Overnight: Rush To Bonds

World Overnight
SPI Overnight (Jun) 6399.00 – 31.00 – 0.48%
S&P ASX 200 6440.00 – 44.80 – 0.69%
S&P500 2783.02 – 19.37 – 0.69%
Nasdaq Comp 7547.31 – 60.04 – 0.79%
DJIA 25126.41 – 221.36 – 0.87%
S&P500 VIX 17.90 + 0.40 2.29%
US 10-year yield 2.24 – 0.03 – 1.41%
USD Index 98.13 + 0.19 0.19%
FTSE100 7185.30 – 83.65 – 1.15%
DAX30 11837.81 – 189.24 – 1.57%

By Greg Peel

Bond Watch I

One wonders what the impetus was for local traders to send the ASX200 up over 30 points on Tuesday with no lead from Wall Street when yesterday morning the index was down -65 points in the first half hour. A swift recovery of 20 points there followed, but that was it for the day.

As was the case on Monday, volume was light and little further movement was seen after the initial opening scuffle.

All sectors bar one closed in the red yesterday, to varying degrees. Telcos managed a 0.1% gain on Telstra’s ((TLS)) announcement it was bringing forward its cost-cutting plans, laying off all and sundry.

Otherwise, an unusual outperformer on the day was financials, which only fell -0.2%. Had the banks matched falls in other sectors it would have looked a lot uglier by the close.

Suffering from pullbacks in commodity prices were materials (-0.7%) and energy (-0.8%) but bigger hits were taken by industrials (-1.4%), healthcare (-1.1%) consumer staples (-1.0%) and discretionary (-1.2%). There was no support from defensives.

One might have expected support from bond-proxy stocks but utilities continued lower (-0.9%), and both Transurban ((TCL)) and Sydney Airport ((SYD)) fell around -2%.

One might have expected support because a rush into bonds has seen the Australian ten-year yield fall to 1.49%. The cash rate is 1.5%, at least until next week. This is the first yield curve inversion Australia has seen in a very long time. Typically, but not always, inversion (if continued) precedes recession on a lag of around 18 months.

If anything at all, the bond market is telling the RBA you had better cut. Such a demand has been reverberating around the world this week.

On the individual stock front, only one ASX200 member stood out on the upside yesterday. Lynas Corp ((LYC)) rallied 15.5% on a Chinese media suggestion Beijing may fire back with a cut to rare earth exports to the US. China producers around 80% of the world’s rare earth metals and the US very little. Rare earths are vital to all of today’s “new” technologies, from wind turbines to EVs and military equipment.

(See: Trade War Will Hasten Bull Market For Rare Earths)

Speaking of wind, Downer EDI ((DOW)) was blown away yesterday (-9.1%) after the company highlighted increased capex spend on wind farm investment.

While Wall Street managed to come back from the brink last night, the focus of attention was solidly on the bond market. Another weak session has US indices looking fragile. Our futures are down another -31 points this morning.

Bond Watch II

On Tuesday night the US ten-year yield fell -6 basis points to a two-year low 2.27%. Last night that yield fell a further -5bps to 2.22%. At that point, the Dow was down over -400 points.

Having crashed through support at 2800 on Tuesday night, the S&P500 fell below its 200-day moving average at 2776. Now Wall Street was staring into an abyss. Sell in May? Down -5% so far.

Momentum in bonds has been building ever since the trade deal that everyone thought was inching closer to resolution suddenly crashed and burned. Trump then added fuel to the fire with the Huawei ban. Last night’s rare earths threat only serves to underscore the fear that things are now going to get a lot worse before they ever get better.

There were more earnings reports out from US retailers last night. One by one share prices tanked. While not all missed on March quarter numbers, weak guidance was the major concern, and most weak guidance has come with the caveat of “and that’s before we see tariffs on everything”.

But just when it looked like all hope was lost, bond yields turned. The ten-year rallied back to be down -3 points at 2.24%. It is not entirely clear as to why. Oversold? Or was it because of news the Democrats appreciate that the president is keen to get on with his infrastructure plans, or Robert Mueller speaking for the first time and saying that charging Trump was “not an option”.

Whatever the case, the currently bond market-obsessed stock market turned. The Dow halved its losses and the S&P rallied back over the 200-day moving average. It is not unusual for a fall below the 200MA to spark dip-buying. But occasionally, as was the case in December, buyers get steamrolled.

The world is hanging on every development in deteriorating US-China relations. The bond market is telling the Fed it had better cut. The Fed will find it hard to make a short-term decision when one little ray of hope on trade could swing everything back to positive. Trump and Xi meet next month at the G20. That meeting will determine, possibly, whether a bounce is on the cards or a recession is coming.

The inverted gap from US three-month to ten-year yields is widening.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1279.30 + 0.40 0.03%
Silver (oz) 14.40 + 0.07 0.49%
Copper (lb) 2.65 – 0.03 – 1.13%
Aluminium (lb) 0.80 – 0.00 – 0.41%
Lead (lb) 0.82 – 0.00 – 0.37%
Nickel (lb) 5.44 – 0.02 – 0.43%
Zinc (lb) 1.22 – 0.01 – 0.99%
West Texas Crude 59.06 – 0.08 – 0.14%
Brent Crude 69.65 – 0.41 – 0.59%
Iron Ore (t) futures 103.50 – 2.60 – 2.45%

Metal prices are not going to rise as trade tensions escalate and the US dollar continues to rally, unless there is further supply-side disruption.

The US dollar index rose 0.2% but gold is hanging in there.

By rights an inverted yield curve and and calls of up to four (yes four!) RBA rate cuts should by rights have the Aussie tumbling, but a holding pattern at US$0.6917 reflects the fact we’re all in the same boat.

Today

The SPI Overnight closed down -31 points or -0.5%.

Tonight in the US the first estimate of March quarter GDP will be revised and April trade numbers will be released.

Locally we’ll see April building approvals and March quarter private sector capex – a vital element of GDP.

Costa Group ((CGC)) and FAR ltd ((FAR)) hold AGMs today.

There are several stocks going ex-dividend today, including CSR ((CSR)), Orica ((ORI)), Premier Investments ((PMV)) and TechnologyOne ((TNE)).

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BSL BLUESCOPE STEEL Downgrade to Underperform from Outperform Macquarie
Downgrade to Neutral from Buy UBS
COL COLES GROUP Upgrade to Neutral from Underperform Credit Suisse
CSR CSR Downgrade to Sell from Neutral Citi
DMP DOMINO’S PIZZA Downgrade to Equal-weight from Overweight Morgan Stanley
DOW DOWNER EDI Downgrade to Underperform from Neutral Credit Suisse
EHE ESTIA HEALTH Downgrade to Neutral from Buy UBS
KDR KIDMAN RESOURCES Downgrade to Hold from Buy Ord Minnett
MTS METCASH Downgrade to Underperform from Neutral Credit Suisse
OZL OZ MINERALS Upgrade to Add from Hold Morgans
PLS PILBARA MINERALS Downgrade to Lighten from Hold Ord Minnett
QBE QBE INSURANCE Downgrade to Neutral from Outperform Credit Suisse
Downgrade to Neutral from Outperform Macquarie
VOC VOCUS GROUP Upgrade to Neutral from Underperform Macquarie
Upgrade to Neutral from Sell UBS
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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