Overnight: The Longest Journey

By Greg Peel

China Syndrome I

The Chinese premier had been out and about on Friday declaring stimulus to be working and the Chinese economy to be on a path to recovery. It did seem rather neat, thus, that Beijing’s manufacturing PMI, released on Sunday, should show a rebound into expansion at 50.5, up from 49.2.

Wall Street was buoyed on Friday night by “constructive” trade talks with China and a suggestion the Fed should cut rates. This led the SPI futures to close up 18 points on Saturday morning, but that was before the Chinese data were released, which subsequently made 18 look underdone.

And so it was the ASX200 flew out of the blocks yesterday, up 50 points in the first hour. Just as the profit-takers appeared to move in, Caixin’s independent, and broader, measure of China’s manufacturing PMI was released. A rise to 50.8 from 49.9 silenced the sceptics.

The index was back up 50 points by lunchtime but there momentum waned, and the afternoon saw a drift-back. The ultimate 0.6% gain was dwarfed by China’s 2.6% and Japan’s 1.4%, but then we do have a budget tonight to worry about.

Materials (+1.1%) were among the winners yesterday as one would expect, despite the goldminers still dragging. The iron ore miners keep surging on, despite Rio Tinto ((RIO)) downgrading Pilbara production guidance due to the cyclone. Energy (+0.2%) was more timid.

Healthcare (+1.1%) and the banks (+0.8%) posted solid sessions but it was consumer staples (+1.9%) that won the day. Given the defensive sectors of telcos (-0.5%) and utilities (-0.7%) were the losers on the day, the gain for staples was out of step; it was all about Woolies.

Woolworths ((WOW)) announced it had completed the sale of its petrol business and would use the proceeds to fund a $1.7bn off-market buyback – a larger number than expected. The grocer would also address its perennially weak Big W chain by closing 30 stores over three years. The stock rose 2.2%.

Among other individuals, battered EclipX Group topped the leaders’ board yesterday with a 16.4% gain. Brokers voiced their views that despite the company’s problems, the sell-off had been overdone, but an announced 20c special dividend from sector peer Smartgroup Corp ((SIQ)) also added to sentiment.

Among yesterday’s top five losers, three were goldminers.

We might also note that a -0.6% decline in average Australian house prices in March was the lowest since October. Light at the end of the tunnel?

Wall Street began the March quarter with a flurry last night on both Chinese and domestic data. Our futures are up 36 this morning, but one has to question as to how much of that is double-counting from yesterday’s rally.

The index has, nevertheless, regained the 6200 mark. Budget tonight.

China Syndrome II

Relax, it was all just a bad dream. The US ten-year yield bounced back 8 basis points to 2.50% last night and the curve snuck back out of inversion.

The impetus came from a combination of the Chinese and US manufacturing PMIs.

Tariffs had clearly been taking a toll on the Chinese economy when last month the PMI fell into contraction territory. The US sector has also suffered in the tariff wars, and last month the US PMI hit a two-year low. But Chinese stimulus has returned that sector back to expansion, and last night’s US reading of a 55.3, up from 54.2, was better than expected.

Hence Wall Street flew out of the blocks as well last night, step-jumping from the open and drifting higher to the close.

The sceptics nevertheless suggest Wall Street was being a bit data-selective.

A breakdown of the US PMI number shows not all segments are showing encouraging signs. A separate PMI calculation by Markit showed a drop to 52.4 from 53.0. US retail sales fell -0.2% in February, continuing a weak trend since December that still has economists scratching their heads. The eurozone manufacturing PMI fell to 47.5 from 49.3. Germany fell to 44.1. The UK PMI jumped to 55.1, but reflects a rush to stockpile ahead of Brexit.

So it might be a bit early to call an end to the global growth slowdown. But with the promise of wonderful news on trade just around the corner, Wall Street has opened the new quarter with all guns blazing, despite the March quarter enjoying the best rally in a decade.

The proof of the pudding will begin to emerge from next week when the March quarter US earnings season begins. Having substantially marked down earnings expectations through the course of the quarter, analysts have now begun to revise upward. Similarly, grim expectations for the March quarter GDP result are being wound back.

Commodities

Base metal and iron ore prices had already jumped on Friday on cheery economic talk from the Chinese premier, so last night’s moves were positive albeit muted.

Aluminium missed out because previously sanctioned Russian producer Rusal recommenced sales to the US.

The oils nevertheless reflected PMI excitement.

With the US dollar steady, gold reflected the jump in US bond yields.

The Aussie is up 0.2% to US$0.7113, reflecting strong commodity prices.

Today

The SPI Overnight closed up 36 points or 0.6%. A break-up through 6200 or reliving yesterday’s news?

The RBA meets today but little is expected ahead of tonight’s budget, which itself might turn to dust in May.

We’ll also see building approval numbers.

In the US, it’s durable goods orders.

Adelaide Brighton ((ABC)) goes ex today.

The Australian share market over the past thirty days…