Overnight: Is This It?

By Greg Peel

Turn-Up

“But it remains to be seen how the local market responds today to last night’s wild ride on Wall Street. The -51 drop in the futures reflects a Dow down -250, but does it reflect a Dow that rallied back 300 from its low? We’ll see.”

We saw.

As I wrote (the above) yesterday, the SPI futures were suggesting a -51 point drop following Monday’s 63 point gain for the ASX200, which given current market sentiment, could well have proved accurate – sell first, ask questions later. However while Wall Street did indeed close lower, it closed much higher than it might have. Wall Street is yet to put together two consecutive days of rallies in October, but the rally on Friday night was followed by a big recovery on Monday night.

From the open yesterday, the ASX200 fell -37 points in the first twenty minutes.

Then came a tweet from the world’s most famous tweeter. Trump suggested he is willing to settle a trade deal with China. Thereafter, the index tracked a straight 45 degree line to the close to mark the biggest one day gain since July 2017.

Was Trump’s tweet really enough to spark such a change of heart? In a subsequent interview, Trump confirmed that he expects a “great deal” with China. Trump and Xi meet at the G20 meeting in late November. But he also said if there was no deal resulting, he’s ready with his final all-in round of tariffs. He’s ready to make a deal right now, but doesn’t think China is ready.

There may have been some impetus, but I doubt this typical ramble from Trump was really worth over a hundred points for our market. A bit of spin ahead of next week’s mid-terms, but not new news. Perhaps more relevant was the fact US futures continued the rally-back in the aftermarket that had begun in the day session and Monday night’s action on Wall Street suggested to some a bottom may have been found.

The Australian market feels like it’s just itching to confirm a bottom, and get in first.

Interestingly, the Aussie is up 0.6% this morning with the US dollar index up 0.4%. All of that rally was in our time zone. We did see building approvals numbers yesterday that provided some relief, if you think more apartment approvals suggest relief, and I’d suggest the forex cowboys are all short, but we might also assume there was a bit of foreign buying going on in our market yesterday – a market which is a proxy for Chinese trade.

It was pretty much a Buy Australia session yesterday, with more sectors joining in than did on Monday. The only loser was utilities (-0.1%), which makes sense in a risk-on move. In percentage terms a 2.3% return to favour for IT won the day, noting the Nasdaq also staged a big swing recovery on Monday night, but in index point terms, a 1.7% gain for the banks was the standout.

Only energy (+0.8%) and telcos (+0.5%) failed to exceed 1%.

At the individual stock level, Beach Energy ((BPT)) topped the board with a 10.3% gain in the wake of its production report and an upgrade from Macquarie (to Neutral). The rally in the IT sector was led by flag bearer Afterpay Touch ((APT)), up 9.4%.

Mining equipment hire company Emeco Holdings ((EHL)) was proving a comeback king until October, when it was knocked back down again for being too big-headed, but it has bounced back hard recently and was up another 7.7% yesterday.

On the losers’ board, nothing of consequence, although I will note that outside the index, bling peddler Lovisa ((LOV)) fell -18.5% following its AGM.

The US futures proved right – Wall Street has managed a solid rally overnight. But the SPI futures are down -5 points this morning, suggesting the market sees that rally as merely confirming yesterday’s rally downunder. But is sentiment turning?

Hard Work

How did Wall Street read Trump’s tweet? Well if no less than four one percent moves up and down for the S&P500 in a single session is any guide, it wasn’t Trump’s tweet that was the main focus last night. One would be hard pressed to be excited by it.

What we saw last night could best be exemplified by the fact that currently, for every two guest commentators that appear on business television, one will say now’s the time to buy and the other will say we haven’t seen the right signs to call a bottom just yet. In other words, sentiment is split down the middle, and volatility reigns.

We can safely say that such activity is what one would expect before a bottom is retrospectively recognised (unfortunately no bell sounds at the time), but what we can also say it’s that it ain’t over till it’s over.

The “signs” the more pessimistic are looking for include capitulation selling, meaning a big move down in one session on heavy volume and wide breadth of stocks closing lower, a rush to buy put option protection, meaning a big jump in the VIX, and a blowout in the yields on junk bonds, signalling the market fears potential bankruptcies.

To date we have not seen any of these signs. But not all or any one is required for a bottom to form. Every time can be different. We are yet to see two consecutive up-days this month. Could that be tonight? In the background of the October correction, a US earnings season has been playing out that to date has delivered earnings beats in excess of 80% of the S&P and revenue beats around two-thirds. Last night’s monthly read on US consumer confidence marked an 18-year high.

It should also be noted that tonight on Wall Street (and today in Australia) is the end of the month. A good day to try and make those monthly losses look a little less ominous for clients? And it’s the end of the month of October.

Yet looming next week are the mid-terms. If Trump losses his two-house majority, which if the polls are any guide he could, then maybe another wave of selling is due. If he holds that majority, it could be lift-off.

Commodities

In the context of a US dollar up another 0.4%, base metals were weak across the board in London but it was the first opportunity to respond to Trump’s tariff threat on Monday night, and it appears last night’s tweet offered little in compensation.

Gold is struggling to hold its safe haven status as the greenback rises.

The oils are down because the weekly US crude inventory lottery surprised to the upside.

The Aussie is up 0.6% at US$0.7104.

Today

The SPI Overnight closed down -5 points.

Whatever does happen today locally could well be influenced by today’s September quarter CPI numbers – a dip to 2.0% annual from 2.1% last quarter is expected – plus ANZ Bank’s ((ANZ)) full year earnings result.

We’ll also see private sector credit data.

Then there’s China’s October PMIs, due today. The Bank of Japan will meet, but nothing untoward is expected on that front.

Tonight in the US brings private sector jobs.

Elsewhere on the ASX, quarterly reports are expected from Northern Star Resources ((NST)), Sandfire Resources ((SFR)) and Genworth Mortgage Insurance ((GMA)). Healthscope ((HSO)), which is under takeover, holds its AGM as does Corporate Travel Management ((CTD)), which is under threat from a major short-side hedge fund.

Japara Healthcare ((JHC)), nib Holdings ((NHF)) and Tassal Group ((TGR)) also hold AGMs.

The Australian share market over the past thirty days…