less than a 20 point gain.

Clearly local investors are not yet convinced it’s all just a storm in a tea cup, although the afternoon saw buyers quietly return. Wall Street appears now to have shaken off any worries about the coronavirus from a net market-wide perspective, notwithstanding individual stocks that are heavily impacted, as the Dow is up another 480 points overnight.

Our futures are up 56, so those sellers yesterday may need to have a rethink.

Philip Lowe also seems unfazed, telling the Press Club yesterday there are better economic times ahead even as the bushfires take some -0.2 percentage points off GDP. The RBA governor urged the government and businesses to now take the baton and borrow at ultra-low rates to increase productivity, implying the central bank is firmly on hold.

Yesterday was a clear risk-on session with utilities (-0.8%), telcos (-0.2%) and, finally, consumer staples (-0.4%) finding sellers as materials (+1.0%), energy (+0.6%), industrials (+0.8%) and discretionary (+0.7%) all recovered. IT (+2.1%) won the day.

The banks (-0.1%) failed to join in after UBS called Commonwealth Bank ((CBA)) the most expensive bank in the world. It fell -1.2%.

While the big miners saw some support yesterday, net of falls for gold miners, it was the battery component miners (lithium, graphite) that really shot the lights out. Orocobre ((ORE)) rose 19.0%, Galaxy Resources ((GXY)) 17.7%, Syrah Resources ((SYR)) 13.4% and Pilbara Minerals ((PLS)) 11.3%.

Why?

Several reasons on the day. (1) Boris Johnson has banned the sale of new internal combustion engine cars in the UK from 2035; (2) Australian industry advocates are pushing Morrison to do the same, as local EV sales triple year on year; (3) the share price of EV leader Tesla has risen 100% this year (bit of a dip last night though); (4) and probably most influentially, those share price moves yesterday are very similar to the percentage of positions held short. Syrah, Galaxy and Orocobre top the most shorted list.

The irony is that so oversupplied are the markets for lithium and graphite right now that all producers have been forced to curtail production. EVs might be the future, but demand still has to catch up.

Cimic Group ((CIM)) reported earnings and jumped 9.8%, but that follows last month’s trashing on write-downs, while another stock trashed last month on a profit warning, Nearmap ((NEA)), gained 7.4%.

There was not a lot of note on the downside other than gold miners.

With Wall Street surging for a second session, there may be more of a rush today to get back in. Energy will likely stick its hand up for leading sector.

Exuberance Unrestrained

It had to happen. Tesla fell -17% last night. Just the start?

Before the open it was revealed the US private sector added 291,000 jobs in January when 150,000 were forecast. The US services PMI rose to 55.5 when 55.0 was forecast – the fastest pace in six months. The US trade deficit fell in December for the first time in six years, due to reduced imports from China.

There seems little amiss with the US economy, as Trump was quick to point out in a State of the Union Address Nancy Pelosi seemed little amused by.

Meanwhile, with around half of S&P500 companies having reported earnings to date, the earnings growth rate year on year is showing +0.1% when -2% was forecast pre-season.

Adding to the exuberance was news on different fronts that work on a treatment for coronavirus is progressing with positive signs. However, when asked, WHO warned there are “no known effective therapeutics” against the virus. And if one is found, months of testing will need to follow.

But it’s enough for Wall Street to have shaken off major virus concerns, while lauding the US economy and enjoying positive earnings results. Last night, the S&P’s long time worst performing sector became its leader, at least for a day.

Energy led the indices higher, while Exxon helped drive the Dow to outperformance. The Nasdaq lagged because of Tesla, which as of Tuesday night was bigger than Volkswagen, previously number one and a producer of significantly more vehicles.

OPEC-Plus met in Vienna last night to discuss further production cuts to offset the impact of the virus. Recommendations are expected later in the week, but oil markets did not tarry in sending prices back up 2.5%.

So all’s right with the world, it seems. The major US indices have all once again hit record highs.

Commodities

The rebound for base metal prices has gained pace but iron ore has become rather volatile.

Gold managed to hang in there this time, despite the US ten-year yield adding back another 5 basis points to 1.65%.

WTI’s foray into the forties has so far proven brief.

The Aussie is up 0.1% at US$0.6747 despite the greenback rising 0.3% on positive data.

Today

The SPI Overnight closed up 56 points or 0.8%.

Locally we’ll see December retail sales and trade numbers today and a December quarter summary of NAB’s business confidence survey.

New Zealand is closed. No, I hadn’t noticed either.

Earnings results are due today from Dexus Property ((DXS)), Nick Scali ((NCK)), Pinnacle Investments ((PNI)) and Service Stream ((SSM)).

The Australian share market over the past thirty days…