The Overnight Report: Don’t Panic

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By Greg Peel

The Dow closed down -45 points or -0.2% while the S&P lost -0.1% to 2341 and the Nasdaq gained 0.2%.

Overreaction 1

As the Dow futures tumbled in Asian trade on Monday morning in response to the scrapping of the vote on Trump’s healthcare bill late on Friday US time, the Australian market opened into a vacuum. But the fall on the open of -55 points in the ASX200 was the bottom for the day. There began a choppy ride back to almost square by day’s end.

It is likely the question was asked: what does America’s health insurance system have to do with the broad Australian stock market? Aside from Australian companies with direct exposure to US health policy such as Mayne Pharma ((MYX)) for example, which was the third biggest gainer in the ASX200 yesterday, very little.

The panic is all about the wider implications of Trump not being able to get his first major reform past his own party, having already failed in the courts with his immigration bans. Specifically, tax cuts, which will drive US economic growth, and infrastructure spending, an area where Australian building products companies stand to benefit. But the mood is now one of circumspection, and the belief that one failure, in the tricky area of health, does not mean implicit failure all round.

Hopefully.

Whatever the impetus, investors decided the initial fall on the local market yesterday was an overreaction. Sector moves remained a mixed bag.

A world away from Trumponomics was the impact of a lower iron ore price. Iron ore has been threatening to correct sharply, and every analyst and his dog has been suggesting such, but to date sharp moves down have been countered by sharp moves back up again. The iron ore price was down on Friday and down again yesterday and this morning looks set to fall through the US$80 mark following another -3.6% fall.

Suffice to say, materials was the worst performer yesterday with a -1.5% fall. On the flipside, energy was the best performer with a 0.9% gain following OPEC’s decision to extend production cuts by six months, made over the weekend.

In between were the financials, which finished relatively flat on the day. US banks were the biggest winners in the initial Trump rally and of late have been the biggest losers, on a combination of the Fed not being quite as hawkish as expected and Trump’s healthcare failure offering wider implications. For some reason there is an inclination for Australian banks to follow US banks around like loyal dogs. But when localised issues are isolated, such as mortgage repricing currently underway, that connection seems vague. Suffice to say the banks fell early yesterday but came flying back.

One may have expected weakness in the wider financials sector given the potential impact on insurers of Cyclone Debbie, but Suncorp ((SUN)), for one, was quick to point out yesterday its exposure is limited due to reinsurance cover.

The other news of the day was the rumour Solly Lew, one time major shareholder of a listed company called Coles Myer, was behind the 10% chunk of Myer ((MYR)) stock that was put through the market yesterday at a slight premium. Lew has seen Coles being revived by Wesfarmers and David Jones being revived by the South Africans. Perhaps he feels the same can happen for Myer. One is reminded of Jurassic Park.

Myer is currently the third most shorted stock on the ASX at around 16% so the 18% share price rally yesterday reflected a combination of takeover speculation and subsequent short covering.

Elsewhere, utilities had another strong session as investors weigh up the possibility of the Trump reflation trade fading to a whimper and the Fed thus winding back its rate hike expectations. Telcos should respond the same way but with one gorilla in that room constantly bouncing backwards and forwards, it’s misleading to call the sector defensive.

Overreaction 2

The Dow was down over -180 points on the open last night. In a case of déjà vu, it was also the bottom for the session. Wall Street spent the rest of the day grafting back to take the S&P almost back to flat and the Nasdaq into the green.

Again it was a matter of a simple question being asked: does Trump’s healthcare failure imply failure ahead across all major policy intentions? The answer appears to be no, not at all. But clearly there is caution. Having broken all sorts of records earlier in the year in consecutive gains, the Dow’s eight sessions of losses is now the longest since 2011.

Wall Street is trimming off the excess premium built into the market on initial Trump euphoria. All along the cooler heads had said don’t get too excited just yet – the policies sound great but he actually has to get them through Congress. That won’t be that easy.

And clearly it isn’t.

Wall Street continues to have faith in tax reform, but the issues are mounting. Aside from objection to a border tax there remains the issue of just how Trump intends to pay for lost tax revenue and boosted infrastructure spending. Something has to balance on the other side of the ledger. Trumpcare was set to save the odd trillion compared to Obamacare. That source of funding is now in doubt.

Come April 28, Congress has to vote on the infamous US “debt ceiling”. Failure to reach an agreement will result in a government shutdown, as happened in 2013.

Trump is now under pressure to roll something out in the form of a draft tax bill or risk slowly losing the faith of Wall Street altogether. In the meantime, the rest of the world is being held to ransom.

Commodities

The US dollar index is down -0.5% to 99.20 in response to the healthcare bill failure. Gold is up US$9.80 at US$1254.20/oz.

All base metals traded lower in London. Aluminium fell -0.5%, copper and nickel -1%, and lead and zinc -2.5%. Note that BHP Billiton's copper miners went back to work over the weekend.

Iron ore fell -US$3.60 to US$80.80/t.

West Texas crude is down -US32c at US$47.76/bbl.

The Aussie is steady at US$0.7622.

Today

The SPI Overnight closed up 16 points or 0.3% despite Wall Street closing slightly lower.

Consumer confidence will be in the frame in the US tonight, not that anyone is paying much attention to actual data at the moment.

Rudi will connect with Sky Business through Skype at around 11.15am to discuss broker calls.
 

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