Overnight: Confusion Reigns

Breakdown

The ASX200 opened weaker yesterday and once 5500 was breached, technical selling was swiftly triggered. It is the first big macro move the local market has seen since the beginning of August. Yesterday had little to do with the final throes of result season.

Initial weakness was all about the Fed. The wash-up from the Jackson Hole symposium is that there will be a rate rise in 2016, maybe even two. Or at least, that’s what the Fed wants markets to believe. Reality may yet be quite different.

The Australian market is very much yield-based and thus attractive to investors from low interest rate economies. Even the big-cap resource companies are major dividend payers. Each incremental move up in US interest rates reduces the US-Australia interest rate differential gap, making Australian yield stocks incrementally less attractive.

Beyond this macro theme, we could say it was a case of a market that hasn’t been able to go up for a month, so it had to go down. Patience ran out. On balance, the earnings result season has been seen as a positive one, featuring a solid net gain in earnings if we take out BHP Billiton. Yet all month the index has struggled to move much above 5550, frustrating investors. Time to sell and regroup.

There were still some notable individual stock stories among those reporting yesterday.

When you’re in a hot new sub-sector, you can’t afford to miss guidance. Residential aged care provider Estia Health (EHE) found this out the hard way yesterday and dropped 17%. Peers Gateway Lifestyle Group ((GTY)) and Japara Healthcare ((JHC)) were dragged down in the wash, falling 4% and 6% respectively.

On the other side of the ledger, naval boat builder Austal ((ASB)) has had a torrid 2016 so a good result for that company saw the stock up 13%. It’s been a very up and down year for biotech Mesoblast ((MSB)), which is not surprising given the stock is basically a binary bet on stem cell technology. It jumped 8%.

Another big loser was popular gold stock Evolution Mining ((EVN)), but a 9% plunge was all about a dilutive rights issue.

Outside of these individual moves, the selling on the day was market-wide. Interestingly, the only sector to finish in the green yesterday, slightly, was telcos, despite Telstra ((TLS)) being the daddy of all yield stocks.

Is the Fed really going to hike? That is the question upon which there is no agreement.

Each Way Bet

On further contemplation, Wall Street has decided that what Janet Yellen said at Jackson Hole on Friday night was no different to what she’s being saying for months. For months she’s been saying a rate rise is possible and yet one never comes.

It was Stanley Fischer who threw the spanner in the works by suggesting not only is there likely to be a rate rise before year-end, there could well be two, and that Janet Yellen’s speech corroborates such an assumption. On that basis, Wall Street is now primed for this Friday night’s jobs report which, if solid, could signal the rate rise in September no one was expecting last week.

Yet still there are those scoffing at the suggestion there could be any rate hike in 2016.

If Brexit fears killed off the possibility in June, and July was too early to be safe the Brexit shrug-off would last, then November is clearly not a possibility as it is right before the presidential election, and that may well also rule out September in the run-up to the election. That just leaves December, until some other excuse comes along.

It will, of course, come down to the data, or so the Fed keeps telling us despite seemingly paying no attention to any numbers. Last night’s data release showed US personal consumption rose 0.3% in July as expected and incomes rose 0.4%.

The Fed’s preferred measure of inflation, personal consumption & expenditure (PCE), was flat on the headline and up 0.1% on the core. Annually, headline inflation was up 0.8% (still carrying the oil price drop) and core inflation was up 1.6%, still well shy of the Fed’s 2% target.

Recently the Fed has been contemplating whether 2% is really the right target to have. Bottom line, there was nothing in last night’s data to settle any rate rise dispute.

Last night investors piled into US banks. Why? Because they benefit from rising rates. Two days to think about it, and US stock markets have decided yes, there will be a rate rise.

Last night saw the US ten-year yield fall 7 basis points to 1.57%, having risen 6bps on Friday night in response to Jackson Hole. Friday night’s knee-jerk reaction probably reflected just how long everyone is in the bond market. Last night’s move suggests the bond market has decided nah, there’s not going to be a rate rise.

Take your pick. Gold has still not moved, in either direction, and that’s usually where nerves are on display.

When it was all said and done, the Dow rallied a hundred points on one of the lowest volume days of the year. It’s the last week of the summer holidays and Friday night’s jobs report be likely be critical, so what bother playing?

Commodities

West Texas crude is down US34c at US$46.95/bbl.

It was August bank Holiday in the UK last night, so the London Metals Exchange was closed.

Iron ore fell US30c to US$58.80/t.

Gold is up US$2.70 at US$1323.20/oz.

Having shot up on Friday night, the US dollar index is up 0.1% at 95.58. The Aussie is up 0.2% at US$0.7573.

Today

The SPI Overnight closed up 18 points or 0.3%. Can 5500 be regained on Wall Street strength?

Locally we’ll see building approvals numbers today. The US will see house prices and consumer confidence tonight.

Ramsay Health Care ((RHC)) is the big name reporting today while FlexiGroup ((FXL)) and Slater & Gordon ((SGH)) should provide some interest, among others.

Rudi will Skype-link with Sky Business at around 11.15am to discuss broker calls.

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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