The Overnight Report: Playing the Spread

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World Overnight
SPI Overnight (Mar)	6627.00	– 28.00	– 0.42%
S&P ASX 200	6708.10	– 158.50	– 2.31%
S&P500	3116.39	– 11.82	– 0.38%
Nasdaq Comp	8980.77	+ 15.16	0.17%
DJIA	26957.59	– 123.77	– 0.46%
S&P500 VIX	27.56	– 0.29	– 1.04%
US 10-year yield	1.31	– 0.02	– 1.50%
USD Index	99.07	+ 0.12	0.12%
FTSE100	7042.47	+ 24.59	0.35%
DAX30	12774.88	– 15.61	– 0.12%

By Greg Peel

Multiple Compression

The ASX200 fell over -2% for the third consecutive session yesterday, but yesterday’s was notably different to the prior two. While every sector has closed in the red on each of the three days, Monday began with a clear divergence of falls – sectors exposed directly to the virus impact were slammed, while sectors with little or no direct exposure fell comparatively mildly.

A similar pattern was seen on Tuesday, although by Tuesday sector falls began to show signs of a wider economic impact from the virus, rather than just lost tourism or falling oil prices. Australia’s banks, for example, have no direct connection, until one considers the flow-through to lower credit demand from exposed sectors. The greater economic impact was becoming apparent.

Yesterday, six out of ten sectors fell by the same amount as the index, give or take. If not for earnings reports on the day, which went either way, we might have seen all sectors fall by equal amounts. Yesterday was sell-the-market, sell everything, don’t discriminate. Yesterday was sell on the global growth impact story.

Yesterday looked like capitulation.

Not falling at close to -2.3% were, to the downside, healthcare (-3.6%) and IT (-3.6%). While the sector saw some mixed earnings result responses – Polynovo ((PNV)) down -20.9%, Healius ((HLS)) up 15.6%, to be the worst and best index performers on the day – CSL ((CSL)) fell -4%. Why? Because everyone who’s made a motza out of the stock wants to lock that in before things get any worse.

For IT, it’s again a case of dumping those risky high-flyers. Appen ((APX)) was a trend-bucking darling on Tuesday but fell -9.3% yesterday. WiseTech Global ((WTC)) had already been carted on its result but fell another -8.1%.

To the upside, consumer discretionary fell only -1.6%, thanks to solid earnings results from Nine Entertainment ((NEC)), which had been thumped earlier in the month when rival Seven West Media ((SWM)) posted a shocker so rose 7.1% yesterday, and InvoCare ((IVC)), which has been a chronic disappointer for years but yesterday jumped 13.7%.

Yes, death is discretionary. Who knew? And no, management did not anticipate a sudden jump in demand.

So if we smooth it all out, yesterday we saw market-wide selling that amounts to multiple compression. The market’s price/earnings ratio had become stretched to more than one standard deviation above average by the all-time peak on Thursday last, and now it has been compressed back to something more realistic. If, that is, we take the E as of the July-December half reported this results season.

For if we look ahead to the January-June half, clearly earnings will be impacted by bushfires, floods and the virus. Forecasts are already being slashed as one by one companies either downgrade or completely withdraw guidance for the period given virus uncertainty. If E falls, PEs rise back once more, unless P falls further.

It didn’t help the economic growth story yesterday when December quarter construction work done showed a -3% fall against -1% forecasts. Residential construction continued to recede but it was private non-residential that stood out as the big surprise, only sightly offset by public infrastructure. Surplus? Goodnight. The Aussie is down a full percent at US65.5c.

While yesterday on the stock market looked like a capitulation session, which typically portends a bounce, the sheer uncertainty ensures nothing is predictable. We haven’t yet seen the fat lady. Let’s hope she doesn’t have a sniffle.

We may nevertheless see a modicum of stability today. The futures are down only -28 points this morning.

Schrodinger’s Bounce

The Dow was up over 450 points by late morning. Hooray, here comes the bounce. A couple of hours later it was down -200, before tracking an uncertain path to another weak close. At least -120 points is not -1000 points.

The trigger was news from health authorities the number of new cases is now growing faster outside China than inside. The virus is spreading in Europe, beyond the epicentre in Italy. The Spanish resort town of Tenerife, full of British tourists, is in lock-down. Diamond Princess without the boat.

The Dow underperformed the other indices with some help from Disney, which fell -3.8% on the announcement its CEO was stepping down. The Nasdaq outperformed as buyers tried to pick up bargains in beaten-down tech stocks, but it, too, came well off its earlier highs.

While economists have been busy attempting to forecast the impact on the Chinese economy, and thus the impact on the global economy from Chinese slowdown, the spread of the virus now implies the global economy will be hit as a whole. To date countries have been blocking flights in from China. What happens when they have to block the whole world?

Wall Street last night showed signs it was trying to find a bottom. History suggests such attempts can often prove a false dawn.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1644.10	– 5.90	– 0.36%
Silver (oz)	17.90	– 0.24	– 1.32%
Copper (lb)	2.55	– 0.01	– 0.20%
Aluminium (lb)	0.76	+ 0.00	0.03%
Lead (lb)	0.85	– 0.02	– 1.77%
Nickel (lb)	5.60	– 0.03	– 0.47%
Zinc (lb)	0.93	+ 0.01	0.60%
West Texas Crude	48.78	– 1.06	– 2.13%
Brent Crude	53.49	– 1.23	– 2.25%
Iron Ore (t) futures	87.35	– 2.75	– 3.05%

Base metal prices appear to be in limbo while iron ore has taken a dive.

The US ten-year bond yield fell another -2 basis points last night to 1.30% but profit-taking in gold continues.

It’s GFC memories for an Aussie down -1% at US$0.6555.

Today

The SPI Overnight closed down -28 points or -0.4%.

Following on from yesterday’s quarterly construction data we’ll see private sector capex today.

The US will revise its December quarter GDP result while January durable goods orders will be interesting.

The final curtain is about to fall on the local earnings season, but not before one last push today. The list is quite extensive.

There’s also a long list of ex-divs today. See the FNArena Calendar (https://www.fnarena.com/index.php/financial-news/calendar/).

For a full list of earnings results due today please refer to the FNArena Corporate Results Monitor (https://www.fnarena.com/index.php/reporting_season/).

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AFG	AUSTRALIAN FINANCE	Upgrade to Add from Hold	Morgans
AWC	ALUMINA	Upgrade to Hold from Lighten	Ord Minnett
BSL	BLUESCOPE STEEL	Upgrade to Neutral from Sell	UBS
COE	COOPER ENERGY	Upgrade to Buy from Hold	Ord Minnett
EBO	EBOS GROUP	Upgrade to Neutral from Underperform	Credit Suisse
HUB	HUB24	Upgrade to Outperform from Neutral	Credit Suisse
ING	INGHAMS GROUP	Upgrade to Outperform from Neutral	Credit Suisse
NHF	NIB HOLDINGS	Upgrade to Buy from Neutral	Citi
OGC	OCEANAGOLD	Downgrade to Accumulate from Buy	Ord Minnett
OSH	OIL SEARCH	Upgrade to Accumulate from Hold	Ord Minnett
RWC	RELIANCE WORLDWIDE	Upgrade to Buy from Neutral	UBS
		Downgrade to Neutral from Outperform	Credit Suisse
SKI	SPARK INFRASTRUCTURE	Upgrade to Outperform from Neutral	Credit Suisse
		Upgrade to Hold from Reduce	Morgans
SXY	SENEX ENERGY	Upgrade to Outperform from Neutral	Credit Suisse
WGN	WAGNERS HOLDING	Downgrade to Neutral from Outperform	Credit Suisse

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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