Overnight: Up The Escalator

World Overnight
SPI Overnight (Sep) 6661.00 – 16.00 – 0.24%
S&P ASX 200 6673.50 + 4.30 0.06%
S&P500 2997.96 – 9.43 – 0.31%
Nasdaq Comp 8153.54 – 23.17 – 0.28%
DJIA 27076.82 – 142.70 – 0.52%
S&P500 VIX 14.67 + 0.93 6.77%
US 10-year yield 1.84 – 0.06 – 3.26%
USD Index 98.65 + 0.37 0.38%
FTSE100 7321.41 – 46.05 – 0.63%
DAX30 12380.31 – 88.22 – 0.71%

By Greg Peel

Oil’s Well

The attack on two Saudi crude processing facilities, not product refineries, on the weekend understandably had the local energy sector surging yesterday, closing up 4.0%. With 5% of global crude production taken out of the market, crude prices jumped close to 20% in Asian trading yesterday before settling back by the end of the US session to be up 13%.

Lofty oil prices are not expected to hold for too long given (a) Saudi Arabia has plenty of stockpiles, (b) the US has stockpiles ready for release, as do other countries, (c) OPEC-plus has been curtailing production for a couple of years now hence can always up the ante and (d), the Saudis believe they can get the facilities back on line fairly swiftly.

The caveat is where this all leads on a geopolitical basis. Oil prices could go much, much higher if things turn nasty.

The materials sector rose 1.6% yesterday because BHP Group ((BHP)) is a major oil producer.

All other sectors bar one closed in the red as one might expect as a market-wide response to raised geopolitical risk. The exception was consumer staples, thanks to a Chinese government state-owned entity making a bid for Bellamy’s ((BAL)). It rose 55%. This will be a fun one for Josh and the FIRB.

Other China-reliant retailers traded in sympathy, both within and without dairy – Blackmores ((BKL)) jumped 9.4% — and the consumer discretionary sector fell only -0.03% compared to the biggest loser, industrials (-1.5%), being a major energy consumer.

China is clearly not that good at producing milk and if yesterday’s data are anything to go by, not much else either.

China’s industrial production grew by 4.4% year on year in August – the slowest pace since 2002 – down from 4.8% in July and well short of forecasts of 5.2%. Retail sales grew by 7.5%, down from 7.6% and below 7.9% forecasts. Fixed asset investment grew 7.5% in the year to August, down from 7.6% and below 7.9% forecasts.

While on any other day such numbers would have our market running scared anyway, the oil price already did its job and the weaker China’s economy appears the more confident the market becomes that a trade deal can be achieved.

No great surprise that Qantas ((QAN)) hit the biggest losers board yesterday with a -4.5% fall but this was well beaten by Sims Metal Management ((SGM)), which fell -13.3% after issuing a profit warning (reporting season only last month?), blaming the trade war.

Wall Street has seen a similar response overnight, with energy soaring and other sectors weak, but not a panic. Our futures are down -16 points this morning.

Measured Response

Trump is about the only person in the White House yet to point the finger squarely at Iran, preferring to wait for actual evidence he believes can provide confirmation. He does not want a war, so it’s timely that he ejected John Bolton last week.

The US energy sector is not the market-cap heavyweight it was years ago on Wall Street, paling now before the leviathan that is Big Tech, and nor is the US beholden to Middle East oil production as it was back in the seventies. All agree the market response would have been much worse if such strikes had occurred in times gone by.

As it was, energy went up and most other sectors fell, but a -0.3% fall for the S&P could be the case on any given day. TINA remains very much in play, hence any pullback is seen as a buying opportunity, no matter what the consequences.

And the consequences are now all that matter – not the temporary loss of export barrels. The rebels have said they will attack again, even though no one believes it was a bunch of underfed desert dwellers that launched missile-capable drones. If the satellite images show the drones came from the other direction, then the White House, and the world has a problem.

It is no surprise the US ten-year bond yield fell back -6 basis points last night and that gold jumped back up ten dollars, although again, in earlier times these moves would have been much more substantial, gold in particular.

The president does not want to take America to war in an election year nor kill off the current enthusiasm of the US consumer with crippling “gas” prices. Oil-led recessions don’t much help re-election campaigns, as Malcom Fraser came to learn. But if the evidence does convict Tehran, then Europe will likely be galvanised into backing the sanctions the US has imposed on Iran when previously it was sticking to the Obama deal. This would be a strong weapon for Trump.

We can only now wait and see.

Meanwhile, we might say the heat is off the Fed. Suddenly a -25 point cut that everyone expects anyway doesn’t seem quite so important.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1497.90 + 10.00 0.67%
Silver (oz) 17.82 + 0.41 2.35%
Copper (lb) 2.67 – 0.01 – 0.51%
Aluminium (lb) 0.80 – 0.01 – 0.89%
Lead (lb) 0.95 – 0.00 – 0.25%
Nickel (lb) 7.83 – 0.22 – 2.68%
Zinc (lb) 1.05 – 0.01 – 1.30%
West Texas Crude 61.88 + 7.03 12.82%
Brent Crude 68.17 + 7.95 13.20%
Iron Ore (t) futures 97.75 – 1.35 – 1.36%

It was the biggest one-day move in the oil price since the GFC.

Base metal and iron ore prices responded to the Chinese data.

The US dollar rose 0.4% but energy-producer Australia’s currency sat tight at US$0.6865.

Today

The SPI Overnight closed down -16 points or -0.2%.

The minutes of the September RBA meeting are out today.

The US will see industrial production numbers.

New Hope Corp ((NHC)) reports earnings today and Inghams Group ((ING)) is one stock going ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AQG ALACER GOLD Upgrade to Outperform from Underperform Macquarie
BSL BLUESCOPE STEEL Downgrade to Hold from Accumulate Ord Minnett
ECX ECLIPX GROUP Upgrade to Buy from Neutral Citi
EVN EVOLUTION MINING Upgrade to Neutral from Sell Citi
Upgrade to Outperform from Underperform Macquarie
GMG GOODMAN GRP Upgrade to Buy from Neutral UBS
GOR GOLD ROAD RESOURCES Upgrade to Outperform from Neutral Macquarie
MGR MIRVAC Upgrade to Neutral from Underperform Credit Suisse
NCM NEWCREST MINING Upgrade to Neutral from Sell Citi
Upgrade to Neutral from Underperform Macquarie
NST NORTHERN STAR Upgrade to Buy from Neutral Citi
Upgrade to Outperform from Underperform Macquarie
Upgrade to Neutral from Sell UBS
OGC OCEANAGOLD Upgrade to Buy from Neutral Citi
Upgrade to Buy from Neutral UBS
PRU PERSEUS MINING Upgrade to Outperform from Neutral Macquarie
RHC RAMSAY HEALTH CARE Upgrade to Neutral from Underperform Credit Suisse
RRL REGIS RESOURCES Upgrade to Neutral from Sell Citi
Upgrade to Outperform from Underperform Macquarie
Upgrade to Buy from Sell UBS
SAR SARACEN MINERAL Upgrade to Neutral from Sell Citi
Upgrade to Outperform from Underperform Macquarie
SBM ST BARBARA Upgrade to Neutral from Sell Citi
Upgrade to Outperform from Underperform Macquarie
SGM SIMS METAL MANAGEMENT Downgrade to Lighten from Hold Ord Minnett
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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