The Overnight Report: When The Levee Breaks

Daily Market Reports | May 14 2019

World Overnight
SPI Overnight (Jun) 6243.00 – 54.00 – 0.86%
S&P ASX 200 6297.60 – 13.30 – 0.21%
S&P500 2811.87 – 69.53 – 2.41%
Nasdaq Comp 7647.02 – 269.92 – 3.41%
DJIA 25324.99 – 617.38 – 2.38%
S&P500 VIX 20.55 + 4.51 28.12%
US 10-year yield 2.41 – 0.05 – 2.04%
USD Index 97.37 + 0.04 0.04%
FTSE100 7163.68 – 39.61 – 0.55%
DAX30 11876.65 – 183.18 – 1.52%

By Greg Peel

All For Nought

Once again we find ourselves in a position where yesterday’s trade on the ASX fades into irrelevance based on last night’s tumble on Wall Street, and the fact our futures are down -54 points this morning. The ASX200 fought back from an initial trade-related -30 point drop to close down -11, which is square when we note the dividends of ANZ Bank ((ANZ)) and Macquarie Group ((MQG)) were worth a net -12 points.

But for what it’s worth…

A -1.8% fall for financials was the standout sector move yesterday. It wasn’t just about dividends – Commonwealth Bank’s ((CBA)) quarterly update was worth -2.5% for that bank due to a fall in earnings and huge RC-related provisions.

We also had housing finance data showing a -3.2% fall in the value of all housing loans in March. A fall was not a shock given February came up with a surprising bounce, but the quantum of reversal was greater than expected. Loan values are now down -18.4% year on year, although that number was -20.1% in January, so maybe the pace is easing.

Owner-occupier loans are down -15.2% and investor loans down -25.9%.

Most worrying for the banking sector at present is a sharp rise in loan delinquencies, which realistically has only just begun.

Balancing financials yesterday were healthcare (+0.9%), industrials (+0.7%) and telcos (+0.8%), but some of those numbers might look different today.

At the individual stock level, Lendlease ((LLC)) topped the charts with an 8.7% gain on rumours Mitsui is considering a takeover – a rumour Lendlease knows nothing about.

Biggest loser on the day was plumbing part manufacturer and former high-flyer Reliance Worldwide ((RWC)), which fell -15.6% on a combination of a profit warning brought about by a mild winter in the US, which did not burst enough pipes, and a sell-down by the founding family of their remaining stake.

On the subject of high-flyers, the most recent infant formula darling, Bubs Australia ((BUB)), led down the China-facing stocks in falling -13% to reflect the trade situation.

We’ll leave it at that.

Of Tits and Tats

The surprising thing about last night’s Wall Street tumble is it didn’t happen on Friday night. Friday night was when the tariff increase came into effect, there was no deal, and there was no timetable set for further talks. That was worth -350 for the Dow to begin with.

But all it took was the word “constructive”, with regard to said talks, to bounce the Dow by 500 points. Both presidents will probably meet at the G20, they said, which was apparently heartening.

I did title yesterday’s Wall Street wrap “Blind Faith”.

It was also expected, on Friday, that the Chinese would retaliate. To that end, Trump was dusting off his threat to place a 25% tariff on all remaining Chinese imports.

Well guess what?

China has retaliated. Tariffs of up to 25% will be placed on US$60bn worth of US imports from June 1. Chinese media said over the weekend the “fierce US offensive” won’t work.

This was enough to tip Wall Street over, and render Friday night’s trade as counter-intuitive as it was. But there is more to it than just trade. Consider that the two biggest US companies, Apple and Amazon, fell -6% and -3% respectively last night. Apple is among the most exposed stocks to earnings from China. Amazon has no exposure to China whatsoever.

The implication here is trade was merely a trigger for a wider equity market shake-out that saw the S&P500 back down to the technically critical 2800 level before bouncing slightly. The Dow was down -720 at the low. Only one S&P sector – utilities – closed in the green. Only one Dow stock – Proctor & Gamble – closed in the green, and only just.

With indices having again reached new highs last month before any resolution on trade, investors had become jittery.

But there was good news to be gleaned. Despite Beijing’s rhetoric, and despite the fact US$60bn rather pales against US$200bn, the fact China will wait three weeks to impose new tariffs, and the level will be “up to” 25%  rather than a blanket 25% as is the case with US tariffs, is seen as a positive. Beijing had to retaliate lest it be seen to be weak. But it seems the government does not want to quite upset the apple cart as yet.

Now, it’s over to the Fed. The odds of the Fed being forced to cut its rate in the face of a trade war have strengthened to the point one cut by year-end is now priced in as a given and two on a 50/50 chance. But there’s not a lot the Fed can do until this game is actually over, one way or the other.

Other notable moves last night beyond stocks were the “flight to safety” trades, being US ten-year bonds, down -5 basis point to 2.40%, the yen, up 0.6%, gold up 1% and S&P put options, as evidenced in a 28% jump for the VIX to above the 20 level, above which the market is considered unstable.

In terms of market commentary, the general view is that last night will not be the end of it. If 2800 breaks in the S&P a big hole could open up.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1299.60 + 13.80 1.07%
Silver (oz) 14.75 + 0.01 0.07%
Copper (lb) 2.74 – 0.04 – 1.53%
Aluminium (lb) 0.80 – 0.00 – 0.37%
Lead (lb) 0.81 – 0.01 – 1.66%
Nickel (lb) 5.32 – 0.08 – 1.42%
Zinc (lb) 1.23 – 0.02 – 1.65%
West Texas Crude 60.84 – 0.88 – 1.43%
Brent Crude 69.91 – 0.97 – 1.37%
Iron Ore (t) futures 94.40 – 1.05 – 1.10%

Australian gold miners will be the go-to safety trade downunder today.

Not much hope for anyone else in the resource sectors.

The good news, at least, is the Aussie is down -0.7% despite the greenback being unmoved, given the Aussie is the China trade proxy. It’s at US$0.6945, providing some support for A$ commodities.

Today

The SPI Overnight closed down -54 points or -0.9%, which compared to -2.4% for the S&P500 is a good result, if it’s accurate.

NAB releases a business confidence survey today which by now may already be old news.

But not before National Bank ((NAB)) goes ex.

InvoCare ((IVC)) and Viva Energy REIT ((VVR)) hold AGMs today.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ABC ADELAIDE BRIGHTON Upgrade to Hold from Sell Deutsche Bank
Downgrade to Sell from Neutral Citi
Downgrade to Neutral from Outperform Credit Suisse
AGL AGL ENERGY Downgrade to Sell from Neutral Citi
AWC ALUMINA Upgrade to Neutral from Sell UBS
CCL COCA-COLA AMATIL Downgrade to Underperform from Neutral Macquarie
COH COCHLEAR Downgrade to Neutral from Buy Citi
CSR CSR Downgrade to Underperform from Neutral Credit Suisse
Downgrade to Hold from Buy Deutsche Bank
EPW ERM POWER Upgrade to Add from Hold Morgans
EVN EVOLUTION MINING Upgrade to Add from Hold Morgans
Upgrade to Accumulate from Hold Ord Minnett
FXL FLEXIGROUP Upgrade to Outperform from Neutral Macquarie
GNC GRAINCORP Upgrade to Hold from Reduce Morgans
MYR MYER Downgrade to Sell from Neutral UBS
ORI ORICA Upgrade to Neutral from Sell Citi
Downgrade to Neutral from Outperform Credit Suisse
OSH OIL SEARCH Downgrade to Hold from Buy Deutsche Bank
PPH PUSHPAY HOLDINGS Downgrade to Lighten from Hold Ord Minnett
QAN QANTAS AIRWAYS Downgrade to Neutral from Outperform Macquarie
QBE QBE INSURANCE Downgrade to Sell from Hold Deutsche Bank
SXY SENEX ENERGY Downgrade to Neutral from Outperform Credit Suisse
TPM TPG TELECOM Upgrade to Accumulate from Hold Ord Minnett

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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