The Monday Report (On Tuesday) – 08-10-2019

Daily Market Reports | Oct 08 2019

By Greg Peel


The SPI futures were suggesting up 35 points for the ASX200 on Friday following a significant turnaround on Wall Street on Thursday night from what was perceived as an oversold position. But from the opening bell, it looked like everyone had already left for the long weekend.

The index did virtually nothing all the way to lunchtime. I don’t know what they put in the shiraz, but suddenly the buyers emerged in the afternoon to provide for a close of up 24.

All sectors produced relatively consistent, modest gains, with a couple of exceptions. IT rose 1.1% but that’s still a modest gain for the most volatile of sectors.

Healthcare stood out with a 2.3% gain, all down to a 3.2% jump for CSL ((CSL)). Morgan Stanley upgraded the stock to Overweight, citing tight immunoglobulin market conditions that have absorbed the company's accelerating supply, leaving upside risk to FY20 guidance.

The banks (-0.1%) were the only losing sector on the day. Commonwealth Bank ((CBA)) will face criminal charges of illegal “cold calling” by its Comminsure insurance business which the bank has since sold. But this wasn’t the problem. CBA shares actually rose 0.3%.

The other three all saw losses after the ACCC said it is pressing ahead with plans for an inquiry into “barriers to entry” created by the Big Four in retail banking. But there are a couple of problems. The Treasurer is not yet on board, creating internal hesitation at the regulator, and after a Royal Commission, which followed several more specific inquires, is it really worth flogging a dead horse?

In economic news, retail sales grew by 0.4% in August, below 0.5% expectations. While this was an improvement on 0.0% in July, economists had assumed tax cuts and rate cuts would have consumers out waving their wallets around with glee.

But this would be to ignore why the RBA is cutting to ever lower record lows. Australians are constantly being reminded they have the highest level of household debt in the developed world and see rate cuts as a desperate attempt by the central bank to prevent the country falling into recession. One can hardly blame consumers for choosing debt reduction over discretionary spending.

The number did not deter consumer sectors, which both closed modestly in the green on Friday, but that was part of market-wide buying rather than sector specifics.

There was nothing of note among individual stocks on the day.

Friday Night

The Dow closed up 372 points or 1.4% while the S&P rose 1.4% to 2952 and the Nasdaq rose 1.4%.

The US added 136,000 jobs in September, short of 150,000 expectation and representing the slowest pace of growth in four months. Annual wage growth fell to 2.9% from 3.2% in August.

The result capped off a week which saw misses on both manufacturing and services PMIs and private sector jobs growth. The manufacturing PMI sent Wall Street into a tailspin on Monday night, the private sector jobs report only served to exacerbate, and when the weak services PMI came in, the Dow was down -1200 points for the week. The R-word was writ large.

But then Wall Street turned, and turned hard, and on the non-farm payrolls report kicked on further, adding up to a 900 point Dow rebound from the Thursday night low.

It would be easy to explain the turn as an assumption the Fed would simply have to cut at the end of the month, and thus bad news is good news. The “weak” jobs report further strengthened that assumption. But if bad news is good news, why the -1200 point drop in the first place? And was all of the news all that bad?

The services PMI did dip more than expected, but remains in expansion territory. As for jobs, the US unemployment rate fell to a 50-year low 3.5% in September, down from 3.7% in August.

Notwithstanding revisions to the prior two months added back another 40,000 jobs, it is not alarming to see the pace of jobs growth slowing at an unemployment rate of 3.5%. Is it slowing because companies aren’t hiring? Or is it slowing because companies can’t fill vacancies given virtually everyone already has a job?

As for wages growth, the fall to 2.9% from 3.2% is disappointing, but with inflation at 1.8% (PCE), it’s still a solid number.

So take your pick. Wall Street rallied on Friday night because the jobs number was “weak” and that suggests the Fed must cut on October 30. Or, it rallied because the jobs number was healthy and that suggests the US may not go into recession after all.

I’d say the week’s action suggested bad news is bad news, and good news good. Wall Street fears a recession that the Fed simply can’t prevent.

Commodity price movements on Friday night were minimal at best other than for the oils, which rebounded 1% simply because they had fallen -5% in the week to that point.

Currency movements were also negligible.

The SPI Overnight closed up 55 points or 0.9% on Saturday morning.

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