The Overnight Report: Not With A Bang

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By Greg Peel

The Dow closed down -53 points or -0.2% while the S&P lost -0.3% to 2500 and the Nasdaq fell-0.5%.

Wrong Again?

I have noted many times in this Report that the “real” reaction to a Fed meeting typically comes the session after that of the statement release. There is only an hour and half of trading left in the day after the release and the tendency to act first and think later usually provides for some wild swings.

Cooler heads digest the information overnight and then make their moves the next day. This is possibly why the Australian market tanked yesterday, somewhat surprisingly. Despite little reaction initially, the local market decided Wall Street would wake up and sell last night.

They weren’t wrong, but then a near -1% fall locally doesn’t really stack up to a -0.3% dip in the S&P after such a long run-up.

The ASX200 closed on a new low since the April peak, at 5655. This looks like a weak technical signal, but the futures are showing up 19 this morning on the supposed overreaction and the longstanding range has not been meaningfully shattered.

Speaking of futures, the September SPI contract expired yesterday, as did options on the SPI and ASX200. This probably goes a long way to explaining yesterday’s seemingly misplaced volatility. Selling across sectors was very uniform, with a couple of exceptions, suggesting index-related activity.

Energy was the only sector to close higher, up 0.6% as WTI retook US$50/bbl. Utilities was the biggest loser with a -2.0% loss, but that one actually does make sense if a Fed rate rise is now considered more likely.

Otherwise, one of the smaller percentage moves came from financials, -0.6%, albeit in index points terms still the significant influence. On any other day the announced sale of Commonwealth Bank’s ((CBA)) life insurance business, boosting the bank’s capital position, would have been well received.

There were, however, other outside influences.

S&P downgraded China’s credit rating, due to rising debt levels. No great surprise – China’s burgeoning debt has been a topic of global discussion for some time and Moody’s downgraded in May – but enough to add to the negative sentiment. And the iron ore price completely tanked. It’s down -US$5.00 in spot trading.

It wasn’t just the local stock market that plunged yesterday but the currency as well. The Aussie is down a whopping -1.2%.

Well that should be easy to explain – Fed balance sheet unwinding and likely December rate hike, and a strong greenback overnight. Except that this time yesterday, after the greenback had made its move, the Aussie was up, not down.

So you could call it a delayed reaction, but typically forex cowboys aren’t known for their slow responses, or we could point to the China rating downgrade, the iron ore price plunge, and, most importantly, Philip Lowe.

The RBA governor gave a speech in Perth yesterday and in a nutshell hosed down any idea of a rate hike in 2018. The RBA still expects the economy to grow at 3% in 2018 but does not see inflation taking off and is very much not inclined to raise rates in the face of record household debt. Lowe’s comments come just as economists have been falling in line to upgrade rate hike expectations.

So down the Aussie went. A lower Aussie, no rate hike, and 3% growth. Could have been a great day to buy the stock market.

Rock Around the Clock

The Dow’s nine-day winning streak came to an end last night. It was the third such streak in 2017. The last time three streaks of such magnitude were seen in one year was in 1955.

Nobody believes the rally came to an end because of yesterday’s Fed news. Balance sheet tapering and a reaffirmation of a likely December rate rise were already priced in by the market. If Wall Street was really going to react poorly to the Fed, the Dow would have fallen by a lot more than -0.2%.

The Fed was, at best, an excuse to take some profits after the long, grinding run up, and to rearrange one’s portfolio.

Dragging on the indices was Apple, which has been falling ever since the company launched its new product suite. Analysts are questioning whether the iPhone 8 is actually that much of an improvement over even the iPhone 6, and whether anyone will buy the iPhone 8 when the iPhone X will be available in a couple of months. But is the iPhone X too expensive for anyone but the purists? In which case will Apple sell any new phones?

Otherwise it was yet another “nothing to see here” session on Wall Street.

Commodities

We can’t say the same for metal markets. Iron ore fell -US$5.00 or -7% to US$63.00/t. It is typically the time of year iron ore demand dries up on seasonal factors.

Having shot up on Wednesday night, last night nickel shot down -3%. Having shot up on Wednesday night, last night lead shot up again, by 2.5%. Copper and zinc fell -1%.

The US dollar index pulled back -0.3% to 92.18 but that didn’t stop gold falling another -US$9.90 to US$1290.60/oz. In this case we can blame the Fed.

The WTI futures contract rolled over into the November delivery front month last night with little fuss, and is up a tad at US$50.74/bbl.

The Aussie is down -1.2% at US$0.7932.

Today

The SPI Overnight closed up 19 points or 0.3%, presumably acknowledging a local market overreaction yesterday. But the index continues to make lower lows and it’s been a while now since we’ve seen a rally get all the way to 5800.

The US and eurozone will flash estimates of September manufacturing PMIs tonight.

Locally, APA Group ((APA)) will release its earnings result.

There are no big names amongst today’s much smaller list of ex-divs.

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

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