The Overnight Report: Tariff Time

This story features ESTIA HEALTH LIMITED, and other companies. For more info SHARE ANALYSIS: EHE

World Overnight
SPI Overnight (Sep)	6179.00	– 4.00	– 0.06%
S&P ASX 200	6185.00	+ 19.70	0.32%
S&P500	2888.80	– 16.18	– 0.56%
Nasdaq Comp	7895.79	– 114.25	– 1.43%
DJIA	26062.12	– 92.55	– 0.35%
S&P500 VIX	13.68	+ 1.61	13.34%
US 10-year yield	3.00	+ 0.01	0.23%
USD Index	94.50	– 0.43	– 0.45%
FTSE100	7302.10	– 1.94	– 0.03%
DAX30	12096.41	– 27.92	– 0.23%

By Greg Peel

Not Amused

The then Turnbull government for a long time dismissed the notion of a bank Royal Commission, pointing to a number of inquiries into the sector that had already been conducted or still underway. Eventually the government buckled to whipped up public pressure, but still bank analysts suggested there probably wasn’t much in the way of new problems that would be revealed, beyond what already had been.

And the rest is history.

Noting that, for example, Commonwealth Bank is down -12% from its high this year and AMP is down -40%, traders did not muck around yesterday in the wake of a Royal Commission into the residential aged care sector being announced by the prime minister on the weekend.

Estia Health ((EHE)) fell -18%, Japara Healthcare ((JHC)) fell -17%, Regis Healthcare ((REG)) fell -17% and Aveo Group ((AOG)) fell -7%. And that was ahead of last night’s Four Corners expose.  Why waste time waiting to see what transpires?

Estia and Aveo took the gold and silver on the ASX200 losers’ board yesterday. The other two are outside the index. CSL ((CSL)) was also weak yesterday despite a lower Aussie, and healthcare was the standout poor performer amongst the sectors, falling -0.9%.

Materials dipped -0.2% on weaker commodity prices but elsewhere, every sector closed in the green. The index dipped early but quickly recovered, showing signs of a “risk on” trade for the second session running.

Let’s face it, whenever the financials rally these days (+0.6%) it can’t be anything other than “risk on”.

And this time the consumer sectors flipped and joined in, telcos (+1.5%) won the session, with TPG Telecom ((TPM)) running up 3.8% ahead its earnings release today to top the ASX200 winners’ board, and utilities gaining 1.3% after APA Group ((APA)) jumped 1.8% on news the takeover bid from the Chinese is unravelling.

So I can no longer refer to the bank Royal Commission as the “RC” in this Report, as we’ll now have two. Although the aged care RC may yet be a-ways off given no details have to date been formulated.

Tariffs on Amazon

I have been waiting since dawn for this promised announcement from the president with regard the new US$200bn tranche of Chinese exports upon which tariffs are to be applied but alas, with my deadline approaching there has yet been no news.

The suggestion is that the tariffs will go ahead, but at 10% rather than the 25% originally suggested, and with exemptions. We’ll see.

Meanwhile, a WSJ article last night pointed out that there are an awful lot of Chinese manufacturers who sell their products via Amazon. It has also now become apparent that, exemptions notwithstanding, this new round of tariffs will impact on Apple, who manufacturers its iThings in China.

So last night the shares in America’s second biggest company fell -3.2% and the biggest company fell -2.7%. They don’t seem like huge moves, but when your market cap is around the trillion mark you do tend to have a big impact on US indices. Amazon is in the S&P500 and is a big chunk of the Nasdaq, while Apple appears in all three, Dow included.

Their moves were a lot to do with why the Dow fell -0.4%, the S&P -0.6% and the Nasdaq -1.4%. The consumer discretionary sector (Amazon) was the biggest loser on the S&P and technology (Apple) the second biggest. These stocks are not that hard to sell, given their ridiculous year to date rallies.

It was also revealed over the weekend that China may decline the White House offer to return to the table for trade talks, which is possibly why Trump decided to move last night. One Chinese official told the WSJ “China is not going to negotiate with a gun pointed to its head”.

So Trump is now pointing the gun.

These knee-jerk reactions from Wall Street to further trade war escalation are not new, and to date every time there is a dip the indices pretty quickly recover. Commentators have pointed out that given the renminbi has fallen some -6% since the war began, a 10% tariff rate, rather than 25%, is to a great extent already offset.

It is also popular to point out that from the initial trade war fear dip in March, the S&P500 is up over 10% and the Shanghai Composite is down around -20%. The faithful like to point to this simple comparison to insist if there is a trade war, America wins.

But it is also well noted now that while the earlier tariff tranches focused mostly on raw commodities and heavy industrial equipment, this next round has a greater proportion of consumer goods on the list (as far as we so far know) and the next tranche – the threatened US$267bn – more still. The victims here will not just be the Chinese but the US consumer.

And that would feed into CPI inflation, and then the Fed would have to decide how to react.

So it’s not quite as simple as “America wins”.

But as you read this you’ll probably by then know more about the new tranche than I presently do, assuming Trump has since made his announcement.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1201.10	+ 8.00	0.67%
Silver (oz)	14.16	+ 0.13	0.93%
Copper (lb)	2.65	– 0.03	– 1.29%
Aluminium (lb)	0.90	– 0.01	– 0.89%
Lead (lb)	0.92	+ 0.01	1.00%
Nickel (lb)	5.58	– 0.10	– 1.77%
Zinc (lb)	1.04	– 0.01	– 1.02%
Iron Ore (t) futures	68.57	+ 0.14	0.20%

The only unusual move last night was in the US dollar index, which fell -0.5%. To date, every time trade war fear escalates, the greenback rises. Is this simply a “sell the fact”?

Base metal prices were still down in London, as they typically are on trade fears.

The greenback’s fall did manage to help gold back over 1200.

The oils are stuck between trade wars, Iranian sanctions and hurricanes.

The Aussie is up 0.4% at US$0.7179.

Today

The SPI Overnight closed down -4 points.

Today in Australia we see June quarter house prices and the minutes of the September RBA meeting, which I’m sure will be thrilling stuff.

TPG Telecom ((TPM)) posts its earnings result and Qube Holdings ((QUB)) is the one ASX200 member going ex today.

Rudi will connect with Sky News Business via Skype this morning to talk share market and broker calls, probably around 11.15am.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
FSF	FONTERRA	Upgrade to Neutral from Underperform	Credit Suisse
MYR	MYER	Upgrade to Hold from Lighten	Ord Minnett
		Upgrade to Neutral from Sell	UBS
PRY	PRIMARY HEALTH CARE	Upgrade to Accumulate from Hold	Ord Minnett

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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