Overnight: Oil Tanks

World Overnight
SPI Overnight (Dec) 5580.00 0.00 0.00%
S&P ASX 200 5589.50 – 68.80 – 1.22%
S&P500 2556.69 + 10.75 0.42%
Nasdaq Comp 6783.91 + 30.18 0.45%
DJIA 23675.64 + 82.66 0.35%
S&P500 VIX 25.38 + 0.86 3.51%
US 10-year yield 2.83 – 0.03 – 1.12%
USD Index 97.08 – 0.05 – 0.05%
FTSE100 6701.59 – 71.65 – 1.06%
DAX30 10740.89 – 31.31 – 0.29%

By Greg Peel

Can’t Win

It was a courageous if not surprising fightback for the ASX200 on Monday to take the index back over 5650 support but alas, yesterday it all came to nought. Any attempt to shake off Wall Street woes just can’t win against the tide.

The oil price is not helping, with energy leading the sectors down -2.7% yesterday and facing a -7% oil price plunge today. Healthcare (-1.6%) was another big loser and the banks (-1.5%) provided the biggest negative influence.

The consumer sectors and industrials were all down over -1% and IT a typical -2.1% but the standouts on the day were materials, telcos and utilities, despite all closing in the red.

Materials fell only -0.2% with a bit of support from gold but also reflecting the rather complicated business of the BHP Group ((BHP)) special dividend, buyback and confusing “scale-back” that introduces uncertainty over who wins and by how much.

Utilities (-0.8%) tried to be just a little defensive while telcos closed as good as flat, probably because they’ve been hammered lately due to individual micro factors beyond the global macro and were due some relief.

There were no standout individual moves among stocks yesterday and no theme within the top five winners and losers. It was just another market-wide dump for the most part.

As we approach tonight’s Fed decision, volatility on Wall Street is not helping, and nor of course will oil. The bottoming process we thought might be evident last week gave way to new lows so at lot depends on what the Fed decides, and what it implies regarding policy in 2019.

Our futures closed “unch”, so now it a waiting game.

Shut down, shut up

After two solid down-days over Friday and Monday, Wall Street last night attempted a rebound, step-jumping from the open and holding on to a 300 point gain for the Dow through to lunchtime. But then politics reared their ugly head.

At that point it was revealed the Democrats, who now hold the House, had rejected the Republicans’ spending bill. The deadline for passage of a bill is Friday and if no consensus is achieved before then, the US government will shut down. Right before Christmas.

The stumbling block is of course The Wall, for which Trump wants US$5bn but the Democrats aren’t interested. At 3pm the Dow was down -70 points.

However the Republicans pointed out that while the detail needed to be agreed upon, the Democrats do want to do a deal and are not attempting to force a shutdown for the sake of it. To that end, an interim spending bill through to February can be passed to allow more time to nut things out.

On that note, Wall Street swung around again and clawed back some ground to the close.

Wall Street had become inured to government shutdowns over the period from 2011 when Obama faced a split Congress through to a period in which Trump treats a shutdown as his way of taking his bat and ball and going home when he doesn’t get what he wants. More recent shutdown threats have been treated with a roll of the eyes by Wall Street, and ignored.

But in this time of nervous sentiment, any negative news is enough to send the market lower. Computers are very nervous types.

The oil price plunge did little to help Wall Street either. The energy sector was the worst performer on the S&P with a -2.4% fall.

Oil prices were already teetering on a combination of ever rising US supply and a break of technical support at US$50/bbl. So when news came through last night that Russia planned to increase its production to record levels this month, ahead of production cuts agreed with OPEC beginning next month, it was the last straw.

Meanwhile, the presidents were at it. Trump took to Twitter to warn the Fed not to “make yet another mistake” by hiking its cash rate while at the same time Xi was telling a gathering that “no one is in a position to dictate to the Chinese people what should or should not be done,” in a thinly veiled reference to trade negotiations and related US demands.

The general consensus is that the Fed will hike tonight, but it will be a “dovish hike”. Trump has done nothing less than complicate the matter, and likely forced the Fed to hike even if the FOMC was not convinced. But without the Trump factor consensus remains that one more hike is justified, it just depends on what happens thereafter.

If Powell further tones back the rhetoric with regard 2019 policy assumptions, such that Wall Street now sees an original three expected hikes next year become two or even one, then a “dovish hike” will be achieved and everyone will be happy.

Perhaps. It’s rather hard to tell in the current environment.

So with Wall Street seemingly itching to at least try another rebound, it’s all eyes on the Fed tonight.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1248.50 + 2.80 0.22%
Silver (oz) 14.59 – 0.05 – 0.34%
Copper (lb) 2.75 – 0.02 – 0.70%
Aluminium (lb) 0.88 + 0.00 0.03%
Lead (lb) 0.88 + 0.01 0.76%
Nickel (lb) 4.98 + 0.04 0.72%
Zinc (lb) 1.17 – 0.01 – 0.96%
West Texas Crude (Jan) 46.00 – 3.30 – 6.69%
Brent Crude (Feb) 56.07 – 2.86 – 4.85%
Iron Ore (t) futures 68.50 + 0.40 0.59%

Outside of oil, not much to report. Metals prices continue to move in smallish increments, no doubt waiting for a breakthrough in trade talks.

With the US dollar steady the Aussie is flat at US$0.7175.

Today

The SPI Overnight closed unchanged.

Fed statement and press conference tonight.

Another fun day downunder as both ANZ Bank ((ANZ)) and National Bank ((NAB)) face the baying mobs at their AGMs. Ten bucks says they both get a first strike on remuneration.

Orica’s ((ORI)) AGM may be friendlier.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
APA APA Downgrade to Underperform from Outperform Credit Suisse
DLX DULUXGROUP Upgrade to Add from Hold Morgans
FMG FORTESCUE Upgrade to Overweight from Underweight Morgan Stanley
GWA GWA GROUP Upgrade to Buy from Neutral Citi
ING INGHAMS GROUP Downgrade to Sell from Neutral Citi
NHC NEW HOPE CORP Upgrade to Outperform from Neutral Credit Suisse
ORG ORIGIN ENERGY Upgrade to Add from Hold Morgans
PAN PANORAMIC RESOURCES Reinstate Coverage with Outperform Macquarie
RIO RIO TINTO Downgrade to Neutral from Outperform Credit Suisse
SIG SIGMA HEALTHCARE Upgrade to Neutral from Sell UBS
TPM TPG TELECOM Downgrade to Hold from Add Morgans
VLW VILLA WORLD Downgrade to Hold from Add Morgans

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.

View more articles by Greg Peel →