Overnight: Back To Business

World Overnight
SPI Overnight (Sep) 6703.00 + 9.00 0.13%
S&P ASX 200 6695.30 + 21.80 0.33%
S&P500 3005.70 + 7.74 0.26%
Nasdaq Comp 8186.02 + 32.47 0.40%
DJIA 27110.80 + 33.98 0.13%
S&P500 VIX 14.44 – 0.23 – 1.57%
US 10-year yield 1.81 – 0.03 – 1.58%
USD Index 98.22 – 0.43 – 0.44%
FTSE100 7320.40 – 1.01 – 0.01%
DAX30 12372.61 – 7.70 – 0.06%

By Greg Peel

Minutes of Weakness

“Recent indicators suggested trade-related activity would remain weak for some time.”

“Forward-looking indicators had continued to suggest that employment growth would moderate over the following six months.”

“The bank found little evidence of increased spending following the tax cuts for low and middle income households.”

And on that note, the ASX200 swung from being down -24 points at 11.30am to close up 21.

The RBA did offer a couple qualifications in the minutes of the September meeting released yesterday at 11.30am. The board noted Australian businesses did not appear to have been impacted by the trade war to the level of other economies, and proposed that if tax cut savings were used to pay down household debt rather than for spending, spending would then follow in time.

Yet “members judged that it was reasonable to expect that an extended period of low interest rates would be required in Australia.” The board was not specific about the timing of any further cut, but the market isn’t waiting to find out. Next month has shortened in the odds, while a cut by the end of the year is considered a given.

To that end, all sectors closed in the green yesterday, bar two. Utilities (+1.3%) was the best performer but it was not just the yield-paying sectors joining in.

Energy (+1.0%) kicked on following Monday’s 4% spike and despite talk of lost Saudi supply being readily covered by reserves. The Johnny-come-latelies might rue that decision – oil prices gave back half their 13% Monday rally last night.

The materials sector had joined in the oil stock scramble on Monday because BHP Group ((BHP)) is a major oil producer, but fell -1.0% yesterday as metal prices fell on weak Chinese trade data (which were out on Monday), including iron ore.

The only sector to clearly buck the day’s trend was consumer discretionary (-0.6%). If a rate cut were expected, this would be one sector that would typically be a beneficiary. But the market clearly heeded the RBA’s evidence of no sign of consumer spending.

There were no remarkable moves among individual stocks yesterday. All top five winners and losers moved by 3.5-5% either way. Inghams Group ((ING)) topped the losers just by going ex, while Ramsay Health Care ((RHC)) fell because the Paul Ramsay Foundation sold 22m shares in a placement, perhaps to fund a course in some other civilisation.

Overnight we’ve seen oil prices fall back -6% and Wall Street come home with a wet sail. Our futures are up 9 points this morning.

As You Were

The Saudi oil minister last night assured full crude production would be back on line by around the end of the month. On that note oil prices halved the gains of Monday night.

That still leaves us with about a 6% reset for oil prices. Gains on Monday night assumed a supply disruption which now seems trivial, but what is not trivial are the geopolitical implications. A report last night suggested the White House now knows exactly where the drones were launched – south-west Iran. Hence your remaining 6%.

On the subject of production, US industrial production jumped 0.6% in August – the biggest move in a year – against 0.4% expectation. Given Monday’s data showed the weakest Chinese industrial production growth since 2002, one might be able to point to who’s winning the trade war.

But the reality is the US manufacturing industry is considered to be “in recession”, with the PMI falling into contraction last month. Nobody wins a trade war. Last night the president provided another one of his now hackneyed and increasingly hollow pep talks, suggesting a deal could be nigh with talks resuming this week.

At least we do know China has begun to back off its tariffs.

The trade comments were considered a positive for Wall Street last night but stock indices opened only modestly higher. It was a very late buying program that turned what looked like being a flat close into a 0.3% gain for the S&P.

Most notable, however, was another session of clear rotation – back the other way. All year investors had been buying defensives and selling cyclicals, right up until last week when suddenly the rush was on to buy anything that had fallen over the year and sell anything that had risen. Then last night someone called time, and the brief reversal period was over. Utilities, REITs and staples were bought, industrials, banks and discretionary were sold, and of course energy.

This might be because the Fed decision is due tonight, and traders were looking to square up. In the wake of very solid retail sales and industrial production numbers and a stock market within a whisker of its all-time high, a rate cut looks illogical. But -25bp is deemed required to bring the US in line with the rest of the world. What happens next is what Wall Street hopes to learn tonight.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1500.90 + 3.00 0.20%
Silver (oz) 18.00 + 0.18 1.01%
Copper (lb) 2.62 – 0.06 – 2.14%
Aluminium (lb) 0.79 – 0.01 – 0.65%
Lead (lb) 0.93 – 0.02 – 1.83%
Nickel (lb) 7.69 – 0.14 – 1.74%
Zinc (lb) 1.05 + 0.00 0.17%
West Texas Crude 58.81 – 3.07 – 4.96%
Brent Crude 64.17 – 4.00 – 5.87%
Iron Ore (t) futures 96.50 – 1.25 – 1.28%

It appears the weak Chinese data are still weighing on metals prices.

Gold stood still, which is a little surprising given the US dollar fell -0.4% and the White House pointed the finger at Iran.

The greenback reversal from Monday night meant the Aussie is stable – again – at US$0.6863, after having initially dropped on the RBA minutes.

Today

The SPI Overnight closed up 9 points.

Fed decision and press conference tonight.

Kathmandu ((KMD)) releases its earnings result.

Webjet ((WEB)) hands out a decent dividend.

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
ECX ECLIPX GROUP Upgrade to Buy from Neutral Citi
EVN EVOLUTION MINING Upgrade to Outperform from Underperform Macquarie
GOR GOLD ROAD RESOURCES Upgrade to Outperform from Neutral Macquarie
NCM NEWCREST MINING Upgrade to Neutral from Underperform Macquarie
NST NORTHERN STAR Upgrade to Outperform from Underperform Macquarie
NUF NUFARM Downgrade to Neutral from Outperform Macquarie
OGC OCEANAGOLD Upgrade to Outperform from Neutral Credit Suisse
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 Outperform from Underperform Macquarie
SAR SARACEN MINERAL Upgrade to Outperform from Underperform Macquarie
SBM ST BARBARA Upgrade to Outperform from Underperform Macquarie
SGM SIMS METAL MANAGEMENT Downgrade to Neutral from Buy Citi
Downgrade to Underperform from Neutral Macquarie

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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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