The Overnight Report: Then Along Came Trump

This story features BLUESCOPE STEEL LIMITED, and other companies. For more info SHARE ANALYSIS: BSL

World Overnight
SPI Overnight (Mar)	5918.00	– 44.00	– 0.74%
S&P ASX 200	5973.30	– 42.70	– 0.71%
S&P500	2677.67	– 36.16	– 1.33%
Nasdaq Comp	7180.56	– 92.45	– 1.27%
DJIA	24608.98	– 420.22	– 1.68%
S&P500 VIX	22.47	+ 2.62	13.20%
US 10-year yield	2.80	– 0.06	– 2.23%
USD Index	90.31	– 0.34	– 0.38%
FTSE100	7175.64	– 56.27	– 0.78%
DAX30	12190.94	– 244.91	– 1.97%

By Greg Peel

Follow the Leader

Wall Street copped a sharp sell-off late in the session on Wednesday night and despite possible month-end explanations, the Australian market followed suit yesterday, dropping sharply from the open and then staying there.

It was always going to be a step-down adjustment on the open given the number of stocks going ex-dividend on the day and the quantum of some of those dividends. But every sector finished in the red bar one – REITs were positive if we extract them from the financials sector – on what was a session of market-wide selling.

This time there were no earnings reports to provide for divergence among sectors and stocks. For the ASX200 to be down for the month of February is a shame really given it was one of the best result seasons on record. A beat/miss ratio of 1.5 is at the high end of the range of the last five years and this was only the second season since August 2013 that broker ratings upgrades exceeded downgrades.

The last was in August 2015, following a protracted market sell-off that had run too far.

Yesterday also brought the release of the December quarter capex numbers.

At first glance, they were disappointing. Private sector capital expenditure fell -0.2% when expectations were for a fourth consecutive quarterly gain. But this was down to a drop in non-residential construction spending and that old chestnut – a sharp drop in mining investment. Spending on plant & equipment nevertheless rose solidly.

Capex intentions were also a little weaker than hoped, however the theme of recent quarters is much the same. Non-mining investment intentions remain solid while in the mining industry, a forecast three months ago for investment to be down -16% has been revised to -8%. For FY19 it’s only -5%, so the trend is in the right direction.

The capex numbers didn’t much matter on the local stock market yesterday. It had already made its move. The 6000 level was definitively breached, and Wall Street has taken another tumble overnight.

Technically, the 50-day moving average has been breached, and thus a move down to the 200-day is the next likely outcome. That’s at 5850, while solid support remains at 5800.

Trump Declares War

I signed off this Report yesterday by suggesting the critical US date release to watch would be the personal consumption & expenditure (PCE) measure of inflation for January, which the Fed prefers over the CPI measure. A hot number could spark a further sell-off.

It came in at 1.7%, unchanged for three months.

This provided a green light to begin the new month on a positive note following month-end selling the session before. Moreover, the US January manufacturing PMI came in at 60.8 – the fastest pace of acceleration in 14 years.

The Dow gained around 150 points early in the session, but there was some concern. News was the White House was about to make an announcement with regard new tariffs, then there wasn’t going to be an announcement until the details were finalised. But it turns out Trump couldn’t wait.

Against his advisors wishes with regard the timing, the president announced that from next week there will be a 25% tariff imposed on imported steel and 10% on aluminium. Two hours later the Dow was down -580 points.

The tariffs themselves are also contrary to the advice given by some in Trump’s inner circle, including Gary Cohn, who is highly respected by Wall Street. The announcement is not a complete surprise given Trump did flag the prospect a few weeks ago, but at the time Wall Street assumed he was just waving around sizeable numbers that eventually would be pared back to something more sensible. (Remember, Trump wanted a 15% corporate tax).

These numbers are very much top-end, and follow tariffs already imposed to date on lumber, washing machines and solar panels.

Unsurprisingly, US steel stocks had a good session. But why did the rest of Wall Street tumble? Let me count the ways.

The input costs for makers of everything from cars to soft drink cans will now jump. That increase will be passed onto consumers. That’s called inflation – a beast Wall Street is currently very much in fear of.

Bizarrely, the US ten-year yield has fallen -6 basis points to 2.80%.

The tariffs may have China written all over it but the US also imports steel and/or aluminium from Europe, Japan, India, and most importantly, neighbours Canada and Mexico. No one is happy. But specifically, NAFTA talks were already at the point of breaking down. One commentator suggested last night they are now dead.

Wall Street likes tax cuts, likes deregulation, likes infrastructure spending, but does not like protectionism. It is no stretch to imagine Trump’s tariffs will spark tit-for-tat retaliation from America’s trading partners. Last night the most heavily hit stocks were the multinationals.

And that includes Big Tech. Tech companies don’t exactly plough through the steel and aluminium, but they do sell more iPhones and what-have-yous to the rest of the world than they do domestically.

Basically, the fear is Trump has now started a trade war that can only escalate. And it is known that the president isn’t finished yet – there are more US industries he wishes to protect.

Trump is now beginning to unwind the goodwill.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1320.44	+ 2.90	0.22%
Silver (oz)	16.51	+ 0.15	0.92%
Copper (lb)	3.12	– 0.01	– 0.27%
Aluminium (lb)	0.98	+ 0.00	0.28%
Lead (lb)	1.11	– 0.02	– 2.17%
Nickel (lb)	6.12	– 0.15	– 2.41%
Zinc (lb)	1.56	– 0.03	– 1.68%
West Texas Crude (Apr)	61.43	– 0.15	– 0.24%
Brent Crude (Apr)	64.25	– 0.48	– 0.74%
Iron Ore (t)	79.60	0.70	0.89%

The US dollar index has slipped -0.3% but commodity prices are mostly weaker, except aluminium.

The Aussie is steady at US$0.7764.

Today

The SPI Overnight closed down -44 points or -0.7%.

We’ll see another batch of ex-divs today, but not as many big cap names. BlueScope Steel ((BSL)) and Southern Cross Media ((SXL)) are among them.

Rudi will connect with Sky News Business via Skype, at 11.15am, to discuss broker calls, and the broader share market.

The Australian share market over the past thirty days…

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms