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The Overnight Report: Reality Bites

Daily Market Reports | Dec 16 2022

This story features BLACKMORES LIMITED, and other companies. For more info SHARE ANALYSIS: BKL

World Overnight
SPI Overnight 7078.00 – 83.00 – 1.16%
S&P ASX 200 7204.80 – 46.50 – 0.64%
S&P500 3895.75 – 99.57 – 2.49%
Nasdaq Comp 10810.53 – 360.36 – 3.23%
DJIA 33202.22 – 764.13 – 2.25%
S&P500 VIX 22.83 + 1.69 7.99%
US 10-year yield 3.45 – 0.05 – 1.51%
USD Index 104.53 + 0.93 0.90%
FTSE100 7426.17 – 69.76 – 0.93%
DAX30 13986.23 – 473.97 – 3.28%

By Greg Peel

There She Goes

I suggested yesterday might see some volatility with the ASX200 around the 7200 level, given derivative expiry day, and indeed there was. The morning was a madhouse of ups and downs, each bouncing off a level close to 7200, before the afternoon brought a calm capitulation.

We closed at 7204.

It’s all academic, as Wall Street has tanked overnight and our futures are down -83 this morning.

There were fundamental influences at play as well yesterday to help drive sentiment, and none of them were good – Fed forecasts, strong local jobs numbers, weak Chinese data.

The Fed kicked things off overnight by implying there was still some way to go in 2023 to tame inflation, upsetting a market that hoped the last two lower CPI results might just bring about a pause in rate hikes.

Then we learned Australia added a whopping 64,000 jobs in November, way ahead of forecasts of 19,000, and unemployment remained unchanged at 3.4%. Participation hit a record high (hence the unchanged unemployment rate), as did the employment to population ratio.

Increasing migration, from zero during covid, is behind the surge, ANZ Bank economists point out, and that’s not going to change into next year. Yet the volume of unfilled labour demand is still substantial, implying more upward pressure on wages.

It’s not going to be such a merry Christmas in the Lowe household.

It was never going to be a strong November for the locked down Chinese economy, but the numbers came in a lot worse than expected. Retail sales fell -5.9% year on year when -3.7% was forecast, and industrial production grew by only 2.2% when 3.6% was forecast. Fixed asset investment grew 5.3% year to date, down from 5.8% in October.

China’s National Bureau of Statistics was set to hold an in-person press conference yesterday following the release, but cancelled without explanation.

China is now madly reopening its economy, so November may have brought a nadir, except that covid is running rampant.

The data helped our materials sector down -1.4%, on another down-day for lithium miners in particular. That story is fast running out of charge.

The Australian ten-year bond yield rose 9 points to 3.45% yesterday, which didn’t help real estate (-1.0%), nor consumer discretionary (-1.3%), with the jobs numbers killing off any notion of an RBA pause.

Energy was up 0.4% on higher oil prices, while staples rose 0.7%, helped by an unexplained 7.5% jump for Blackmores ((BKL)) and a 3.4% bounce-back for Endeavour Group ((EDV)) after Woolworths ((WOW)) sold a stake on Wednesday.

But anyway…

Sticker Shock

Despite the fact FOMC members have been calling for a peak Fed funds rate of 5.00-5.50% for some time, Wall Street was disappointed on Wednesday night with forecasts suggesting exactly that, destroying hope that a couple of positive inflation reports might change the Fed’s mind.

The fear is – and has been so now for months – the Fed will prove too aggressive and force the US economy into recession. And just in case there were any doubters, November retail sales data set off the alarm bells.

Economists were not expecting a great Black Friday week this year, given cost of living pressures, but sales fell -0.6% from October when -0.3% was forecast. And that’s a dollar value inclusive of inflation.

That’s it. Batten down the hatches. The Dow fell -950 points.

The Empire State and Philly Fed activity indices for December also came in lower than expected last night. Surely unemployment must begin to rise? Weekly new jobless claims actually fell again last week.

It was all too much.

To rub salt into the wound, the Bank of England and ECB both hiked by 50 points last night, despite both economies doubtless being already in recession. Yet while it might have been 50s all round, the US dollar shot up 0.9%, which is another knife in the side of Wall Street.

The US ten-year bond yield fell -5 points to 3.45% while the two-year remained at 4.24%, further steepening the recession signal of the inverted yield curve.

In the UK, nurses are striking for a 19% pay-rise. They won’t get it, of course, but it is indicative of a seventies-style wage-price spiral that threatens developed economies, ours included.

Wall Street did recover some ground towards the close, but nothing substantial. The S&P500 is sitting right on the pivot-point of 3900.

It has now become a battle of the market versus the Fed. The Fed says it will hike further and then hold, to implement a soft landing. The market says the Fed will be cutting rates before 2023 is out, to combat this inevitable recession.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1777.70 – 29.70 – 1.64%
Silver (oz) 23.11 – 0.70 – 2.94%
Copper (lb) 3.75 – 0.05 – 1.37%
Aluminium (lb) 1.18 – 0.02 – 1.98%
Lead (lb) 0.97 – 0.01 – 1.27%
Nickel (lb) 12.68 – 0.01 – 0.12%
Zinc (lb) 1.45 – 0.02 – 1.60%
West Texas Crude 76.12 – 1.45 – 1.87%
Brent Crude 81.28 – 1.70 – 2.05%
Iron Ore (t) 110.50 + 1.24 1.13%

The US dollar surge, and Chinese data, were never going to help commodity prices.

And the Aussie? Despite the strong jobs numbers, and implications for more RBA rate hikes, it’s down a full -2.3% at US$0.6705.

Today

The SPI Overnight (new March contract) closed down -83 points or -1.1%.

National Bank ((NAB)) and Link Administration ((LNK)) hold their AGMs today.

Enjoy the Christmas party tonight!

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BEN Bendigo & Adelaide Bank Downgrade to Neutral from Buy Citi
Downgrade to Neutral from Outperform Macquarie
BHP BHP Group Downgrade to Sell from Neutral UBS
BRG Breville Group Downgrade to Underperform from Neutral Credit Suisse
EVN Evolution Mining Downgrade to Neutral from Buy UBS
FMG Fortescue Metals Downgrade to Lighten from Hold Ord Minnett
FPH Fisher & Paykel Healthcare Downgrade to Equal-weight from Overweight Morgan Stanley
ILU Iluka Resources Downgrade to Sell from Neutral Citi
JBH JB Hi-Fi Downgrade to Neutral from Outperform Credit Suisse
MIN Mineral Resources Downgrade to Neutral from Buy UBS
NHC New Hope Upgrade to Buy from Neutral Citi
NST Northern Star Resources Downgrade to Neutral from Buy UBS
RIO Rio Tinto Downgrade to Lighten from Hold Ord Minnett
Downgrade to Sell from Neutral UBS
S32 South32 Upgrade to Buy from Hold Ord Minnett
SFR Sandfire Resources Downgrade to Neutral from Buy UBS
SGM Sims Downgrade to Lighten from Hold Ord Minnett
WHC Whitehaven Coal Upgrade to Buy from Neutral Citi

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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CHARTS

BKL EDV LNK NAB WOW

For more info SHARE ANALYSIS: BKL - BLACKMORES LIMITED

For more info SHARE ANALYSIS: EDV - ENDEAVOUR GROUP LIMITED

For more info SHARE ANALYSIS: LNK - LINK ADMINISTRATION HOLDINGS LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED