The Overnight Report: Awaiting The Fed

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World Overnight
SPI Overnight	7225.00	– 14.00	– 0.19%
S&P ASX 200	7273.80	+ 25.60	0.35%
S&P500	4354.19	– 3.54	– 0.08%
Nasdaq Comp	14746.40	+ 32.49	0.22%
DJIA	33919.84	– 50.63	– 0.15%
S&P500 VIX	24.36	– 1.35	– 5.25%
US 10-year yield	1.32	+ 0.02	1.15%
USD Index	93.20	– 0.05	– 0.05%
FTSE100	6980.98	+ 77.07	1.12%
DAX30	15348.53	+ 216.47	1.43%

Enough’s Enough

“The S&P500 closed down -1.7% but given (a), we had our sell-off for the same reason yesterday and (b), Wall Street saw dip-buyers move in swiftly in the last half hour, one might assume we would not be down hard again today, and maybe even up.”

I did wonder yesterday morning why the futures were down -87 points after Monday’s big tumble when responding to Wall Street would have meant a double-up on the same story, that being Evergrande. It wasn’t exactly a screaming rebound – 25 points to Monday’s -155 – but at least we didn’t spiral out of control 2008-style. (Lehman went down in September.)

On Monday the only sector to close in the green were utilities, but only because of a takeover offer for AusNet Services ((AST)), while yesterday every sector closed in the green bar the banks, which at -0.4% did somewhat hold back the bounce.

The AusNet offer has already been gazumped, sending that stock up another 9.8% on top of Monday’s 19%.

As for the banks, the Aussie ten-year yield did pull back -3 basis points yesterday but perhaps there is concern the RBA is pushing on with tapering regardless of the delta impact. The minutes of the September meeting, released yesterday, simply confirmed the board had considered maintaining the level of QE due to delta but instead opted for the taper.

To recap, QE purchases have been trimmed to $4bn per week from $5bn but rather than reviewing in November, the RBA will now wait until February. Given last year’s experience, the board expects a rapid economic rebound out of lockdowns and hence is happy with its current policy.

Energy saw the greatest rebound yesterday (+1.5%) but has been the most volatile of sectors in recent times. Materials saw a timid 0.3% after two big sessions of losses, with the iron ore price unchanged yesterday (Chinese holiday).

Champion Iron ((CIA)), which was the worst performer on Monday (-12%), bounced back 4.2%.

Property saw the least impressive rebound (+0.2%) but elsewhere sector gains were in the 0.5-1.5% range.

China is back from holiday today so we await any news of what Beijing plans to do about Evergrande, which could be anything from a bail-out to nothing. S&P believes Evergrande can be left to collapse without setting off a banking collapse but the government also has thousands of Evergrande employees and out-of-pocket apartment buyers to consider.

Evergrande has an interest payment of around US$80bn due tomorrow which alone it cannot pay.

Then tomorrow night it’s the Fed’s turn to announce tapering. It is not considered likely the Fed will say nothing, but Wall Street still needs to learn timing and scale.

Wall Street closed largely flat last night ahead of that announcement, but our futures are down -14 points this morning.

Over to you Jay

On Monday night the Dow managed to turn a -970 point loss into a -600 loss by day’s end – most of that in the last half hour. Last night the Dow opened up 300 points, but the momentum was not there.

In all, the Dow made three attempts to rally during the session, each time revisiting the flatline before closing slightly weaker.

That Monday rebound ensured the S&P500 had still not marked one -5% pullback in 2021, ending at -4% from the high at Monday’s close.  Faded rally attempts last night are attributed to investors wishing to play it safe ahead of the Fed.

And ahead of what will happen regarding Evergrande.

Since Beijing started clamping down on different sectors in the Chinese stock market, US fund managers have become polarised on whether it is worth investing in China or not. On one side the argument is one of extensive growth potential, and enormous population and pockets of value now evident after a substantial pullback.

The other side is more forthright, claiming China is now simply “uninvestable”. You cannot safely put your money into a capitalist stock market under communist control.

One example, in the wake of Beijing’s clampdown on Macau casinos, is a proposition that from now on the Macau government (by default the Chinese government) will from here on need to approve dividend payments to casino shareholders.

What is certain is that China’s GDP growth will take a hit as a result of the government’s actions, and in the case of Evergrande, inactions. As one global fund manager has put it, Beijing’s financial regulation policy is “cyclical”, as in it changes continually to suit the government’s objectives.

A counter argument is that Beijing’s clampdown will lead to more stable corporate governance, in what has been to now a bit of a cowboy affair.

But for now the world can only wait to find out Evergrande’s fate, and what the Fed plans to do about policy.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1774.10	+ 10.10	0.57%
Silver (oz)	22.47	+ 0.22	0.99%
Copper (lb)	4.15	+ 0.02	0.57%
Aluminium (lb)	1.30	+ 0.00	0.11%
Lead (lb)	0.98	– 0.01	– 0.56%
Nickel (lb)	8.66	– 0.06	– 0.69%
Zinc (lb)	1.36	– 0.01	– 0.55%
West Texas Crude	70.56	+ 0.27	0.38%
Brent Crude	74.74	+ 0.61	0.82%
Iron Ore (t)	94.00	0.00	0.00%

Typically metal markets are quiet when China is on holiday, but that was not the case on Monday night. It was more the case last night, with base metals mixed and iron ore unchanged.

We also await the first response to Evergrande of Chinese traders today.

Gold again stands out, but it’s still a fair climb back to US$1800/oz, and gold is very sensitive to the Fed.

The Aussie is down -0.3% at US$0.7233, and at least providing a bit of a buffer.

Today

The SPI Overnight closed down -14 points.

The Bank of Japan meets today.

The Fed will provide a policy statement and quarterly “dot plots” tonight, as well as the usual press conference.

AGL Energy ((AGL)) holds its AGM today.

Adbri ((ABC)) goes ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AST	AusNet Services	Upgrade to Equal-weight from Underweight	Morgan Stanley
BBN	Baby Bunting	Upgrade to Buy from Neutral	Citi
EVT	Event Hospitality & Entertainment	Upgrade to Buy from Neutral	Citi
FMG	Fortescue Metals	Downgrade to Sell from Neutral	UBS
IPL	Incitec Pivot	Downgrade to Neutral from Outperform	Credit Suisse
NHC	New Hope	Upgrade to Outperform from Neutral	Macquarie

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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