The Overnight Report: Oil Tanks

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World Overnight
SPI Overnight (Dec)	5826.00	– 6.00	– 0.10%
S&P ASX 200	5834.20	– 107.10	– 1.80%
S&P500	2722.18	– 4.04	– 0.15%
Nasdaq Comp	7200.88	+ 0.01	0.00%
DJIA	25286.49	– 100.69	– 0.40%
S&P500 VIX	20.02	– 0.43	– 2.10%
US 10-year yield	3.15	– 0.04	– 1.29%
USD Index	97.22	– 0.31	– 0.32%
FTSE100	7053.76	+ 0.68	0.01%
DAX30	11472.22	+ 146.78	1.30%

By Greg Peel

Poised

Not much to say about the Australian market’s inevitable drop yesterday, which for the most part was market-wide and indiscriminate. The ASX200 had fallen by 11am to around as low as it was going to close.

There it found support and traded sideways for the rest of the session. From a technical perspective, that support level is interesting. In the major sell-off of October, one of the “last hurrah” biggest down-days was October 25, in which the index fell by a similar amount as it did yesterday. The previous session had seen the index close at about the 5830 mark.

Yesterday we fell swiftly to around the 5830 mark and then held all day. We recall that on the way up, earlier in the year, 5800 was a major resistance level. In late October, when 5800 was ultimately breached, the index swiftly fell to just below the next support level of 5650. From there the rebound began.

So, does 5800 hold this time or do we need to retest 5650? A -7% plunge in the oil prices overnight is not going to help. But the futures are only down -6 this morning.

In yesterday’s rout, healthcare and IT were the worst performers, each falling -2.6%, having been the best performers for most of the year before October.

Financials lost -2.2% but that is net of Westpac ((WBC)) going ex-dividend, so realistically the sector outperformed, given (a) the banks have already been trashed and (b) REITs are in the financials sector and they were a safe haven yesterday. The other safe haven was utilities (+0.5%) – the only sector to close in the green.

Otherwise, consumer staples (-1.0%) played a defensive role but elsewhere the selling was relatively even among the cyclical sectors as one might expect.

The only individual stock move of any note was that of Elders ((ELD)), which fell -13% having jumped 20% the day before post-result. A bit of give-back after such a rally is not unusual, and it was, after all a major risk-off session, and also Morgans called the rally overdone and downgraded to Reduce.

The surprising optimism exhibited by Australian businesses earlier this year has now clearly given way to a less buoyant mood. NAB’s survey, released yesterday, showed a drop in the conditions index to 11.8 in October from 13.9 in September and 14.6 in August. The confidence index, which picked up slightly in September to 6.3, fell to 4.1. Zero is the line between optimism and pessimism.

Most disappointing within the numbers, ANZ’s economists suggest, are the two labour market indicators of capacity utilisation and profitability. The former is now at its lowest level for the year and the latter its lowest level in two years. ANZ had previously assumed unemployment would continue to quietly trend down to 5.0% but now the economists fear a possible turnaround.

Were that the case, a perfect storm could develop: falling house prices, rising unemployment, banks looking to reprice mortgages.

But it’s okay – the RBA assures us everything’s rosy.

Oil’s Not Well

Why did oil fall -7% last night – its biggest one-day drop in three years — and why is it down a never-before-seen 12 sessions in a row?

In the lead up to last night we had seen WTI shooting up towards US$80/bbl when OPEC/Russia were maintaining their production cuts, US supply was hindered by pipeline bottlenecks and Iranian exports were about to be taken off the market, it was assumed, because of the reimposition of sanctions.

Iranian oil is nevertheless still flowing, Saudi Arabia and Russia had upped their production in anticipation it wouldn’t be, US bottlenecks are being addressed and US production continues to increase day by day. Hence the twelve-day slide. Last night’s capitulation followed the technical trigger of WTI closing below US$60/bbl the day before, which had been staunch resistance for so long on the way back from the 2016 low.

Saudi Arabia is now talking about cutting production again, but only that production it recently added to offset Iran. But the real question here is: Is the oil price drop a reflection of rising supply or falling demand? If the answer is (a), then lower prices will soon force supply to slow. If the answer is (b), the global economy is slowing.

The most likely answer is both. If falling global demand is as a result of a rising take-up of EVs, then that would not be a global economy issue. But we’re not even close to that point yet. If the global economy is slowing then the standout US economy cannot remain an outlier for much longer.

The US dollar is key in the equation, and is hurting US multinationals. But the dollar did fall back a bit last night on some glimmers of global hope.

The UK and EU have agreed a Brexit deal. The pound subsequently rallied. Tonight Theresa May will put that deal to her cabinet. If they accept the deal, and the UK parliament accepts the deal, Brexit fear is over. If not, then…nobody knows.

The US and China are talking again. This in itself is a positive, and the reason why Wall Street did try to rally mid-session last night. However, the talks are a precursor to the meeting of the presidents at the G20 and thus a necessary step, so whether we can read much into it is yet to be made clear.

On the other hand, Trump is reportedly preparing tariffs on auto imports that would very much upset the EU. Trump will also meet Junker in Buenos Aires.

The Dow underperformed the other indices last night due largely to Boeing. The company has admitted, in the wake of the Lion Air tragedy, that there is an issue with one of the instruments on its plane. Boeing fell -2.5%.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1200.40	– 0.60	– 0.05%
Silver (oz)	13.96	– 0.05	– 0.36%
Copper (lb)	2.77	+ 0.02	0.74%
Aluminium (lb)	0.87	– 0.01	– 0.83%
Lead (lb)	0.86	– 0.00	– 0.43%
Nickel (lb)	5.13	+ 0.00	0.06%
Zinc (lb)	1.16	+ 0.01	1.01%
West Texas Crude (Dec)	55.32	– 4.28	– 7.18%
Brent Crude (Jan)	65.15	– 4.64	– 6.65%
Iron Ore (t) futures	75.00	– 0.64	– 0.85%

Outside of oil, the slip in the US dollar index provided some relief for metals prices last night, mostly in preventing further losses.

That said, iron ore has finally had a down-day.

The Aussie is up 0.3% at US$0.7207.

Today

The SPI Overnight closed down -6 points.

In the context of slowing global growth, China will be in the spotlight today with October industrial production, retail sales and fixed asset investment data.

Japan will release its September quarter GDP result.

The countdown to Australia’s GDP number begins today with the release of the September quarter wage price index.

Westpac’s consumer confidence survey for November is due, as the most critical time of the year approaches.

The US will see CPI inflation numbers tonight.

AusNet Services ((AST)) and DuluxGroup ((DLX)) report earnings today.

There are a lot of AGMs being held today, including those of Computershare ((CPU)), Fortescue Metals ((FMG)), Medibank Private ((MPL)), Newcrest Mining ((NCM)), Nine Entertainment ((NEC)) and Seven West Media ((SWM)).

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
CSL	CSL	Upgrade to Buy from Neutral	UBS
CTD	CORPORATE TRAVEL	Upgrade to Add from Hold	Morgans
CTX	CALTEX AUSTRALIA	Upgrade to Outperform from Neutral	Credit Suisse
DMP	DOMINO'S PIZZA	Downgrade to Reduce from Hold	Morgans
ELD	ELDERS	Downgrade to Reduce from Hold	Morgans
LLC	LEND LEASE CORP	Downgrade to Neutral from Buy	Citi
		Downgrade to Neutral from Outperform	Credit Suisse
		Downgrade to Neutral from Outperform	Macquarie
LOV	LOVISA	Upgrade to Equal-weight from Underweight	Morgan Stanley
MMS	MCMILLAN SHAKESPEARE	Upgrade to Outperform from Neutral	Credit Suisse
		Upgrade to Outperform from Neutral	Macquarie
		Downgrade to Hold from Buy	Ord Minnett
PRY	PRIMARY HEALTH CARE	Downgrade to Neutral from Buy	Citi
PTM	PLATINUM	Downgrade to Underperform from Neutral	Credit Suisse
QBE	QBE INSURANCE	Upgrade to Outperform from Neutral	Credit Suisse
REA	REA GROUP	Upgrade to Outperform from Neutral	Macquarie
		Downgrade to Hold from Accumulate	Ord Minnett
SDF	STEADFAST GROUP	Downgrade to Hold from Accumulate	Ord Minnett
SEK	SEEK	Upgrade to Neutral from Sell	UBS
WOR	WORLEYPARSONS	Upgrade to Outperform from Neutral	Credit Suisse

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

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