The Overnight Report: Taper Triumph

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Change of Heart

Unless investors had a complete about-face in sentiment as they slept on Tuesday night, a big buy-order hit the market yesterday morning as was suggested by an incongruous 71 point gain in the futures pre-open. And so it was the ASX200 closed up 68 points, although not before the momentum algos pushed it up over 100 points by lunchtime.

Up to yesterday the market had wallowed on falling commodity prices and a weak earnings report from Westpac ((WBC)) and wouldn’t you know, these and the other big-cap sectors were targeted by the buyer yesterday.

Materials up 1.4%, banks up 1.2%, healthcare up 0.9%, staples up 1.0%.

All sectors closed in the green bar technology, which fell -0.2% on a -15.0% plunge for Tyro Payments ((TYR)) after a disappointing AGM.

There was no clear trigger for the buying against the week’s run of play. The iron ore price did stabilise under US$100/t yesterday but that’s about it. The Australian market has lagged Wall Street since the September swoon, mostly given our far more significant weighting to rocks, which may have something to do with it – that and a still dovish central bank when all about are turning hawkish.

Not the Fed though.

Despite yesterday coming out of the blue, traders have endorsed the gains, given the futures are up 37 points this morning after Wall Street applauded Jay Powell.

Glasgow has proven a fillip for all things green, including lithium, such that all of Orocobre ((ORE)), Pilbara Minerals ((PLS)) and Mineral Resources ((MIN)) appeared on the top five leaders’ board yesterday with gains of 4-7%.

Blow me down if AMP ((AMP)) didn’t top the board with a 9.3% flurry, but only because it finally offloaded its life insurance business.

Tyro was the only real standout on the losers’ board.

With the RBA meeting now behind us, and Lowe waving the white flag on yield curve management, local bond yields have been slipping back. Yesterday the two-year fell -8 points to 0.56% (with the RBA’s 0.10% cap now abandoned) and the ten-year fell -6 to 1.82%.

Our ten-year still remains solidly above the US equivalent, even after a kick-up in US yields last night, but the two-year gap has closed with the US at 0.47%, which is the duration that most affects the exchange rate.

That has currently stalled in the US74-75c range despite commodity price weakness as the US dollar does its own thing.

Happy with that

Last December, the Fed said it would continue to buy bonds until the economy had made “substantial” progress towards its goal of stable 2% inflation and a healthy labour market. Last night, with progress having been made, Jay Powell announced bond purchases would be tapered by -US$15bn per month from a current US$120bn per month.

Which is exactly what Wall Street expected to hear. The tapering level is not set in stone, but if unchanged would mean the end of QE by next July.

The market is still arguing that progress towards a 2% inflation rate is rather questionable, but to the end the FOMC statement suggested:

“Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”

Yep, still transitory. But we might note that US used car prices, to cite one example, which had appeared to have peaked and were heading down again are now heading back up again. Taking Australia as an example, Eclipx Group ((ECX)), at its result release yesterday, warned that new vehicle supply shortage is expected to last into late next year and high prices for used cars will thus linger.

With regard Powell’s longstanding target of 2024 for the first rate hike, there was no specific reinforcement. The Fed will be patient, Powell said (just as Lowe said on Tuesday) and tapering and tightening are two separate issues – the latter not even being discussed by the FOMC.

But, the Fed stands ready to act without hesitation if it is deemed necessary to do so.

So still more on the dovish side, particularly compared to other central banks such as those of the UK, Canada and New Zealand, but not stubbornly so. (Note New Zealand yesterday reported a drop to a 14-year low unemployment rate of 3.2% in the September quarter from 4.0%.)

The US ten-year yield rose 3 points to 1.58%.

For Wall Street, it was more a case of getting this meeting out of the way so life can go on.

And life, at present is good, with earnings beats still rolling in (albeit still with some wild volatility). Uber rival Lyft reported last night and jumped 8%, after the company noted cab demand is coming back fast – a good economic bellwether.

Commodities

OPEC-Plus will meet tonight to discuss production quotas. As a precaution, positions were squared up in the oils last night.

A production increase is nevertheless not expected given some members are struggling to produce at current quota levels, largely due to covid disruptions. Members pumped a net 27.5m barrels in October, up only 190,000 for September when the current quota allows for 254,000.

The point being an increase in production quota will not lead to an increase in production. Look out for the oils to rebound tonight.

When iron ore fell under US$100/t recently it did not stay there for long, rather swiftly rebounding to US$120/t. But with Beijing pulling the strings, anything could happen.

The Aussie is up 0.3% at US$0.7455 with the US dollar down -0.2%.

Today

The SPI Overnight closed up 37 points or 0.5%.

The Bank of England meets tonight.

On the local market, CSR ((CSR)) and Pendal Group ((PDL)) report earnings, while a raft of AGMs today includes those of Domain Group ((DHG)) and Zip Co ((Z1P)).

The Australian share market over the past thirty days…

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