The Overnight Report: The Day After

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World Overnight
SPI Overnight (Jun)	6233.00	– 48.00	– 0.76%
S&P ASX 200	6295.70	+ 12.00	0.19%
S&P500	2884.05	– 48.42	– 1.65%
Nasdaq Comp	7963.76	– 159.53	– 1.96%
DJIA	25965.09	– 473.39	– 1.79%
S&P500 VIX	19.32	+ 3.88	25.13%
US 10-year yield	2.45	– 0.05	– 2.08%
USD Index	97.55	+ 0.01	0.01%
FTSE100	7260.47	– 120.17	– 1.63%
DAX30	12092.74	– 194.14	– 1.58%

By Greg Peel

Overruled

I suggested yesterday that the RBA rate decision had the potential to be market-moving but this would have to be taken in the context of the rebound we were likely to see from Monday’s sell-off. As it was, domestic completely wiped out international.

Following Monday night’s “she’ll be right” rebound on Wall Street, the ASX200 flipped Monday’s -52 point fall into a 58 point gain by lunchtime yesterday. The index then drifted over main course to be up 48 just before the release of the RBA statement. Twenty minutes later, it was back to square.

Stand back, computers stampeding.

We saw a little bit of late buying to take the index to a close of up 12 but of course it’s all academic, once again, given Wall Street has now decided she possibly may not be right and the Dow has fallen -473 overnight. Our futures are down -48 this morning.

News also came through yesterday that having approved the reopening of one Vale iron ore mine, the Brazilian court had again rejected the request to reopen another mine suffering tailings dam issues. Iron ore miners took off on the news, and Fortescue Metals ((FMG)) topped the ASX200 with a 6.3% gain.

So materials (+1.3%) proved the winning sector by the closing bell yesterday. Only three sectors actually closed in the red, and among those, healthcare (-0.06%) only just. The main offset to materials was financials (-0.3%), which turned tail on the RBA decision.

A rate cut would have (possibly) eased building mortgage stress and provided the banks an opportunity to pick up a few basis points on a less than full pass-through of a 25bp cut.

From the RBA’s perspective, it appears the strong labour market continues to offset any other factors suggesting a rate cut is appropriate. But the statement did note “a further improvement in the labour market will be needed for inflation to be consistent with the target [2%]”, and “the Board will be paying close attention to developments in the labour market at its upcoming meetings,” which implies all meetings are “live” from here.

Data dependent.

There’s no point in dwelling further on yesterday’s ups and downs given overnight developments.

Confirmation

The US trade representative Robert Lighthizer confirmed last night tariffs will indeed increase on Friday to 25% from 10% on the specific US$200m tranche of imported Chinese goods. Co-negotiator, Treasury Secretary Steven Mnuchin, revealed that the White House was made aware over the weekend that Beijing was trying to “back away” from some of the language that had been agreed to in prior talks.

Lighthizer and Mnuchin thus confirmed Trump’s Sunday night tweet, which on Monday night Wall Street seemed to shrug off as just another one of Trump’s idle threats, but also gave a reason, that being that having almost reached the finishing line, China now appears to be backing off.

Brinkmanship from Beijing? We’ll know more later in the week when Chinese vice premier Liu He arrives in Washington as planned. At least he’s still coming. But for Wall Street, Monday’s shrug became Tuesday’s wake in fright.

Importantly, while reignited trade fears were the catalyst for last night’s tumble on Wall Street, it was not just about trade. The usual trade suspects did post the biggest falls – big industrials such as Boeing, chip-makers such as Intel, retailers such as Apple – all of which have the highest exposure to Chinese markets, but every sector on the S&P500 closed in the red, and over 90% of individual S&P stocks posted falls.

A better than expected US earnings season helped take Wall Street back to all-time highs, but only just. The move was incremental, not decisive. A return to the highs suggested a positive outcome on trade was already priced in. In essence Wall Street was more than ripe for a pullback.

Hence even defensives were being offloaded last night, along with stocks that have no exposure to China whatsoever.

Wall Street now finds itself facing a binary outcome. Deal or no deal. It is very unlikely that China would suddenly capitulate and sign a deal on Friday in order to avert the tariff increase. It is more likely that concessions will be made to ensure yet another extension to the tariff deadline. That would be positive, as it implies a deal is still potentially close.

But it is also now possible one or other party simply walks away. Brinkmanship at its finest. This would be a negative outcome, to put it mildly. The risk is asymmetric – a deal would no doubt take Wall Street at least back to the highs and probably beyond, but no deal would potentially trigger a full-blown correction, at least back to the December low.

It is thus unsurprising the VIX volatility index on the S&P jumped 25% last night, and the US ten-year bond yield fell -5 basis points to 2.45%.

In other news, the EU has cut its 2019 GDP growth forecast for Germany to 0.5% from 1.1%, which represented a cut in February from a prior 1.8%.

Global slowdown?

Commodities

Gold (oz)	1284.10	+ 3.50	0.27%
Silver (oz)	14.88	+ 0.02	0.13%
Copper (lb)	2.78	– 0.06	– 1.95%
Aluminium (lb)	0.80	– 0.00	– 0.26%
Lead (lb)	0.84	– 0.01	– 1.52%
Nickel (lb)	5.46	– 0.06	– 1.02%
Zinc (lb)	1.27	– 0.03	– 2.49%
West Texas Crude	61.44	– 1.10	– 1.76%
Brent Crude	69.74	– 1.65	– 2.31%
Iron Ore (t) futures	95.70	+ 2.60	2.79%

The LME came back on board last night, and inevitably metal prices tumbled on the trade situation.

Iron ore went the other way on Brazilian developments.

Oil fell on trade, but bounced off its lows when it was announced the US will send four B-52 bombers to the Middle East given concerns Iran might attack US troops in the region.

The Aussie shot up yesterday on no RBA rate cut from under 70 to 70.5, before falling back on the trade situation to US$0.7010.

Today

The SPI Overnight closed down -48 points or -0.8%.

China will release trade data today, funnily enough.

CSR ((CSR)) and EclipX Group ((ECX)) have probably not chosen the best day to report earnings.

ResMed ((RMD)) goes ex-dividend.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
DXS	DEXUS PROPERTY	Downgrade to Underperform from Neutral	Macquarie
GNC	GRAINCORP	Downgrade to Reduce from Hold	Morgans
HSN	HANSEN TECHNOLOGIES	Upgrade to Buy from Hold	Ord Minnett
HUB	HUB24	Downgrade to Sell from Neutral	Citi
JHG	JANUS HENDERSON GROUP	Downgrade to Neutral from Outperform	Macquarie
MQG	MACQUARIE GROUP	Downgrade to Hold from Accumulate	Ord Minnett
NCK	NICK SCALI	Downgrade to Sell from Neutral	Citi
NTD	NATIONAL TYRE & WHEEL	Downgrade to Hold from Add	Morgans
NWL	NETWEALTH GROUP	Downgrade to Accumulate from Buy	Ord Minnett
PDL	PENDAL GROUP	Upgrade to Neutral from Underperform	Credit Suisse
		Upgrade to Accumulate from Hold	Ord Minnett
		Upgrade to Neutral from Sell	UBS
RMD	RESMED	Upgrade to Buy from Neutral	UBS
TAH	TABCORP HOLDINGS	Downgrade to Neutral from Outperform	Credit Suisse

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

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.)

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