Markets in Asia have been following the lead from Europe and the US and relishing the bounce in oil prices. The US CPI release overnight showed core inflation climbed to 2.0% year-on-year (YoY). For Janet Yellen, who has been at pains to emphasise her concern of inflation overshooting if rates are not hiked in 2015, this final data point surely locks in the Fed rate rise now. The rally we are seeing in equity markets indicates that they are likely to respond well to a rate hike at the decision today as certainty in the direction of Fed policy should bring some stability to markets.
But the rebound in oil has taken some of the pressure off high yield bonds overnight. Talk of the US potentially lifting restrictions on petroleum exports has clearly been lifting the WTI price. China’s NDRC also announced that they would “postpone” an oil price adjustment to help embattled state-owned producers, which saw their shares rally strongly in Hong Kong. Prices have also been within touching distance of 2009 lows in nominal terms. But in inflation adjusted terms, the oil price is even lower than 2009 and is trading at levels not seen since 2003-2004.
Some of the bounce in prices was inevitable with combined short positions of options and futures contracts in WTI and Brent reaching a record high of 364 million barrels on 8 December. With such a large accumulated short position, even if only a small percentage of those positions were to be covered that could see a significant jump in oil prices. Certainly, with huge volatility expected around this evening’s Federal Reserve meeting, there is an added incentive for funds to be taking some profits now. Expectations are also for the EIA weekly oil inventories data to show another decline at their release tonight, which could provide an extra fillip to the oil price if it declines by more than the current market expectations of a 1.5 million barrel contraction.
However, even if we do see a bit of a run up in oil in the near-term, it seems fairly likely that many will still be looking at it as a good entry point for further short positions. The growing threat from an ISIS insurrection in Libya appears to have been a driving force for the two rival parliaments to enter talks about forming a unity government in Malta. The possibility of tensions easing in Libya could see a significant increase in Libyan production in 2016 to add to the forthcoming Iranian supply deluge.
Australia
Aussie markets responded strongly to some respite in global markets. The ASX rallied over 2% to regain the key 5000 level. With volatility levels dropping off noticeably this week the rebound came to the Aussie market with the high yielding blue chips seeing big buying.
The Big Four banks moved up in lock-step today, with all four up over 2%. They outpaced all the other financials ex-property, clearly indicating a strong desire for yield.
BHP’s assurances of further capital cuts to their US oil projects to continue their dividend policy were taken very well by the market as the stock rallied 5.8%. The materials sector as a whole also gained as the DXY dollar index gave back 0.2% in the Asian session and iron ore prices looked to see further gains. The materials sector as a whole jumped 2.7%.
The energy sector was also buoyed by the rebound in oil prices seeing the best performance on the ASX as it rose 3.3%. The large producers Origin Energy Ltd (AX:ORG) and Santos Ltd (AX:STO) both gained 4-5% on the day.
The only negative on the index was on the ongoing fallout from MYEFO on the healthcare sector. The government’s announcement that it was going to significantly cut state reimbursements to diagnostic imaging and pathology services has significantly impacted key players in the space with Primary Healthcare, Integral Diagnostics and Sonic Healthcare all seeing major declines in their stock price again today. The aged care stocks affected by the cuts to the Aged Care Funding Instrument (ACFI) seem to have rebounded today after seeing a fair bit of selling yesterday with Regis Resources Ltd (AX:RRL), Estia Health Ltd (AX:EHE) and Japara Fpo (AX:JHC) all seeing some of the best performances in the healthcare sector today.
However, the Labor Party is still likely to kick upa bit of a fight over these proposed cuts as it finally gives them something to dig into the Turnbull government over. Their attacks on Mal Brough and Ian MacFarlane’s insurrection were already beginning to run thin. And this will make it easy for them to argue that the government is still unchanged from Abbott’s time and that the government are trying to stealthily introduce the unpopular Medicare co-payment cuts. So the impact this announcement is having on stocks is by no means a done deal, with political positioning in the lead up to a 2016 election giving plenty of time for changes.