Overnight: Trading Places

World Overnight
SPI Overnight (Dec) 6721.00 + 10.00 0.15%
S&P ASX 200 6717.50 + 35.90 0.54%
S&P500 3006.79 + 0.06 0.00%
Nasdaq Comp 8182.88 + 5.49 0.07%
DJIA 27094.79 – 52.29 – 0.19%
S&P500 VIX 14.05 + 0.10 0.72%
US 10-year yield 1.77 – 0.01 – 0.67%
USD Index 98.36 – 0.19 – 0.19%
FTSE100 7356.42 + 42.37 0.58%
DAX30 12457.70 + 68.08 0.55%

By Greg Peel

Stop the World

Trading on the ASX yesterday was no less than extraordinary. When the dust had settled on Wall Street on Wednesday night, US markets offered a fairly benign response to the Fed rate cut and subsequent rhetoric, deciding they were comfortable with the outcome, and our futures suggested a tepid 9 point gain. Half an hour after the bell the ASX200 was up 60 points.

It then held around up 50 up to the jobs report release, spiked slightly, but at 1pm crashed to be up only 20 points, by 3pm was back up 50, and at 4pm closed up 35.

I did warn that it was the SPI futures and options and ASX options expiry day, which can often lead to non-fundamental volatility.

Fundamentally, the odds of another RBA rate cut as soon as next month have shortened again following yesterday’s jobs numbers. At face value, a healthy 35,000 jobs were added in August and the participation rate ticked up once more to another new record. But – and this is the big “but” – the unemployment rate ticked up to 5.3% from 5.2%. Stop! You’re going the wrong way.

The 35,000 new jobs were net of 50,000 part time jobs being added and -15,000 full-time jobs being lost. Underemployment rose to 8.6% from 8.4%. See above.

Speaking of dust settling, oil prices have now stabilised, for the time being, after their brief spike and energy (-0.2%) and materials (-0.1%), wherein lies oil producer BHP Group ((BHP)), were the only two sectors not to close in the green. Every other sector closed up 0.8-2%. Healthcare shows a 0.1% gain, but that’s net of Cochlear ((COH)) going ex.

So apparently everyone had expected a -25 point Fed rate cut except Australia. The argument is fair – the further the Fed cuts, the more attractive our high yield-paying stock market becomes, particularly when the Aussie is low. Yesterday it fell back into the Summer of Love on the jobs report (US$0.6793).

Let’s face it, outside of young growth stories in the IT sector, and smaller miners that are in development, pretty much every sector can boast solid dividend payers these days.

Building materials producer/property investor Brickworks ((BKW)) topped the winners’ board yesterday with a 6.4% gain following a strong earnings result, while coal miner New Hope Corp ((NHC)), which posted a miss on Wednesday, topped the losers’ board by falling -4.2%.

The new December front month futures contract closed up 10 points this morning and Wall Street closed flat, so we may be in for a Friday sort of Friday. But then the futures closed up 9 points yesterday morning…

Now to Trade

It is typical to see a strong move on Wall Street in either direction the morning after a Fed meeting once the wider market, which stayed out of the post-decision argy-bargy on the day, has had time to digest the implications. This time they looked, and they saw that it was good. Wall Street had closed flat, ultimately, on the Wednesday night and closed flat again last night.

A defensive tone remained, nonetheless, with your REITs, utilities and staples being bought and your industrials, materials and banks being sold.

Unlike August, high-flying software companies are no longer being sold down since Microsoft announced an increased dividend and share buyback. That stock is again nearing its all-time high above a trillion dollar market cap.

The monetary policy question now settled to a valid assumption that the Fed will cut if the trade war escalates and not if there is progress, if one reads between the lines. For this is the swing factor. The Fed is caught between relatively strong US domestic growth and weak global growth, and trade is a pervasive swing factor.

“Escalating trade conflicts are taking an increasing toll on confidence and investment,” said an OECD report released last night, “adding to policy uncertainty, aggravating risks in financial markets and endangering already weak growth prospects world-wide.”

Trade meetings among the junior delegates have now begun in Washington and are set to progress next week, ahead of the big guns coming together thereafter. So for Wall Street it’s now a question of watching and waiting for the next piece of news.

Hopefully that next piece of news is about trade, and not Iran.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1498.70 + 4.80 0.32%
Silver (oz) 17.75 + 0.02 0.11%
Copper (lb) 2.60 – 0.01 – 0.40%
Aluminium (lb) 0.80 + 0.00 0.49%
Lead (lb) 0.94 + 0.01 0.59%
Nickel (lb) 7.88 + 0.11 1.37%
Zinc (lb) 1.05 – 0.00 – 0.10%
West Texas Crude 58.68 + 0.57 0.98%
Brent Crude 64.81 + 1.28 2.01%
Iron Ore (t) futures 92.00 – 4.10 – 4.27%

The first chance for base metal traders to respond to the Fed last night brought nothing remarkable.

Iron ore has thrown a bit of a wobbly though.

Oil prices had initially shot up last night on a report from the WSJ the Saudis are looking to buy in crude from OPEC frenemies, notably Iraq, in order to make up lost production. So much for having processing back on line by month’s end. It always did sound a bit ambitious.

But prices fell back again when a tropical storm hit Texas and shut down coastal refineries. This suggests US crude inventories will back up, and thus prices fell back again, albeit still closing higher on the day.

Despite the US dollar falling -0.3%, the Aussie is down -0.5% on the jobs report, as noted.

Today

The SPI Overnight closed up 10 points.

Premier Investments ((PMV)) reports earnings today, while Sydney Airport ((SYD)) publishes its latest traffic numbers.

The ASX index rebalance becomes effective today.

If yesterday’s expiry day on the ASX is anything to go by, what should be another quiet session on Wall Street tonight may not be, given the “quadruple witching” equity derivative expiry.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BPT BEACH ENERGY Downgrade to Hold from Buy Ord Minnett
DCN DACIAN GOLD Downgrade to Underperform from Neutral Macquarie
KMD KATHMANDU Downgrade to Neutral from Outperform Credit Suisse
NUF NUFARM Downgrade to Neutral from Outperform Macquarie
OGC OCEANAGOLD Upgrade to Outperform from Neutral Credit Suisse
QAN QANTAS AIRWAYS Upgrade to Overweight from Equal-weight Morgan Stanley
RHC RAMSAY HEALTH CARE Upgrade to Outperform from Neutral Macquarie
SGM SIMS METAL MANAGEMENT Downgrade to Neutral from Buy Citi
Downgrade to Underperform from Neutral Macquarie
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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