Overnight: Now We Wait

World Overnight
SPI Overnight (Dec) 5861.00 + 11.00 0.19%
S&P ASX 200 5875.20 + 57.10 0.98%
S&P500 2747.86 + 9.55 0.35%
Nasdaq Comp 7375.96 + 47.11 0.64%
DJIA 25635.01 + 173.31 0.68%
S&P500 VIX 20.05 + 0.09 0.45%
US 10-year yield 3.21 + 0.01 0.41%
USD Index 96.31 + 0.02 0.02%
FTSE100 7040.68 – 63.16 – 0.89%
DAX30 11484.34 – 10.62 – 0.09%

By Greg Peel

Call Option?

When Australia was otherwise distracted yesterday, foreign buyers moved in, so it has been suggested. We saw possible evidence of this on Monday when what looked like a big buy order came in late morning, but when completed, the ASX200 went back to being soggy again.

That sogginess probably reflected caution ahead of the US midterms and Fed meeting this week. But from an outside perspective, Australia can be seen as a hedge.

As of yesterday, and it is still the case this morning, the expectation is that the Democrats will win the House and the republicans will hold the Senate. Given this expectation has been built into the market, it is assumed Wall Street’s response to such an outcome will be neutral.

But as Americans go to the polls, the number of seats the Democrats are forecast to take in the House is falling. In other words, the late mail has a swing back towards Trump. It may all come down to commitment. Given voting is not compulsory, midterm Congressional elections do not typically draw a lot of interest from average Americans. But this time it’s different, because this time no one’s ever seen a president like the current one.

So, does Trump’s army jump in their pick-ups and head to the booths when normally they’d be happy on the porch drinking beer, or do the Trump haters across various spectra rally to the cause when really they’d rather just be at the coffee shop? Or both? At this stage it looks like these midterm elections might break the participation record.

If the Republicans do hold the House, Wall Street would take off, all and sundry are sure about, and so would the US dollar. This would not be good for emerging markets. The Chinese, which clearly have refused to talk trade up till now in case Trump is weakened in the election, would see a reinvigorated Trump and thus their own position would be weakened.

If Wall Street takes off, so would the Australian market, because that’s what we do. A weaker China would imply a greater likelihood of a resolution being reached on trade, and that would be a sigh of relief for Australia. If the US dollar goes up, the Aussie goes down, and that would provide an added boost for US investors.

Thus yesterday it would appear the world took out a call option on the Republicans holding the House, by buying Australian large caps. With no support from commodity prices, materials jumped 1.7% and energy 1.6%. With no new news to drive them, the banks rose 0.8%. Even the telco coin came up heads.

The index opened higher and then tracked a near perfect straight line in an orderly rally to the close. No one was there to stop it, so volumes were thin and the door was left open.

In other news that no one paid any attention to yesterday, the RBA board appears to have moved to a Parallel Australia. Or at least that’s the way economists see it.

“The Australian economy is performing well,” said Governor Lowe in his statement yesterday. “Over the past year, GDP increased by 3.4 per cent and the unemployment rate declined to 5 per cent, the lowest in six years. The forecasts for economic growth in 2018 and 2019 have been revised up a little. The central scenario is for GDP growth to average around 3½ per cent over these two years, before slowing in 2020 due to slower growth in exports of resources.”

The RBA is adamant the next move in rates – the first since August two years ago – will be up, but just not yet. The majority of economists now expect the next move to be down. At the core of that belief is the “wealth effect”. As house prices fall, we’ll stop spending money, and that impact will feed on itself.

There was no market response to the RBA decision at 2.30pm yesterday. Other matters were more important.

Asymmetric

Taking all discussed above vis a vis the election, the line of least resistance for Wall Street is up. A Democrat win in both houses is seen as very unlikely, so either the Democrats win the House, as is priced in, or the Republicans hold it. Wall Street’s response would thus either be a shrug or a mad rush to buy. There appears to be no likely scenario that could send Wall Street tumbling.

(Let us not forget Brexit.)

The Dow was up 150 points early in last night’s session, almost back to square mid-afternoon, and up 170 by the close. All four major indices closed in the green, with the Nasdaq enjoying a nice comeback.

The election was the only subject on last night’s agenda. As the closing bell sounded, there were no early indications, given voting will continue across the country until the last booth closes in Alaska at 1am New York time, or 5pm Sydney time.

Now we wait.

The US dollar index and US ten-year bond yield are as good as unmoved.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1225.40 – 4.60 – 0.37%
Silver (oz) 14.48 – 0.13 – 0.89%
Copper (lb) 2.80 – 0.01 – 0.36%
Aluminium (lb) 0.89 – 0.00 – 0.36%
Lead (lb) 0.86 – 0.02 – 2.44%
Nickel (lb) 5.33 + 0.01 0.25%
Zinc (lb) 1.15 – 0.02 – 1.46%
West Texas Crude (Dec) 62.11 – 0.75 – 1.19%
Brent Crude (Jan) 72.00 – 0.76 – 1.04%
Iron Ore (t) futures 74.10 – 0.17 – 0.23%

China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey have all been granted exemptions from Trump’s renewed sanctions on Iran, which are increasingly becoming Claytons sanctions. (Google it)

The WTI price has now fallen for seven sessions in a row. Trump wants to take it slow, he says, so as not to drive oil prices up too sharply.

Base metal prices are, on a net basis, continuing to drift lower. Miners would not be thrilled if the greenback were to surge. Nor would gold traders, which is probably why they are cautious.

The Aussie is up 0.1% at US$0.7221.

Today

The SPI Overnight closed up 11 points or 0.2%.

It’s back to business today in the local market. Commonwealth Bank ((CBA)), Charter Hall ((CHC)) and Domino’s Pizza ((DMP)) all hold AGMs, as does News Corp ((NWS)) tonight.

ResMed ((RMD)) goes ex-dividend.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ASX ASX Upgrade to Hold from Sell Deutsche Bank
COH COCHLEAR Upgrade to Buy from Neutral Citi
CSL CSL Upgrade to Accumulate from Hold Ord Minnett
CSR CSR Upgrade to Buy from Hold Deutsche Bank
CTD CORPORATE TRAVEL Upgrade to Buy from Hold Ord Minnett
GXY GALAXY RESOURCES Upgrade to Overweight from Equal-weight Morgan Stanley
IGO INDEPENDENCE GROUP Upgrade to Equal-weight from Underweight Morgan Stanley
IPL INCITEC PIVOT Upgrade to Outperform from Neutral Credit Suisse
MIN MINERAL RESOURCES Upgrade to Accumulate from Hold Ord Minnett
MQG MACQUARIE GROUP Upgrade to Accumulate from Hold Ord Minnett
ORI ORICA Upgrade to Outperform from Neutral Credit Suisse
Downgrade to Equal-weight from Overweight Morgan Stanley
OSH OIL SEARCH Upgrade to Neutral from Sell Citi
REA REA GROUP Upgrade to Accumulate from Lighten Ord Minnett
SIQ SMARTGROUP Upgrade to Add from Hold Morgans
TWE TREASURY WINE ESTATES Upgrade to Outperform from Neutral Macquarie
Upgrade to Overweight from Equal-weight Morgan Stanley
WPL WOODSIDE PETROLEUM Upgrade to Neutral from Sell Citi
WSA WESTERN AREAS Upgrade to Equal-weight from Underweight Morgan Stanley
XRO XERO Upgrade to Buy from Lighten Ord Minnett
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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