The Overnight Report: Beware The Beast

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World Overnight
SPI Overnight	7337.00	– 20.00	– 0.27%
S&P ASX 200	7381.10	+ 19.10	0.26%
S&P500	4486.46	+ 15.09	0.34%
Nasdaq Comp	15021.81	+ 124.47	0.84%
DJIA	35258.61	– 36.15	– 0.10%
S&P500 VIX	16.31	+ 0.01	0.06%
US 10-year yield	1.58	+ 0.01	0.51%
USD Index	93.97	+ 0.03	0.03%
FTSE100	7203.83	– 30.20	– 0.42%
DAX30	15474.47	– 112.89	– 0.72%

By Greg Peel

Kiwi Chaos

The ASX200 jumped 23 points in the first ten minutes yesterday on Wall Street strength, which proved a bit misguided in light of September quarter inflation data out of New Zealand.

The headline Kiwi CPI rose 2.2% quarter on quarter to the fastest pace in a decade, up from 1.3% in June. Annual inflation jumped to 4.9% from 3.3%, well exceeding the RBNZ’s forecast of 4.2%. Bear in mind, the RBNZ has already implemented one rate rise.

The main drivers were housing-related costs, followed by vegetables, transport and fuel. Auckland has been in lockdown since August.

Within half an hour, the ASX200 was down -7 points, until someone noticed Aussie bond yields were on the move. This stirred the banks into action.

At midday the index was up 30 points, and then came data out of China.

China’s GDP growth slowed to 4.9% year on year in the September quarter, down from 7.9% in June and missing 5.2% forecasts. Not a huge surprise really, given Chinese industrial production rose only 3.1% in the month of September (year on year) when 4.5% was forecast, on the back of power shortages and Beijing’s clampdown on industry.

Fixed asset investment gained 7.3% year to date, down from 7.9% in August, as credit availability tightened in light of Evergrande. The only bright spot were retail sales, up 4.4% year on year when 3.3% was expected.

The ASX200 ultimately gave up gains towards the close, but the key move on the day was in bonds, with the Aussie ten-year yield leaping 11 basis points to 1.75%. The five-year rose 17bps. The two-year rose only 3bps, but this is where the RBA is in buying.

It was always going to be a good day for the materials sector on commodity price moves, and implications of slower Chinese growth notwithstanding, materials won the day with a 1.0% gain, while energy rose 0.8%. Resources are not victims of inflation, they are perpetrators.

Higher bond yields expand bank margins, and financials rose 0.9%.

Yield-payers for the most part went the other way. Property lost -1.1% and telcos -0.2%, while healthcare fell -1.0% and technology, impacted by higher yields, fell -1.2%.

Quite the mixed bag on the day. The index top five losers’ board was also a mixed bag, while the winner’s board was rocks all the way.

Coming back to the elephant in the room, the Bank of England governor said last night the bank would have to act to curb inflation. The UK market now expects a rate hike as early as next month, and the UK two-year yield last night jumped to 0.75% from 0.57% on Friday.

The RBA is still hanging on to 2024.

She’ll be right buddy

US equity futures were heading south overnight on China and the BoE, and it’s rare to hear New Zealand mentioned by Wall Street commentators if it’s not to do with Hobbits. But when the market proper opened, such influences were largely dismissed.

The US two-year yield did rise, by two basis points, and the ten-year by one, so no sign of panic. The US yield curve nevertheless continues to gradually flatten, with the market pricing in the first Fed rate rise in 2022.

While slowing Chinese growth and UK/European inflation provide some cause for concern, the US economy is largely insulated. European gas prices have now risen almost five-fold but while the US gas price has also surged, Henry Hub is a closed-shop, domestic-only market and the US is gas self-sufficient. And no US bank is on the hook for Evergrande.

Which leaves the US to focus on its consumer-based economy.

Following on from surprisingly solid retail sales numbers on Friday, last night shares in department store dinosaur Macy’s jumped 17%. It wasn’t an earnings result – the company announced it would spin off its online business from its bricks & mortar business (presumably leaving B&M to sink into the tar pit).

Walmart announced the return, post-lockdowns, of its “Black Friday Deals For Days” event, implying discounts for the week around Thanksgiving. Amazon announced it was hiring 150,000 more part- and full-time staff ahead of the holidays.

Retail fever is feeding into Wall Street, as the level of US household spending power post-covid is constantly referenced.

Of course the US is not actually “post-covid”, just ask Colin Powell’s family, but reopening continues apace. Over in the UK, case numbers are rising rapidly once more on a new strain called “delta plus”.

That’s all we need. Don’t throw away your mask – the border is about to reopen.

Consumer discretionary was the standout performing sector in the S&P500 last night, with help from Amazon but also Tesla. Technology was next best.

The Dow’s underperformance was largely due to a -3% fall for Disney, after one broker warned of slowing subs growth and downgraded its rating. Disney is also discretionary, but the Dow is a distorted beast.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1764.30	– 3.10	– 0.18%
Silver (oz)	23.17	– 0.13	– 0.56%
Copper (lb)	4.76	+ 0.05	1.04%
Aluminium (lb)	1.44	+ 0.00	0.28%
Lead (lb)	1.09	+ 0.02	1.39%
Nickel (lb)	9.13	+ 0.05	0.50%
Zinc (lb)	1.71	+ 0.10	6.43%
West Texas Crude	82.33	+ 0.05	0.06%
Brent Crude	84.16	– 0.70	– 0.82%
Iron Ore (t)	124.15	– 1.30	– 1.04%

What inflation? Zinc’s only up 6%. This is due to more production being curbed in Europe due to soaring electricity prices.

On another note, Skoda has cut its production guidance by -250,000 vehicles due to supply shortages.

The Aussie is down slightly at US$0.7413.

Today

The SPI Overnight closed down -20 points or -0.3%, which would wipe out yesterday.

The minutes of the October RBA meeting are out today.

BHP Group ((BHP)) provides a quarterly report, as does Stockland ((SGP)).

There are a number of AGMs today, including those of Brambles ((BXB)), Cochlear ((COH)) and Tabcorp Holdings ((TAH)).

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
APA	APA Group	Downgrade to Hold from Add	Morgans
ARB	ARB Corp	Upgrade to Buy from Neutral	Citi
AWC	Alumina Ltd	Downgrade to Neutral from Outperform	Credit Suisse
BOQ	Bank of Queensland	Upgrade to Buy from Neutral	Citi
BUB	Bubs Australia	Upgrade to Buy from Neutral	Citi
CNU	Chorus	Upgrade to Neutral from Sell	UBS
DMP	Domino's Pizza Enterprises	Downgrade to Neutral from Buy	Citi
GPT	GPT Group	Upgrade to Equal-weight from Underweight	Morgan Stanley
IAG	Insurance Australia	Downgrade to Neutral from Buy	UBS
MHJ	Michael Hill International	Upgrade to Buy from Neutral	Citi
PGH	Pact Group	Upgrade to Outperform from Neutral	Macquarie
TCL	Transurban Group	Upgrade to Add from Hold	Morgans
WAF	West African Resources	Downgrade to Neutral from Outperform	Macquarie
WPL	Woodside Petroleum	Downgrade to Neutral from Outperform	Macquarie

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

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