The Overnight Report: Down Again

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By Greg Peel

Oil’s Well?

The futures had suggested down -37 points on Saturday morning following Wall Street’s Friday night fall and that’s exactly where the ASX200 landed eight minutes into yesterday’s session. But by lunchtime the index was back to square, and by the close up 19 points.

It was a very strong session in the context, but unfortunately I’m back in the position of saying it’s all a bit irrelevant given Wall Street has headed back into correction mode overnight.

Furthermore, the oil price was weaker overnight. The energy sector was the standout performer yesterday in rising 1.2% after a long slow tumble as oil prices fell -20%. Utilities (+2.2%) posted the best percentage gain thanks to AGL Energy ((AGL)) therein and more strength in takeover target APA Group ((APA)).

The rebound came courtesy of Saudi Arabia’s announced intention to cut production in December while urging partners to do the same. Trump has since thrown cold water on the subject – more on that below.

Outside of energy, healthcare (+1.1%) rose on a new takeover offer for Healthscope ((HSO)), which sent that stock up another 14%. Consumer staples rose 1.1% after Woolworths ((WOW)) announced the sale of its petrol stations and agri-company Elders ((ELD)) posted a drought-busting profit result which surprised the market into a 20% gain.

Financials closed in the red (-0.3%) but that was net of ANZ Bank ((ANZ)) going ex-div, effectively leaving IT as the only loser on the day, down -0.8% as it continues to track the Nasdaq.

It won’t be a pretty session for IT today.

There’s no point in dwelling any longer – on any other day we would say this was a very positive post-correction session as we head into Christmas but alas it looks like we’re heading south once more. The futures are down -65 this morning.

Too Many Problems

Oil prices did indeed bounce early in last night’s session but relief proved short-lived. Trump was at it again, tweeting that the Saudis should not cut production and that oil prices should be much lower based on supply. Not untrue, and why the market would assume Trump had any sway over the Saudis is unclear, but by that stage the US dollar was surging and all markets were going into risk-off mode.

Oil prices thus fell again, to continue their longest negative streak in history.

The US dollar surged largely because of weakness in the pound and the euro.

The pound fell again because attempt number whatever-we’re-up-to-now by Theresa May to put together a Brexit deal again looks under threat. Another resignation in cabinet – this time Transport Minister Jo Johnson, who is Boris’ brother – has again brought the whole shemozzle to the fore. Interestingly, while Boris is head flag-waver for the “leavers”, brother Jo is a “remainer”, indicating May cannot appease either side of the debate.

The euro fell because this week Italy has to submit a new budget proposal to the EU and it is not expected the new populist government will meekly bow to the wishes of Germany and France. Italian bond yields were on the rise again last night and fear weighed on the common currency.

While Brexit and a possible Italexit are enough alone to suggest caution on Wall Street, the overriding factor was a 0.6% surge in the US dollar. Whatever the cause, ongoing dollar strength is taking its toll on US corporates. Last week consumer staples company Proctor & Gamble declared the dollar to be its biggest problem, far bigger a drag than tariffs.

On the subject of tariffs, just when it looked like Trump and Xi might be playing nice, and hopes were rising for some sort of breakthrough in Buenos Aires, the White House has now taken the trade war into a new battle by announcing intentions to directly combat Chinese intellectual property theft by means other than tariffs.

G20 optimism just went out the window.

On the stock-specific front, one of Apple’s myriad suppliers posted an earnings result last night that was a big miss, which the company blamed on a drop in demand from “a major client”, and its share price duly fell over -30%. Wall Street drew its own conclusions on who the client might be, and sold Apple down -5%.

Apple had been somewhat of a last man standing in the earlier correction, holding firm while the FANGs suffered major falls. But now it, too, is caught in the tech wreck. Last night’s plunge was again led by the tech and communication services sectors, hence the Nasdaq is down -2.8%.

Next worst sector were financials. The banks were generally weak on a further flattening of the US yield curve as risk-off meant the US ten-year yield held firm at 3.19%. But the GFC is finally coming back to bite Goldman Sachs, as moves are now afoot to redress the alleged ripping-off of clients ahead of the fall of Lehman.

A -7.5% drubbing for Goldman was worth a hundred Dow points alone, hence the Dow closed down -2.3% to the S&P’s -2.0%.

All of the above can be cited as reasons Wall Street went clearly back into correction mode last night, leaving the 200-day moving average for the S&P once more in its dust. From the top-down perspective, the narrative has changed from synchronised global growth in 2017 to synchronised global slowing in 2018, ex-US. But for how long can the US economy hold out against global headwinds, particularly if the Fed is hell bent on raising the cost of funding?

Commodities

West Texas crude is now below US$60, having peaked at US$77, and Brent is below US$70, having peaked at US$86.

Gold has succumbed to the greenback.

Base metals are copping it from all sides.

Iron ore just keeps hanging in there.

The Aussie is down -0.4% at US$0.7187.

Today

The SPI Overnight closed down -65 points or -1.1%.

NAB’s business confidence survey is due today.

It’s Westpac’s ((WBC)) turn to go ex.

Incitec Pivot ((IPL)) and Boart Longyear ((BLY)) release earnings numbers.

Breville Group ((BRG)), Charter Hall Retail ((CQR)) and NextDC ((NXT)) are among those companies holding AGMs today.

The Australian share market over the past thirty days…

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

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