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The Overnight Report: As The World Turns

Daily Market Reports | Aug 15 2019

World Overnight
SPI Overnight (Sep) 6400.00 – 135.00 – 2.07%
S&P ASX 200 6595.90 + 27.40 0.42%
S&P500 2840.60 – 85.72 – 2.93%
Nasdaq Comp 7773.94 – 242.42 – 3.02%
DJIA 25479.42 – 800.49 – 3.05%
S&P500 VIX 22.10 + 4.58 26.14%
US 10-year yield 1.58 – 0.10 – 5.89%
USD Index 97.99 + 0.16 0.16%
FTSE100 7147.88 – 103.02 – 1.42%
DAX30 11492.66 – 257.47 – 2.19%

By Greg Peel

Trouble Ahead

The scorecard so far:

Tuesday opens with Dow down -400, our futures showing down -52 and the ASX200 closes down -21.

Wednesday opens with Dow up 400, our futures showing up 48 and the ASX200 closes up 27.

We could call that a wash, except that yesterday Commonwealth Bank went ex and that was worth -13 points, so realistically the index closed up 40 yesterday. And it's interesting to note that both sessions would have closed lower but not for a very late buying surge in each case, suggesting someone is executing big market-on-close orders.

Unfortunately for the buyer, this morning the futures are down -135 on an -800 point plunge in the Dow.

Early in yesterday's session the ASX200 was up 32 points, driven not just by a positive session on Wall Street but specifically by a 6.6% pop for CSL ((CSL)) following its earnings release, which helped the healthcare sector up 4.5%. Outside of CBA's dividend and CSL's surge, elsewhere saw largely market-wide buying of a more modest nature.

One of the factors which sent Wall Street into a tailspin last night killed off our rally yesterday to the point the index was down -13 points ahead of the aforementioned late rally.

Forecasters had China's industrial production slowing to an annual growth rate of 5.8% in July following 6.3% in June. Instead it slowed to 4.8%, marking the weakest rate in seventeen years.

Retail sales grew by 7.6%, down from 9.8% in June and missing 8.6% expectations. Fixed asset investment grew 5.4% year to date in July, down from 5.7% in June.

There's little more to say given overnight developments but we might note that the energy sector performed strongly yesterday and that will reverse today, while profits were taken in gold miners and that should also reverse.

The first major train crash of reporting season occurred yesterday when Pact Group ((PGH)) announced its numbers, cancelled its dividend and fell -17%. High-flying Magellan Financial ((MFG)) came back on after a capital raising trading halt and fell -6.8%, following two broker downgrades to Sell to make five from six in the FNArena database.

Think Globally, Act Locally

Germany's GDP contracted by -0.1% in the June quarter having grown 0.4% in the March quarter. Contraction was attributed to weak manufacturing and Brexit fears.

Add in China's data and at the open on Wall Street last night, the US ten-year yield fell below the two-year yield for the first time since 2007. Call this the" traders' inversion" (given the three-month to ten-year is seen as "the curve"). The 30-year bond rate fell to its lowest level in history.

The inversion kicked the computers into gear and the Dow opened down -350. The plunge rattled human nerves and the Dow tracked a relatively straight line south all session, closing on its low.

Naturally the R-word was again bandied about. The previous day's relief rally was also deemed misguided, given a delay in tariffs hardly represents a major trade breakthrough.

On that subject, while not killing Christmas may have been the main reason Trump announced the delay, it is also suggested he wanted to take some pressure off China as it deals with Hong Kong. Perhaps a backhanded way of saying "don't do anything stupid".

When the dust settled, the US ten-year was down -10 basis points at 1.58% but the two-year closed at 1.54%, so inversion averted. The rule of thumb is inversion signals a recession ahead, but the curve must remain inverted for a period of time. And as we all know, this time it's different.

Yes, those often fatal words.

In the past three recessions interest rates had been much higher and the world was less globally intertwined. This time rates are already low, negative in many cases, and a global recession does not necessarily imply a US recession. On last count there were seven million job openings in the US for six million unemployed. While US earnings were net slightly lower year on year in the June quarter, that's compared to earnings surges in 2018 post tax breaks. Not exactly recession stuff.

But that doesn't mean the US is immune. It's a global world. One of the major drivers of a global economy is trade, and therein lies the problem.

Last night Trump declared that China has nothing to do with the Dow being down -800, the fault lies entirely with the Fed, and "clueless Jay Powell".

Leading the losers on Wall Street last night were energy, given oil prices tanked again on the global growth story, financials, given an inverted curve destroys margins, and tech, particularly the FAANGs and chip makers, as they all ran up hard in Tuesday's night's relief rally.

The S&P500 last night closed below the June low. But at around -6% from the all-time highs of two weeks ago, we're not yet talking correction. It is around another -50 S&P points down to the 200-day moving average, off which the index has been bouncing regularly in recent pullbacks.

The question now is was last night an overwrought response? Or do we simply have to see -10% and/or a test of the 200-day before the rally can resume?

That may come down to trade / Hong Kong / Argentinian politics / Italian politics / Iran tensions / Brexit…

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1516.10 + 15.20 1.01%
Silver (oz) 17.18 + 0.26 1.54%
Copper (lb) 2.59 – 0.02 – 0.85%
Aluminium (lb) 0.79 + 0.00 0.27%
Lead (lb) 0.93 – 0.01 – 0.95%
Nickel (lb) 7.18 – 0.02 – 0.23%
Zinc (lb) 1.01 – 0.00 – 0.27%
West Texas Crude 54.95 – 1.78 – 3.14%
Brent Crude 58.94 – 2.01 – 3.30%
Iron Ore (t) futures 90.35 + 1.85 2.09%

Base metal prices were down, but not out. Outside of the macro, prices are more emphatically being driven by specific supply-side issues at present.

Thank you iron ore, and thank you gold.

To rub salt into the wounds of the oil market last night – the barometer of global growth – was the latest US weekly inventory lottery which showed an unexpected build.

The US dollar found a little support as being least worst, but the Aussie is down a full -0.8% at US$0.6745.

Today

The SPI Overnight closed down -135 points or -2.1%.

The US will see industrial production, retail sales and housing sentiment numbers tonight, with the Fed in the frame.

Locally we'll see July jobs numbers, with the RBA in the frame.

Companies reporting today include the ASX ((ASX)), QBE Insurance ((QBE)), Telstra ((TLS)) and Woodside Petroleum ((WPL)), just to name a few.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
1AD ADALTA Downgrade to Hold from Add Morgans
AFG AUSTRALIAN FINANCE Downgrade to Hold from Add Morgans
ALQ ALS LIMITED Upgrade to Outperform from Neutral Credit Suisse
AMP AMP Upgrade to Outperform from Neutral Credit Suisse
ANN ANSELL Downgrade to Neutral from Outperform Credit Suisse
AQZ ALLIANCE AVIATION Downgrade to Hold from Buy Ord Minnett
ASB AUSTAL Downgrade to Hold from Accumulate Ord Minnett
AZJ AURIZON HOLDINGS Downgrade to Underperform from Neutral Macquarie
JBH JB HI-FI Downgrade to Equal-weight from Overweight Morgan Stanley
JHX JAMES HARDIE Upgrade to Buy from Neutral UBS
MFG MAGELLAN FINANCIAL GROUP Downgrade to Sell from Neutral Citi
Downgrade to Sell from Hold Ord Minnett
MGR MIRVAC Downgrade to Underperform from Neutral Credit Suisse
NWH NRW HOLDINGS Upgrade to Buy from Neutral Citi
NWS NEWS CORP Upgrade to Outperform from Neutral Credit Suisse
REA REA GROUP Upgrade to Hold from Lighten Ord Minnett
RIO RIO TINTO Upgrade to Buy 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.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

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