The Monday Report – 23 September 2019

This story features MYER HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: MYR

World Overnight
SPI Overnight (Dec)	6719.00	+ 2.00	0.03%
S&P ASX 200	6730.80	+ 13.30	0.20%
S&P500	2992.07	– 14.72	– 0.49%
Nasdaq Comp	8117.67	– 65.21	– 0.80%
DJIA	26935.07	– 159.72	– 0.59%
S&P500 VIX	15.32	+ 1.27	9.04%
US 10-year yield	1.76	– 0.02	– 1.07%
USD Index	98.51	+ 0.15	0.15%
FTSE100	7344.92	– 11.50	– 0.16%
DAX30	12468.01	+ 10.31	0.08%

By Greg Peel

Friday Fade

Despite a lack of action on Wall Street on Thursday night, the ASX200 shot out of the blocks on Friday for the second session in a row post the Fed meeting, before again fading to the close. Indeed the index faded all day from its 58 point leap on the opening bell.

The Fed rate cut provided for a renewed focus on Australia as a yield-paying market and our local jobs report on Thursday only underscored expectations that the RBA will cut again next month – all playing into the yield story – and the drop in the Aussie dollar on the back of the jobs report is the icing on the cake for would-be foreign investors.

But Thursday and Friday both saw sellers moving in to dampen the mood. Thursday’s volatility can be attributed to the quarterly derivatives expiry whereas Friday was just a typical Friday, with traders likely squaring up ahead of the weekend.

These days weekends can be the scariest time of the week.

Those sellers clearly decided on Friday the yield story was being overplayed, with the bond proxy sectors actually closing in the red. Utilities, REITs, telcos and industrials (toll road and airport operators) all closed down and everything else closed up, albeit modestly.

Consumer discretionary rose 0.5% with help from a 15.3% jump from retailer and major Myer ((MYR)) investor, Premier Investments ((PMV)). Materials rose 0.5% despite the iron ore price falling -4% overnight and gold doing not much.

Other sector moves are barely worth a mention.

Among individual stocks, IOOF Holdings ((IFL)) took the silver behind Premier Investments in rising 7.9%. The Federal Court held that the company’s APRA-related entities and individuals did not contravene the Superannuation Industry Act. As of last week, IOOF was just under 10% shorted.

We then had to endure a weekend of US-Australian schmoozing but not before there was a brief scare on the trade front on Friday night.

Farm-Stay Postponed

Wall Street opened higher on Friday night and proceeded to drift all morning without conviction before suddenly plunging at 1pm. News hit that the Chinese trade delegation had “cut short” its visit.

It’s not the first time the Chinese have taken their bat and ball and gone home, citing a stalemate in negotiations, so Wall Street was understandably spooked. Until greater clarity was provided.

The delegation of junior officials had been meeting their US counterparts all week, planning for when the big guns meet early next month. Those talks wrapped on Friday night as expected. But rather than going straight home, the Chinese had decided to take a trip out to Montana and Nebraska to check out a couple of farms and talk to local producers. This trip had nothing to do with the White House, rather the Chinese spoke directly to state farming organisations.

Those farm organisations had to hastily make arrangements, having not expected the request, and just when they were working things out the Chinese decided actually no, they won’t visit this time around. Maybe next time. No reason was provided as the delegates hot-footed it back to Beijing.

Once Wall Street learned the details US stock indices began to creep back up again, before suddenly dropping at the close. Friday night was the “quadruple witching” of quarterly equity derivatives and the rebalancing of indices so anything that transpired on the day, and particularly at the death, can usually be disregarded.

In the wider scheme of things, there is nevertheless concern growing with regard a squeeze in the US overnight lending market.

Earlier last week there was a sudden spike in the overnight cash (repo) rate, up to almost 10%, because of a lack of liquidity. Bear in mind the Fed overnight cash rate is 1.75-2.0%. The next day the Fed jumped in to provide the liquidity to balance what was seen as a short term blip, put down largely to corporations needing to pay their tax obligations and other temporary factors. But the tightness continued.

To that end, the Fed has been forced to set up a specific facility to provide liquidity into the overnight market, and to do so has had to “expand its balance sheet”. That facility will be in place at least until October 10.

Expand its balance sheet? A rose by any other name, says Wall Street. But the Fed had denied the liquidity facility amounts to QE, rather it’s just standard operations.

The question nevertheless remains unanswered as to why, when the Fed funds rate is so low, there is a liquidity squeeze.

Meanwhile, FOMC members were out and about being interviewed on Friday night as to why they dissented on the decision to cut -25 basis points. Given one dissented because he wanted no cut and the other dissented because he wanted -50 points, Wall Street was left none the wiser. The former questioned why the US needs a cut when the economy is doing just fine, while the latter wants to jump in now to prevent a recession.

Take your pick.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1516.70	+ 18.00	1.20%
Silver (oz)	17.97	+ 0.22	1.24%
Copper (lb)	2.59	– 0.01	– 0.41%
Aluminium (lb)	0.80	+ 0.00	0.31%
Lead (lb)	0.95	+ 0.01	0.87%
Nickel (lb)	8.02	+ 0.14	1.76%
Zinc (lb)	1.04	– 0.01	– 0.60%
West Texas Crude	58.09	– 0.59	– 1.01%
Brent Crude	64.28	– 0.53	– 0.82%
Iron Ore (t) futures	91.60	– 0.40	– 0.43%

While the US stock market relaxed once details of the Chinese trade exit became clearer, the gold price jumped US$18/oz despite the US dollar rising, and the US ten-year yield fell -4 basis points to 1.74%. Very “risk off”, but then there is likely also an element of Iran tension in there.

On that subject, oil prices seem to be stabilising for now but no doubt traders remain on edge.

Meanwhile, the nickel price just keeps ticking quietly higher, once again over US$8/lb.

Don’t know what it was that ScoMo said in Washington, but the Aussie is down -0.3% at US$0.6767.

Despite the late sell-off on Wall Street, the SPI Overnight closed up 2 points on Saturday morning.

The Week Ahead

There was a lot going on last week so this week is setting up to be a lot quieter, but for the fact drone strikes or presidential tweets aren’t typically scheduled.

Flash estimates of global manufacturing PMIs for September will be released today.

The US will also see house prices and consumer confidence tomorrow, new home sales on Wednesday, one more revision of the June quarter GDP result on Thursday and durable goods on Friday. Friday also brings the Fed’s preferred PCE inflation numbers.

The RBNZ meets on Wednesday.

Nothing much is happening economically this week in Australia. The RBA governor will speak tomorrow.

Nufarm ((NUF)) reports earnings this week, Treasury Wine Estates ((TWE)) hosts an investor day, ASX ((ASX)) and Suncorp ((SUN)) hold their AGMs and Saracen Minerals ((SAR)) holds an EGM today.

There are still quite a few ex-dividends to get through, but bear in mind the mathematical handicap of ex-divs is now being balanced in the market by dividend payments that need to be reinvested.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BPT	BEACH ENERGY	Downgrade to Hold from Buy	Ord Minnett
CMA	CENTURIA METROPOLITAN REIT	Downgrade to Neutral from Buy	UBS
DCN	DACIAN GOLD	Downgrade to Underperform from Neutral	Macquarie
KMD	KATHMANDU	Downgrade to Neutral from Outperform	Credit Suisse
MFG	MAGELLAN FINANCIAL GROUP	Upgrade to Neutral from Underperform	Macquarie
QAN	QANTAS AIRWAYS	Upgrade to Overweight from Equal-weight	Morgan Stanley
RHC	RAMSAY HEALTH CARE	Upgrade to Outperform from Neutral	Macquarie

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

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