Overnight: Consolidation

By Greg Peel

Notes from Switzerland

The ASX200 was a little weaker but doing not a lot yesterday morning, lacking a lead from Wall Street, but an afternoon swoon resulted ultimately in a -31 point drop. All eyes were on Davos, apparently.

A theme of the World Economic Forum has been slowing global growth, and of course on Monday we had China’s “slowest” GDP growth result in decades (if we take percentages and not dollars) along with the IMF slashing its 2019 global growth forecast to 3.5% from 3.7%. There was also talk of China’s growing debt – not one to be dismissed but quite an old one – and generally the mood has been sombre.

Such talk was likely not so much the driver of weakness in the local market yesterday but the excuse. After such a solid run-up from Christmas, consolidation was nigh. Wall Street did not need to be open – the Dow futures continued to lose ground in electronic trading over the course of our day and if ever a market was due for consolidation it is Wall Street.

So we pulled back and, as it turned out, so did Wall Street last night.

The banks (-1.2%) provided the bulk of the index fall, giving back some of their recent gains. The resource sectors also saw profit-taking, with energy and materials both down -0.9%. The only other sector to finish in the red yesterday was telcos, down a mere -0.2%, so it is readily apparent yesterday saw little more than some big cap selling after a strong run.

The local futures have closed down -28 so we’re set to see more of the same today, one might assume.

The Meeting that Wasn’t

The Chinese GDP result, despite being as forecast, provided one reason for profit-taking on Wall Street last night. The day’s earnings results were also not that flash after a solid round last week.

But the main driver of selling was news that the meeting that was due to be held before the meeting had been cancelled by the US.

Supposedly, a delegation of lesser Chinese trade officials was due to meet with US counterparts this week to set the scene for the main meeting between senior US officials and the Chinese vice premier later in the month. News broke last night that because Beijing had not sufficiently progressed on the matter of, in general terms, intellectual property theft, Washington had cancelled the pre-meeting.

This then led the speculation that if the pre-meeting was off, what did that mean for the real meeting?

It all came to nought anyway. With twenty minutes to go before the closing bell, White House senior economic advisor Larry Kudlow appeared on CNBC to say you’ve all got it wrong, there never was a pre-meeting organised, negotiations are ongoing and the main meeting is still set to go ahead – nothing’s changed. So the Dow rallied back from around -450 to -300.

I think the lesson from last year with regard US-China trade negotiations is don’t believe anything until it actually happens.

Still, a fall of -300 is nothing to sniff at, and while it’s easy to suggest “global growth concerns” were the primary driver, assuming trade was not actually an issue, we might just as well pull out the old chestnut “more sellers than buyers” because talk of the need for a consolidation had already been rife and once the levee broke, it was on.

China’s weak GDP/slowing global growth was also blamed for a -5 basis point fall in the US ten-year yield to 2.73% and for a -2% pullback in oil prices, all of which conspired together in the sort of negative feedback loop we see often enough.

As I write I note this morning’s aftermarket US earnings reports are looking more positive – IBM being one – so all is not lost. This consolidation phase might well require yet more time to play out, at least until there actually is a trade meeting. The outcome of that meeting will then determine where to next, bearing in mind the S&P500 rallied 13.5% from Christmas Eve to last Friday and a lot of that was to do with trade deal hopes.

So look out if the meeting is a fizzer.

Commodities

Base metal prices were weaker, for the most part, on the same theme. London was closed before Larry Kudlow spoke.

Aluminium bucked the trend on news China’s supply is much lower as would be expected ahead of the upcoming New Year holiday, with a lot of smelting capacity having been forced to shut down.

Oil prices had been lower in the session before an US Energy Information Agency report forecasting a rise in February shale production over January production of only half of what had been previously suggested was released, prompting a bounce.

The Aussie has been sliding since yesterday, see “China”, and is currently down -0.6% at US$0.7118 with the US dollar index little moved.

Today

The SPI Overnight closed down -28 points.

It is worth noting at this point that while the FNArena Calendar lists US economic releases as scheduled, those provided by government agencies will not be released, for obvious reasons, thus please take it all with a grain of salt until the mess is cleared up. Presumably we won’t see the “biggies” on Friday night of durable goods orders and retail sales.

The Bank of Japan holds a policy meeting today.

Locally, CYBG ((CYB)) releases quarterly numbers while gold miners Northern Star ((NST)), Regis Resources ((RRL)) and St Barbara ((SBM)) release production reports.

The Australian share market over the past thirty days…