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The Overnight Report: Whiplash

Daily Market Reports | Aug 08 2019

World Overnight
SPI Overnight (Sep) 6438.00 – 11.00 – 0.17%
S&P ASX 200 6519.50 + 41.40 0.64%
S&P500 2883.98 + 2.21 0.08%
Nasdaq Comp 7862.83 + 29.56 0.38%
DJIA 26007.07 – 22.45 – 0.09%
S&P500 VIX 19.49 – 0.68 – 3.37%
US 10-year yield 1.68 – 0.06 – 3.16%
USD Index 97.62 + 0.03 0.03%
FTSE100 7198.70 + 27.01 0.38%
DAX30 11650.15 + 82.19 0.71%

By Greg Peel

So much to absorb

It was a choppy start to trading on the ASX200 yesterday as the market weighed up early news and data, with uncertainty overhanging. The futures had suggested a 57 point gain on the Wall Street rebound but not until 2pm did the ASX200 look anything like getting that far.

Before the bell we had the RBNZ cutting a shock -50 basis points to 1.0% when the market was expecting -25bp. Later in the day the Thai central bank cut by -25 points when no cut was expected, and then India cut by -35bp when -25bp was expected.

The race to the bottom is on in earnest.

Before the bell we also had an earnings result from Commonwealth Bank ((CBA)) which fell short of the mark, and that stock led the banks down early. This despite Suncorp ((SUN)) coming in with a beat.

During the morning we saw numbers for June housing finance, which showed a flip to positive (+1.9%) after a weak May (-2.7%). Owner-occupiers (+2.4%) provided the bulk of the gain, while investor loans (+0.5%) finally stabilised after ten consecutive months of falls.

The June numbers reflected the shift in sentiment, and stabilisation of house prices, following the May election, APRA easing and the first RBA rate cut.

But what does it all mean? Markets love rate cuts until they are emblematic of onerous problems in the economy. More on that in a moment. A turn in the housing market is, for Australia, a very hopeful sign given so many sectors are indirectly affected. The market was still trying to figure it all out up to lunchtime, when the index was only mildly positive. But then at 1pm…

The PboC set its currency peg at US$6.9996. We recall that Wall Street tanked on Monday night when the peg was set above US$7, the so-called line in the sand, and we followed suit. Tuesday it was set lower, but still above US$7, and yesterday, just below. No doubt Beijing is simply playing games, but the Australian market took it as blessed relief.

Within an hour the ASX200 hit what would be roughly its closing level of up 41. The call from the futures was not so misguided after all. The buyers were there but they were just a bit hesitant.

Yield was again king, as one might expect. Utilities, telcos and staples all rallied 1.4%, with industrials managing 0.9% with Transurban ((TCL)) in a trading halt (capital raising announcement). The banks managed to spin back to positive (+0.4%).

Healthcare (+0.9%) staged a comeback after being trashed on Tuesday, while consumer discretionary (+1.4%) clearly loved the housing finance numbers.

The offset was provided by, other than IT (-0.1%), energy (-0.7%), as the oil price slide continues, and by the gold miners within the materials sector (+0.2%) balancing more falls for the iron ore miners. Four of the top five ASX200 winners on the day were gold miners. The biggest loser on the day was Fortescue Metals ((FMG)), down -3.3%.

One interesting point to note was that ahead of our lunchtime jump, the Dow futures were positive, but by the close of trade they had begun to fall by over -100 points. That might explain why we stalled out over the last two hours.

Bonds, Treasury Bonds

Down over -100 points? Twenty minutes into Wall Street's trading session the Dow was down -589. Why? Because US bond yields collapsed. Why? See New Zealand/Thailand/India above. And then throw in German industrial production, down -1.5% in June when +0.4% was expected, and a German ten-year yield at a historic low of -0.59%.

Twenty minutes into the session the US ten-year yield was down -14 basis points at 1.60%.

The irony here is that the market now has the odds of a Fed rate cut in September at 100%. If the world is cutting, the Fed has no choice. In December, Wall Street threw a tantrum when the Fed hiked its cash rate. In January, US stock markets raced towards new all-time highs as the Fed “pivoted” to dovish. In May, escalated trade tensions caused a swoon until the Fed started talking rate cut, and US stocks shot up to new highs once more.

So last night the odds of another Fed rate cut shifted to “definite”. And the Dow fell almost -600 points. Has Wall Street gone crazy? Yes. Late in the session the US ten-year yield was back above the level from which it fell, and the Dow was back at square. Nothing of any note triggered the massive turnaround.

It has just got too weird. Wall Street has to make up its mind whether Fed rates cut are good – supporting the economy and share price valuations – or bad – because they imply an economic emergency. The US 30-year yield last night almost hit its all-time historical low before the turnaround. The R-word was back in fashion, if only briefly.

The other irony is that the trigger for Wall Street’s plunge on Monday was the renminbi fix at over US$7. Tuesday’s rebound was supported by the slightly lower fix. Yesterday the PBoC gave Wall Street US$6.9996 and this was completely ignored on the open.

The situation is not being helped by the fact it’s August, which in the US is equivalent to January downunder. Everyone’s at the beach, except the computers (they get a bit hot). Last night’s trade looked a lot like an initial panic with computers involved, as the US ten-year yield crashed through technical levels, followed by a handful of humans stepping in waving TINA banners.

What happens next? God only knows. What we did see last night was, however, the sort of pattern that was not seen on Tuesday night – initial capitulation followed by solid rebound – that often can signal a bottom.

But it’s a day by day situation at present.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1500.90 + 26.90 1.82%
Silver (oz) 17.08 + 0.66 4.02%
Copper (lb) 2.58 + 0.01 0.26%
Aluminium (lb) 0.78 – 0.00 – 0.52%
Lead (lb) 0.91 + 0.02 2.54%
Nickel (lb) 6.72 – 0.05 – 0.70%
Zinc (lb) 1.03 – 0.02 – 1.94%
West Texas Crude 52.31 – 1.15 – 2.15%
Brent Crude 57.41 – 1.14 – 1.95%
Iron Ore (t) futures 92.80 – 5.10 – 5.21%

Looks like a similar day ahead for the local resource sectors. Oil down -2%, iron ore down -5% and gold up twenty-seven bucks.

With the central bank razor gang out in force across the globe, both the US dollar and the Aussie look like rabbits in the headlights. Although the Aussie did almost fall through 67 yesterday morning on the RBNZ announcement.

Today

The SPI Overnight closed down -11 points.

The market will begin today with the handicaps of oil and iron ore offset by gold, but also with Rio Tinto ((RIO)) going ex-dividend, and that’s no small hand-out.

AGL Energy ((AGL)), AMP ((AMP)), Insurance Australia Group ((IAG)) and Mirvac Group ((MGR)) report earnings.

China releases July trade numbers.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALQ ALS LIMITED Upgrade to Buy from Neutral Citi
APE AP EAGERS Upgrade to Overweight from Equal-weight Morgan Stanley
DMP DOMINO'S PIZZA Upgrade to Buy from Neutral UBS
RWC RELIANCE WORLDWIDE Downgrade to Equal-weight from Overweight Morgan Stanley
SLC SUPERLOOP Downgrade to Equal-weight from Overweight Morgan Stanley
TNE TECHNOLOGYONE Upgrade to Hold from Lighten Ord Minnett
TPM TPG TELECOM Downgrade to Equal-weight from Overweight Morgan Stanley

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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CHARTS

AGL AMP CBA FMG IAG MGR RIO SUN TCL