Overnight: Meanwhile, Back At The War

By Greg Peel

Trade vs Yield

The ASX200 continued its pullback from the high yesterday with a bit of impetus from Wall Street disappointment the Fed did not signal further rate cuts ahead. But that has all changed overnight.

The index opened down -30 but choppy trade in the morning session showed the market is trying to find that point at which the over-exuberance premium required to kiss the old high has been wiped out and fundamentally it’s now worth buying at more sensible levels.

Last night the Dow closed down -280 points as Trump announced 10% tariffs will be placed on the final US$300bn of Chinese imports. Our futures are only down -15 points this morning. Given we spent last year tanking on every escalation in the US-China trade war, that -15 seems very underdone.

It was left to the Aussie to provide the expected response with a -0.7% fall into the Summer of Love last night. It is now expected the Fed will indeed cut further and it remains an expectation that the RBA will cut further. Combine an Aussie back near GFC lows and Australian corporations intent on delivering strong yields and for investors both domestic and foreign, our market is right up there on a TINA basis.

If we are down only -15 today it will be despite iron ore falling -4% overnight and oil falling -6%. Gold is nonetheless up US$30. More whipsawing in that sector today.

For the record, gold miners were among those stocks dragging our market lower yesterday, combined with iron ore miners, as prices in both commodities fell on Wednesday night. Materials closed down a standout -1.5%. Next worst was IT, down -1.0%, but thereafter sector losses were relatively modest.

Industrials bucked the trend in rising 0.7% and consumer discretionary held its ground.

At the individual stock level, Downer EDI ((DOW)) was best index performer but all it needed was a 3.5% gain.

On the downside, Janus Henderson ((JHG)) reported a stronger market performance in the half but could not stem the tide of funds outflows. It fell -12.2%. Rounding out the top five losers were two gold miners and two stocks that were “going on with it” after their earlier profit warning/profit result. Adelaide Brighton ((ABC)) fell another -5.9% and CYBG ((CYB)) another -5.2%.

The good news of the day was that average Australian house prices rose 0.1% in July. Yes, rose. Sydney and Melbourne both rose 0.2%.

A Game of Two Halves

The Dow fell over -300 points on Wednesday night when the Fed chair called the -25 point rate cut a “mid-cycle adjustment” and not the beginning of a long easing cycle.

Wall Street thus assumed it was back to watching the data for any signs of weakness that might push the Fed into further cuts. Early last night the US manufacturing PMI for July came in at 51.2, down from 51.7 in June, to mark its lowest level in three years.

Buy 10am the Dow was up 300 points.

Then came the announcement.

Clearly the US trade delegation returned from China with a shake of the head. Trump has thus announced a “small” tariff of 10% on the remaining US$300bn tranche of Chinese imports – a tranche which includes mostly consumer goods, from sneakers to iPhones. The tariffs will apply from September.

That time gap, and the fact it’s only a 10% tariff and not 25%, suggest Trump is trying to turn the screws on Beijing slowly in the hope of forcing a resolution. It leaves time for a concession to be reached, and it leaves room for greater pain if China retaliates, ie an increase to 25%.

On the announcement, the Dow promptly fell -600 points, turning up 300 into down -300.

The irony here is that the two main factors cited by Powell as reason for one rate cut were trade uncertainty and slowing global manufacturing. The PMI result showed US manufacturing slowing further, and Trump’s announcement increased trade uncertainty. Both should prompt the Fed into further cuts. Yet Wall Street rallied on one piece of news and plunged on the other.

When asked for a response to the new tariffs by CNBC, the head of the US Footwear & Apparel Retailers Association replied “we’re cooked”.  The tariffs will either wipe out margins, or force higher prices and thus wipe out sales. The US consumer represents 70% of US GDP (that’s including healthcare spending; the real number is closer to 56%). Clearly the Fed will have to act.

Which raises the question: when is bad news actually bad news?

The US ten-year yield has fallen -13 basis points to 1.89% in anticipation more Fed rate cuts are coming. It’s not just the retailers who are “cooked”, but banks as well.

And let us not forget the US earnings season remains ongoing. Earlier results suggested expectations of a net decline in S&P500 earnings were too pessimistic, with a positive result looking more likely. Well with 71% of the S&P now having reported, FactSet is projecting a net -1.4% fall.

The VIX volatility index jumped 11% to 18. If uncertainty has escalated, it includes the uncertainty as to whether further Fed rate cuts can actually save the US economy in the face of a trade war. Trade war escalation will only feed further into global slowing.

Commodities

One might have expected a more negative response in base metals, particularly considering iron ore and oil have taken a hit.

It’s one step back and two steps forward for gold, as central banks gear up to go back into GFC mode.

On balance the US dollar is only down-0.2%, but the Aussie has fallen -0.7% to US$0.6797. Time to put flowers in your hair.

Today

The SPI Overnight closed down -15 points or -0.2%. The S&P500 fell -0.9%.

Locally we’ll see the June quarter GDP and month of June retail sales today, which will be interesting after David Jones yesterday declared a “retail recession”.

Amidst all that has happened in the past 48 hours, it’s jobs night in the US tonight.

The Australian share market over the past thirty days…