The Overnight Report: Thanks IMF

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World Overnight
SPI Overnight (Dec)	6020.00	– 6.00	– 0.10%
S&P ASX 200	6041.10	– 59.20	– 0.97%
S&P500	2880.34	– 4.09	– 0.14%
Nasdaq Comp	7738.02	+ 2.07	0.03%
DJIA	26430.57	– 56.21	– 0.21%
S&P500 VIX	15.95	+ 0.26	1.66%
US 10-year yield	3.21	– 0.03	– 0.77%
USD Index	95.67	– 0.07	– 0.07%
FTSE100	7237.59	+ 4.26	0.06%
DAX30	11977.22	+ 30.06	0.25%

By Greg Peel

Unhealthy

“An intensification of trade tensions, and the associated rise in policy uncertainty, could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade.”

Mastermind special subject: Stating the bleeding obvious.

The IMF has a long track record of being a good six months behind the curve, and clearly yesterday signalled nothing’s changed. The fund’s forecast for global growth has been lowered to 3.7% for 2018-19 from a prior 3.9%, having been raised to 3.9% earlier in the year.

The trade war is the culprit, of course, and China is seen as coming off worse, of course. And if that is the case, Australia would be caught in the cross-fire, of course, hence the IMF has held onto its 3.2% growth forecast for Australia in 2018 but has lowered its 2019 forecast to 2.8% from 2.9%. The last federal budget projected 3%.

We’ve known all this the whole year – the only difference now is that the confidence the market had, and in this case particularly Wall Street – is beginning to wane. China was meant to have buckled by now. It hasn’t, and only now is the impact starting to be felt in Chinese data. Chinese markets have been sending negative signals all year – plunging stock market, plunging currency, stalling manufacturing industry – and the PBoC’s latest attempt at stimulus, being the weekend’s RRR cut, appears to have tipped sentiment over.

Wall Street is hanging in there, but yesterday we saw Day Two of a major “Sell Australia” trade. The IMF picked the wrong day to make its astonishing predictions, with nerves already raw after Monday.

We may look no further than the healthcare sector – down a whopping -4% to be the glaring standout sector of the session. All the big names therein – CSL ((CSL)), Cochlear ((COH)), ResMed ((RMD)) and Ramsay Health Care ((RHC)) in particular — are exporters of their products and services to the rest of the world. They are highly currency sensitive, and on top of it all, the Aussie has bounced these past two days.

Materials (-0.2%) did not get hammered as one might expect when the word China appears in the news, but it had already been hammered on Monday. IT was an “outperformer” on Monday, so it was slammed yesterday by -2.8%, being another export sector. All other sectors bar utilities were otherwise slapped relatively evenly, including the banks (-0.9%), which are themselves barometers of the economy.

Utilities (+0.3%) and REITs (+0.3%) proved to be the defensive go-tos.

The ASX200 has broken its 200-day moving average. Complacency over the trade war through the year has now given way to fear.

In market parlance they call it “October”.

No Idea

Complacency is being sorely tested on Wall Street. The lingering assumption is that the victor in the trade war will ultimately be the US, but the question is as to how much pain has to be suffered in the interim. Interestingly, when Trump launched the most recent tariffs on US$200bn of Chinese imports he warned that any retaliation from China would “automatically” trigger tariffs on the final US$267bn tranche. That was weeks ago, and so far nothing.

Perhaps that’s because next month brings the mid-term elections which for which no one is prepared to predict a definitive outcome. It’s too close. Everything that happens between now and then may prove critical. Outside the market, the Kavanaugh circus could impact either way. Inside the market, were Trump to launch his final, shock & awe tariff package, it may not go down well with some of his supporter base.

Not if China is refusing to surrender, as was meant to be by now.

The theme on Wall Street over past sessions has been sell in the morning, recover in the afternoon. But not all recoveries have made it all the way back, and the trend is down. Last night US stock indices were all over the shop. The S&P500 has broken down through its 50-day moving average.

Yet while intraday swings have been wild, day to day movements have been mostly minimal. If Wall Street is beginning to submit, it’s doing so very slowly. All eyes last night were on the US ten-year yield as the bond market reopened after Columbus Day. It shot to 3.26% from Friday’s 3.23% and then fell back to 3.21%.

The stock market rocked and rolled in harmony. The VIX volatility index, which had spent most of the past few months around an ultra-complacent 11, is now at 16, or 45% higher.

Not helping sentiment is the US hurricane season’s round two, by the name of Michael. Unlike Florence, this one is coming up through the Gulf, thus threatening oil rigs and coastal refineries along with general destruction. And it looks like tracking up to the Carolinas, which are still half underwater from the last one.

I noted at the time of Florence that Wall Street has become somewhat immune to hurricanes because initial damage, and impact on GDP, is always reversed a quarter or two later on rebuilding. But that does not mean there can’t be short-term impacts. Oil prices rising on potentially lost supply implies a spike in short-term inflation at a time Wall Street is very inflation-sensitive.

But if the ups and down of the past few sessions on Wall Street tell us anything, it’s that traders and investors are not really sure what’s going to happen from here. Are rates rising on a strong economy or on inflation? What impact is the trade war, and the rising greenback, having on corporate earnings and outlooks?

The latter question will soon be answered, with the US earnings season kicking off on Friday night. The next question will be: What impact will higher rates have on earnings, and on valuations?

The former question remains a matter of fierce debate.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1189.20	+ 1.60	0.13%
Silver (oz)	14.37	+ 0.02	0.14%
Copper (lb)	2.79	– 0.02	– 0.68%
Aluminium (lb)	0.93	– 0.01	– 0.77%
Lead (lb)	0.87	– 0.01	– 1.46%
Nickel (lb)	5.73	+ 0.07	1.15%
Zinc (lb)	1.23	+ 0.04	3.04%
West Texas Crude (Nov)	74.84	+ 0.61	0.82%
Brent Crude (Dec)	84.98	+ 1.13	1.35%
Iron Ore (t) futures	70.09	+ 0.80	1.15%

A global shortage of zinc became apparent last night on the latest inventory data, hence a 3% jump. Otherwise, base metals were relatively quiet in the current scheme of things.

If China is going to buy less iron ore because of the trade war, you wouldn’t know it from the price, which has been ticking up steadily and is now over US$70/t in the futures.

The oils were up on Michael.

And if the Australian economy is set to slow we should soon be seeing the Aussie in the sixties, but yesterday it again recovered ground from last week’s falls, up 0.4% to US$0.7104.

Today

The SPI Overnight closed down -6 points. I doubt, at this juncture, if futures traders have any more idea than anyone else.

NAB’s confidence survey released yesterday belied any overt trade war fear among Australian businesses. Today we’ll find out from Westpac how consumers are feeling.

Nothing of consequence on today’s corporate calendar.

Rudi will present today to the Sydney North Shore Chapter of the Australian Investors Association (AIA). Place of action is the Chatswood Club, 11 Help St in Chatswood. 7-9pm. Next week he presents in Sydney CBD. Next month he's in Brisbane.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
A2M	A2 MILK	Upgrade to Neutral from Sell	Citi
AHG	AUTOMOTIVE HOLDINGS	Downgrade to Underperform from Neutral	Macquarie
ANZ	ANZ BANKING GROUP	Upgrade to Add from Hold	Morgans
BOQ	BANK OF QUEENSLAND	Upgrade to Hold from Lighten	Ord Minnett
CAR	CARSALES.COM	Upgrade to Buy from Sell	Citi
		Upgrade to Outperform from Neutral	Credit Suisse
DHG	DOMAIN HOLDINGS	Downgrade to Neutral from Outperform	Credit Suisse
IVC	INVOCARE	Upgrade to Hold from Lighten	Ord Minnett
NXT	NEXTDC	Upgrade to Hold from Sell	Deutsche Bank
PGH	PACT GROUP	Upgrade to Outperform from Neutral	Credit Suisse
RCR	RCR TOMLINSON	Downgrade to Neutral from Outperform	Macquarie
SEK	SEEK	Upgrade to Neutral from Underperform	Credit Suisse
SXY	SENEX ENERGY	Downgrade to Lighten from Accumulate	Ord Minnett
VOC	VOCUS GROUP	Downgrade to Hold from Accumulate	Ord Minnett
WPL	WOODSIDE PETROLEUM	Downgrade to Lighten 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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