Overnight: Hope And Anxiety

World Overnight
SPI Overnight (Dec) 6571.00 + 42.00 0.64%
S&P ASX 200 6547.10 + 0.40 0.01%
S&P500 2938.13 + 18.73 0.64%
Nasdaq Comp 7950.78 + 47.04 0.60%
DJIA 26496.67 + 150.66 0.57%
S&P500 VIX 17.57 – 1.07 – 5.74%
US 10-year yield 1.66 + 0.07 4.34%
USD Index 98.70 – 0.42 – 0.42%
FTSE100 7186.36 + 19.86 0.28%
DAX30 12164.20 + 69.94 0.58%

By Greg Peel

Headline Rollercoaster

The ASX200 closed where it opened yesterday, but traders were left feeling a little woozy. It was quite a wild ride.

After a decent rebound on Wall Street overnight our futures suggested up 45 points before the open. It was a tentative start nonetheless, and by 11am the index had only added 24 points before a report from the South China Morning Post hit the wires.

It suggested the Chinese trade delegation were planning to leave Washington at the end of day one of the planned two-day trade negotiations. The Dow futures fell -300 points. The ASX200 fell -41 points in the next hour.

Not true, said the White House. The ASX200 rallied 32 points in the next half hour.

Clearly the computers had run amok on headline algorithms, but it was all just a bit much for the humans. As the afternoon progressed, it appeared the best place to be was on the sidelines, safe from the inestimable volatility.

The biggest move in any sector was 0.5% either way yesterday, and all moves cancelled each other out. Five sectors closed in the green and five in the red, and outside of adjusting for some commodity price moves, there’s really nothing much we can read into it. With trade talks underway, the risk is purely binary.

Among individual index stocks, packaging company Orora ((ORA)) won the day with a 13.9% gain after selling its Australasian fibre business to Nippon Paper for a tidy profit that will be returned to shareholders.

Polynovo ((PNV)) jumped 11.9% on no news, but being a skin regeneration specialist, and Clinuvel Pharmaceuticals ((CUV)) jumping 60% the day before on approval for a skin treatment, maybe it’s just a punt.

Or maybe a switch trade. Clinuvel fell back -14.8%.

Resolute Mining ((RSG)) fell -11.2% after disclosing issues at its Syama gold mine.

In economic news, the series of RBA rate cuts may have not inspired consumers but it’s a different story for property investors, who for the past year have been all but shut out of the market on lending restrictions, leading to the housing pullback.

Total housing finance grew 2.9% in August, with owner-occupier loans rising 1.9% and investor loans 5.7% — the biggest jump in three years. Here we go again?

ANZ Bank economists don’t think so. They believe this is more of a “pop” after the long decline rather than the beginning of a V-bounce in housing. One thing is sure though – Philip Lowe will be banging his head against a brick wall. How can he save the economy from going into a government-led recession while at the same time preventing another housing bubble?

As the safety bars lifted and the riders dismounted after yesterday’s close, it was all eyes on Washington, where the trade talks were set to actually begin.

Let’s Meet

After the Dow futures had recovered from the headline scare, Wall Street started slowly but shot up after Trump tweeted that he will meet with Liu He on Friday. The Dow rose 250 points.

Protocol has it that the junior trade delegates first agree on an agenda, the senior delegates then thrash that out, and then finally those with the last word – in this case the US president and the Chinese vice premier – do the photo-op in the Oval Office, signing and swapping token leather-bound agreements. But the final stage can only be reached if stages one and two arrive at at least some sort of result.

Hence the fact Trump has said the meeting will go ahead implies some progress will have been made, and that’s a positive.

To date China has offered the concession of buying more US soybeans, and pork which it desperately needs anyway, in exchange for tariff relief. Last night reports suggested the White House is prepared to bring forward a previously agreed on currency deal, and suspend the October 15 tariff hike on US$250bn of Chinese exports to 30% from 25%, and allow some US companies to deal with Huawei.

Must be an election coming up.

It’s all still speculation at this stage, and experience suggests the whole thing could blow up any moment and the war won’t be over by Christmas. On that note, the biggest threat to the US economy will be planned tariffs on the final tranche of consumer goods, which so far have not rated a mention. Wall Street is sincerely hoping this tranche will be suspended as part of an interim deal, given the US consumer is the only thing driving the US economy.

Wall Street eased off towards the close, fearful of becoming overly confident. But traders won’t be relaxing given the talks will continue, perhaps late into the night.

Which means our market will again be beholden to any headlines or tweets today.

In other news, the US CPI came in flat for September.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1493.70 – 11.30 – 0.75%
Silver (oz) 17.49 – 0.23 – 1.30%
Copper (lb) 2.61 + 0.05 1.97%
Aluminium (lb) 0.79 + 0.01 0.84%
Lead (lb) 0.97 + 0.00 0.32%
Nickel (lb) 8.01 + 0.09 1.19%
Zinc (lb) 1.09 + 0.05 4.44%
West Texas Crude 53.71 + 1.07 2.03%
Brent Crude 59.30 + 1.01 1.73%
Iron Ore (t) futures 93.40 + 2.70 2.98%

Alongside the rally in US stocks, the US bond yield shot up 7 basis points and the US dollar index dropped -0.4%. That should have been a mathematical fillip for the gold price, but it fell back on the glimmers of trade hope.

Metals nevertheless perked up, on both the lower greenback and those glimmers.

Ditto oil.

The Aussie is up 0.5% at US$0.6760 on the greenback move but also given a trade resolution would be positive downunder.

Today

The SPI Overnight closed up 42 points or 0.6%, which seems rather bold in the circumstances.

Trade talks continue at least for a while through our morning and resume tonight.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
FLT FLIGHT CENTRE Upgrade to Outperform from Neutral Credit Suisse
NXT NEXTDC Upgrade to Add from Hold Morgans
SYD SYDNEY AIRPORT Upgrade to Outperform 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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