The Overnight Report: Retreat To The Sidelines

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By Greg Peel

Not Too Dramatic

The ASX200 fell -54 points immediately from the open yesterday, taking the lead from the trade-fear inspired fall on Wall Street. But the index bottomed out after the first ten minutes, and grafted back to a less dramatic -27 point fall at the close.

We have to take into consideration the index fell -52 points on Monday on Trump’s initial tweets and had recovered all of that and more before the RBA poured cold water over the market by not cutting rates. That gave us only a 12 point recovery, meaning we were net down -40 before yesterday morning.

Late in the session the telco sector drew attention on the ACCC’s accidental early release of its TPG Telecom ((TPM))/Vodafone ((HTA)) merger decision, which was a “no”. TPG fell -13.5% and Hutchison Telecom -28% to take the telco sector down -2.3%, which was worth a few index points alone.

Every other sector nevertheless closed down on the day except financials, which finished flat, thanks to some help from the RBNZ cutting its cash rate to 1.50% from 1.75% before our market opened. All four banks have levels of exposure in NZ, and are nervously awaiting a decision on potentially increased capital requirements.

Had the banks joined the otherwise general market selling, things would have been a lot worse in index terms. Outside of the ASX200 financials, FlexiGroup ((FXL)) jumped 24% after adding several big name customers to its buy-now-pay-later platform. FlexiGroup buyers funded their share purchases by selling the darling of the BNPL players, Afterpay Touch ((APT)). It fell -6.7%.

Not upsetting yesterday’s fightback were trade data out of China, which showed a surplus of only US$13.8bn in April when US$35bn was expected. Surprising forecasters was a -2.7% fall year on year in exports, when a 2.3% gain was expected, and a 4.0% gain in imports when a -3.6% fall was expected.

Yet despite the big drop in trade surplus, China’s surplus with the US is still rising, up to US$21bn in April from US$20.5bn in March. Perhaps the US should impose some tariffs.

If the Australian stock market didn’t react to the Chinese data, the Australian currency did, down -0.3% this morning at US$0.6988.

The stock market fightback was also supported by the Dow futures, which had clawed back 50 points by the time we closed having fallen -473 on Tuesday night.

All A-Twitter

And so it was the Dow managed to be up 120 points as it headed towards the close last night, but then late selling brought it right back down and the S&P closed lower on the day. While a weak guidance update from Intel (Dow) was responsible for some of the late pullback, more broadly traders are content to move to the sidelines for fear of “headline risk”. Specifically, someone sending out incendiary tweets in the middle of the night.

Yes, the biggest risk to Wall Street right now, in either direction, is Donald Trump’s thumb. And tweets usually come in pairs.

Last night’s first offering was a suggestion, in the president’s typically eloquent style, that the reason the Chinese backed away this week is because they wanted to try to negotiate a better deal with the “very weak” Democrats so they could “continue to rip off” the US. That was followed by “Guess what, that’s not going to happen! China has just informed us that they (Vice-Premier) are now coming to the US to make a deal”.

Vice Premier Liu He arrives tonight. At one minute past midnight, ie Friday morning, the tariff increase goes into effect. Cameras will be firmly focused on the White House tonight in case He is spotted heading in. The suggestion is if He goes to the top, after negotiating with US trade delegates, then a deal may well be in the offing.

So by the close last night, Wall Street decided the safest place to be is out of it.

In other news, Iran announced last night it may cease compliance with parts of the 2015 nuclear agreement the US has withdrawn from, unless the other signatories (UK, France, Germany, China, Russia) step in to shield Iran from US sanctions that have been crippling its economy.

It’s all happening. But trade-wise, it’s over to Rod: Tonight’s the night…

Commodities

Outside of zinc, base metals went quiet last night. Iron ore nevertheless gave back a lot of what it gained on Tuesday night.

Iranian tensions are supporting the oil price, but at the end of the day it comes down to weekly US inventory and production data – the swing factor.

Today

The SPI Overnight closed up 14 points, so it seems hope springs eternal.

China will release inflation numbers today.

The US releases March trade data.

It’s a busy day on the local stock front today. Graincorp ((GNC)) and Orica ((ORI)) report earnings while News Corp ((NWS)) and REA Group ((REA)) report quarterly earnings tonight.

Qantas ((QAN)) provides a quarterly update.

All of Caltex Australia ((CTX)), Genworth Mortgage Insurance ((GMA)), HT&E ((HT1)), Kidman Resources ((KDR)), Oil Search ((OSH)), QBE Insurance ((QBE)), Rio Tinto ((RIO)) and Smartgroup Corp ((SIQ)) hold AGMs.

The ACCC decision on the telco merger was slated for today, but that cat’s out of the bag.

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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