Overnight: Mild Concern

World Overnight
SPI Overnight (Sep) 6205.00 + 5.00 0.08%
S&P ASX 200 6252.20 – 26.20 – 0.42%
S&P500 2821.93 – 11.35 – 0.40%
Nasdaq Comp 7819.71 – 19.40 – 0.25%
DJIA 25187.70 – 125.44 – 0.50%
S&P500 VIX 14.78 + 1.62 12.31%
US 10-year yield 2.88 + 0.02 0.70%
USD Index 96.29 – 0.07 – 0.07%
FTSE100 7642.45 – 24.56 – 0.32%
DAX30 12358.74 – 65.61 – 0.53%

By Greg Peel

Material Weakness

The SPI futures looked ambitious yesterday morning, suggesting an 11 point gain on the open in the face of sizeable falls in commodity prices. Sure enough, the ASX200 slid from the bell through to lunch time, with the materials sector leading the way.

Materials closed down -1.3% following attacks from all sides.

Trump’s announced doubling of tariffs on Turkish steel and aluminium rekindled trade war fears and pushed the US dollar higher, hence base metals suffered sharp falls.

Sims Metal Management ((SGM)) suffered a second session of heavy selling as US tariffs on Chinese scrap are set to come into place. The stock fell another -8.7%.

The cancer compensation award against Monsanto has not just brought Round Up into focus but glyphosate in general, thus sending Nufarm ((NUF)) down -13.1% to top the ASX200 losers’ board yesterday and Elders ((ELD)), not in the ASX200, down -11.3%. Kicked when they’re already down.

It was a big gap to the next worst performing sector, being consumer discretionary. It fell -0.7% on the big fall in the Aussie (higher prices for consumers) and a -9.3% fall for News Corp ((NWS)), post result, as the market questions the outlook for Foxtel. Rupert has declined to suggest any counter-move by him in the face of the Nine-Fairfax merger.

The market was nevertheless abuzz over one discretionary name that is not in the ASX200. Capilano Honey ((CZZ)) jumped 25% after revealing a private equity bid.

Next worst were the banks, down -0.3%. National Bank ((NAB)) may be on the rack at the RC but financial sectors across the globe were weak over the 24 hour period on the ripple effect of the Turkish lira’s collapse. European banks are the major lenders and worst hit, US banks have fallen to a lesser extent in sympathy, mainly due to a flight to bonds, and the ripples diminish the further they spread.

Healthcare should have been primed for a good session on the Aussie’s plunge but Primary Health Care ((PRY)) killed the mood with a guidance update less than a week before its official results release, and it fell -4%. CSL ((CSL)) has probably just run too far.

On the plus-side, utilities (+0.6%) waved the defensive banner and telcos (flat) held their ground, while energy was also flat after Friday’s big drop and IT (+0.3%) found some love.

Wall Street is weak again overnight but less so than Friday. Gold woke up last night and fell out of bed. Base metal prices, bar lead, are all down again. Zinc is down -3%. Iron ore and the oils are relatively steady, and the Aussie is slightly weaker.

The futures are showing up 5 this morning, but were quite wrong yesterday.

Contagion?

Comparisons are being made to the Asian currency crisis of 1997, which began when an over-borrowed Thailand saw its currency collapse and one by one, all of South East Asia right through to South Kores fell like dominos. And to the European crisis of 2010, when the extent of Greece’s problem were revealed and the contagion spread across southern Europe and on to Ireland, dragging down the common euro. Is Turkey a canary in a fragile coal mine?

No, say the experts. At least not for major economies. US exposure to Turkey in terms of lending by banks is limited, although Turkish corporations have issued significant dollar-denominated debt. Turkey is Amercia’s 32nd largest trading partner. Europe’s banks hold the greatest risk, but the ECB is always there to prop them up.

Yet the fear is Turkey could set of an emerging market currency crisis, ignoring geographical connections. The South African rand has already suffered. The rouble has also tanked, but that relates more to Trump’s sanctions. China’s renminbi is -5% lower, but it is a controlled currency. China would be the major problem, but Beijing has strings to pull.

Of course, Beijing could always settle its trade dispute with the US. It is Trump’s trade war that has sparked this latest currency crisis, so presumably Trump could also end it. Tariffs aside, mostly to blame are the QE policies of the Fed and ECB which made super-cheap funding available to emerging market governments and corporations.

Add it all up, and Wall Street is mildly concerned. Money is being taken off the table as a precaution, not in a state of panic.

Not helping the situation is Ergodan’s insistence that he will not raise the cash rate. His major campaign pledge in the recent election was exactly that. Given his shift towards autocracy, markets fear the Turkish central bank will not be in a position to act independently of the government.

The government has said it’s working on a plan. If interest rates cannot be raised, the other option is to simply close the borders to capital flows and become economically isolated.

The Turkish lira fell another -8% last night.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1193.10 – 18.10 – 1.49%
Silver (oz) 14.97 – 0.31 – 2.03%
Copper (lb) 2.76 – 0.03 – 0.91%
Aluminium (lb) 0.93 – 0.01 – 0.85%
Lead (lb) 0.95 + 0.01 1.16%
Nickel (lb) 6.17 – 0.05 – 0.74%
Zinc (lb) 1.13 – 0.04 – 3.02%
West Texas Crude (Sep) 67.41 – 0.22 – 0.33%
Brent Crude (Oct) 72.88 + 0.07 0.10%
Iron Ore (t)      

It never ceases to amaze that gold always waits a full 24 hours before it responds to anything one might expect it to respond to. It was Friday night when the US dollar shot up 0.7%, and gold didn’t move. Last night the dollar was steady, and gold fell eighteen bucks.

Base metal prices are weak again for the most part.

Unfortunately FNArena has lost its spot iron ore price source for the moment. The futures are relatively flat at US$68.55/t. The oils are steady.

The Aussie is down another -0.1% at US$0.7272.. At least in Australia’s case, a (steadily) weaker currency is a net positive.

Today

The SPI Overnight closed up 5 points.

It is not the first time in recent years the local earnings season has coincided with global macro influences. It remains to be seen whether strong results can provide the offset, or weak results exacerbate the situation. Only ~10% of stocks on FNArena’s relevant coverage list have reported so far.

Today’s reporters include Challenger ((CGF)), Cochlear ((COH)), Domino’s Pizza ((DMP)), Scentre Group ((SCG)) and Whitehaven Coal ((WHC)).

 In a case of poor timing, ANZ Bank ((ANZ)) and National Bank provide quarterly updates.

On another floor of NAB, the monthly business confidence survey is out today.

China will report July industrial production, retail sales and fixed asset investment numbers.

Rudi will not connect with Sky News Business this morning due to flu.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ABC ADELAIDE BRIGHTON Downgrade to Lighten from Hold Ord Minnett
AGL AGL ENERGY Downgrade to Hold from Buy Deutsche Bank
    Downgrade to Underweight from Equal-weight Morgan Stanley
AMP AMP Downgrade to Hold from Add Morgans
BPT BEACH ENERGY Downgrade to Underperform from Neutral Macquarie
BSL BLUESCOPE STEEL Downgrade to Hold from Buy Deutsche Bank
ECX ECLIPX GROUP Downgrade to Hold from Buy Deutsche Bank
EVN EVOLUTION MINING Upgrade to Equal-weight from Underweight Morgan Stanley
FLT FLIGHT CENTRE Downgrade to Sell from Neutral Citi
IGO INDEPENDENCE GROUP Upgrade to Neutral from Underperform Macquarie
    Downgrade to Underweight from Equal-weight Morgan Stanley
JHX JAMES HARDIE Upgrade to Hold from Lighten Ord Minnett
MFG MAGELLAN FINANCIAL GROUP Downgrade to Neutral from Outperform Credit Suisse
MGR MIRVAC Downgrade to Neutral from Buy Citi
REA REA GROUP Upgrade to Neutral from Underperform Macquarie
    Upgrade to Add from Hold Morgans
SDA SPEEDCAST INTERN Upgrade to Add from Hold Morgans
SGM SIMS METAL MANAGEMENT Downgrade to Hold from Accumulate Ord Minnett
SUN SUNCORP Downgrade to Neutral from Buy Citi
TAH TABCORP HOLDINGS Upgrade to Hold from Lighten Ord Minnett
TCL TRANSURBAN GROUP 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.

Greg Peel

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

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