The Overnight Report: Out-Hawking The Hawks

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World Overnight
SPI Overnight	6628.00	– 17.00	– 0.26%
S&P ASX 200	6700.20	– 106.20	– 1.56%
S&P500	3757.99	– 31.94	– 0.84%
Nasdaq Comp	11066.81	– 153.39	– 1.37%
DJIA	30076.68	– 107.10	– 0.35%
S&P500 VIX	27.35	– 0.64	– 2.29%
US 10-year yield	3.71	+ 0.20	5.64%
USD Index	111.27	+ 0.63	0.57%
FTSE100	7159.52	– 78.12	– 1.08%
DAX30	12531.63	– 235.52	– 1.84%

By Greg Peel

Wednesday

One might ask what it was that changed between Tuesday, when the ASX200 rallied 86 points, and Wednesday, when it fell -106. The answer is not a lot. It’s all about sentiment.

Wall Street looked confident on Monday night ahead of the Fed meeting but suddenly turned scared on Tuesday night, worried over what Powell might deliver. On Tuesday the local market was buoyed by signs the RBA may be ready to slow down but on Wednesday that no longer mattered.

The iron ore price did flip from a gain to a loss, which is one tangible factor, otherwise we might argue Putin’s move to conscript reservists (who are now trying to flee the country) and his nuclear threats only add to unease.

Materials rose 2.7% on Tuesday to be the best sector performer and on Wednesday fell -2.7% to be the worst. Energy rose 2.0% on Tuesday on New Hope Corp’s ((NHC)) earnings result and fell back -0.8% on Wednesday, with New Hope and friends making further gains against the tide.

The banks rose 1.3% on Tuesday and fell -1.2% on Wednesday.

The list goes on.

The only bright spot was communication services, which gained a lonely 0.1%. Telstra ((TLS)) rose 1.1%, suggesting its dividend, paid on Wednesday, was reinvested.

Real estate was one of only two sectors to close lower on Tuesday, and got clobbered another -2.2% on Wednesday.

While on a net basis the ASX200 was only down -20 points over two days to Wednesday, the market was right to take on Wall Street’s nervousness on Tuesday night, as it turned out.

Our futures closed down -52 points on Thursday morning.

Wednesday Night

On Wednesday night the the Dow closed down -522 points, the S&P500 fell -1.7% to 3789 and the Nasdaq fell -1.8%.

The Fed hiked its rate by another 75 points to 3.00-3.25%. Between the decision, the statement, and through the ensuing press conference, computers went nuts trying to figure out if it was all good or bad. Indices flew down, up and finally down as the humans pointed out Powell is no less hawkish than he was at Jackson Hole, and perhaps more.

While 75 is better than 100 on the day, it’s academic. The so-called quarterly “dot plots” – FOMC members’ average forecasts – have the “terminal” rate now at 4.6% (where the Fed will stop), and 4.4% by next year. That’s 100 basis points higher than the dot plots indicated in June, when Wall Street hit its last low.

There are two more meetings this year. By what combination the Fed meets its target is not important – there will be another 100-125 points of hikes by Christmas.

The US two-year yield climbed towards 4.0% ahead of the Fed but sat just under before Wednesday night. The ten-year yield climbed faster on expectation of a big hike, up to 3.57%. On Wednesday night the two-year closed up 5 points at 4.01%. The ten-year fell -6 points to 3.51%.

The backflip in the ten-year implies Wall Street is no longer holding out hope of a “soft landing” for the US economy. That expression has gone from Powell’s rhetoric to be replaced by the word “pain”. The two-ten spread has blown out to over 50 points, implying a recession ahead – a “hard landing”.

The move to buy long-end bonds is also a reflection of them now being an attractive investment compared to volatile equities, for the first time since the GFC.

Having broken down through 3900, the S&P500 closed under the next support level down – 3800. The June low was 3666. It now does not seem that far away.

The US dollar index shot up a full percent at one point, before settling back to be up 0.4%. The strong dollar is further bad news for America’s many large multinationals. Subsequent earnings guidance downgrades have been slow to date.

Wall Street is always very volatile in the two hours between the Fed release and the close. Thursday night’s action proved more revealing.

Commodities

The LME closes as the Fed statement is being released, so Thursday night’s moves in metal prices are more relevant.

The oils fell on recession talk.

The Aussie fell another -0.9% at US$0.6635. The lower it goes, the more we import inflation from offshore.

Thursday Night

While there is general agreement fixed income is becoming a more attractive investment, it is also assumed yields will go higher yet. While moves in US stock indices confirmed Wednesday night’s weakness, it was a very different story in bond markets.

The US ten-year yield, which dipped on Wednesday night, shot up 20 points to 3.71%. The two-year rose 12 points to 4.13%.

This does not mean the market has changed its mind about a hard landing, it’s just that there’s more upside in yields to come if the Fed keeps up the pace it has indicated. The Fed’s “dot plot” call of a terminal rate at 4.6% is higher than even the hawks in the market had forecast.

But as one US fund manager told Dow Jones: “I think the higher the bond rates go, the faster we get into a recession era, and the quicker the ten-year will pivot. So maybe we need more pain in the short term, which will be better for the long term”.

The US dollar had initially shot up 1% on Wednesday night post-Fed but fell back to be up 0.4%. Last night it regained that extra 0.6%. The combination of higher yields and a stronger dollar is simply not good for US stocks, particularly those in the Nasdaq.

But the Fed is not the only game in town. Following on from the Swedish central bank’s 100 point hike earlier this week, last night Norway’s central bank hiked by 50 points, the Swiss by 75 and the Bank of England by 50.

By contrast, the Bank of Japan left its rate at 0.1%. In a country that has suffered deflation for decades, the CPI is currently 2.8%.

That is not, however, the situation in Australia. The RBA has to join the game, or risk the currency collapsing. It remains likely the next hike will again be 50, even though 25 was discussed at the last meeting.

There is now a growing belief a retest of the June lows for Wall Street is inevitable. There’s not a lot of faith in that level holding. We are now approaching October – historically the most volatile month of the year.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1671.20	– 0.30	– 0.02%
Silver (oz)	19.62	+ 0.12	0.62%
Copper (lb)	3.51	+ 0.00	0.01%
Aluminium (lb)	1.09	– 0.00	– 0.21%
Lead (lb)	0.85	+ 0.01	1.66%
Nickel (lb)	10.99	– 0.24	– 2.16%
Zinc (lb)	1.43	+ 0.01	0.77%
West Texas Crude	83.49	+ 0.51	0.61%
Brent Crude	90.36	+ 0.53	0.59%
Iron Ore (t)	98.83	+ 0.50	0.51%

Metal prices have remained surprisingly resilient amidst elevated talk of US recession and the strong dollar.

Most notable is gold. We would expect a jump in bond yields of that magnitude would send the gold price packing. But gold has now dusted off its safe haven hat.

Despite another jump in the US dollar index, the Aussie is up 0.2% at US$0.6647 following Wednesday night’s -0.9% fall.

Today

The SPI Overnight closed down -17 points or -0.3%, taking the total fall over two sessions to -76 points.

Japan is closed today, otherwise the rest of the world releases flash estimates of September PMIs.

Victoria is closed today. The rest of the market will be thin anyway on sneaky long weekends.

Chalice Mining ((CHN)) reports earnings today and Suncorp ((SUN)) holds its AGM.

I noted that Telstra paid its dividend on Wednesday and it appears to have been reinvested. Telstra was due to pay its dividend yesterday, as was BHP Group ((BHP)). BHP did pay its dividend yesterday.

Also due to pay their dividends yesterday were Insurance Australia Group ((IAG)), Rio Tinto ((RIO)), ResMed ((RMD)) and Santos ((STO)). I’m not sure whether they were paid yesterday, or will be paid today, but either way fund managers are suddenly sitting on a bucket load of cash that will have to be redeployed.

As to whether they do that today is unclear.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BKW	Brickworks	Upgrade to Add from Hold	Morgans

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

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