Overnight: Poised

World Overnight
SPI Overnight (Dec) 6704.00 – 14.00 – 0.21%
S&P ASX 200 6736.50 + 84.50 1.27%
S&P500 2989.69 – 5.99 – 0.20%
Nasdaq Comp 8124.18 – 24.52 – 0.30%
DJIA 27001.98 – 22.82 – 0.08%
S&P500 VIX 13.68 + 0.14 1.03%
US 10-year yield 1.75 – 0.02 – 1.30%
USD Index 98.02 – 0.29 – 0.29%
FTSE100 7167.95 – 43.69 – 0.61%
DAX30 12670.11 + 40.32 0.32%

By Greg Peel

Stuff the IMF

Two days after the IMF warned Australia’s economy is going down the gurgler, the stock market takes off on a flyer. While IMF forecasts typically represent a mere catch-up to reality, could it be Josh has had a trip to Damascus?

Maybe, just maybe, the government might consider bringing forward fiscal stimulus. Do my ears deceive me? Not at the expense of a surplus mind.

As to whether this glimmer of economic hope was evident in yesterday’s market surge is unclear, but our 1.3% gain outpaced the S&P500’s 1.0% without any domestic developments to draw upon. While all of healthcare, telcos, and the two consumer sectors posted gains of 2%, it was a 1.5% jump for the banks that really piled on the points.

Presumably this jump reflected a solid session overnight for US banks after four of the biggies reported better than expected earnings results. The main focus there was on net interest margins, which while lower on lower interest rates, were not as bad as feared. With Australian rates also low, and our banks about to report full-year earnings, perhaps JP Morgan, Citi and friends have boosted expectations downunder.

Never mind our cash rate is some -100 basis points lower.

There was also a surprise announcement that Beijing had injected US$28m of liquidity via loans to banks.

It’s not often you see a gain of over 1% for the ASX200 with materials sitting out the session. And very rarely would the main “growth” sector not top the percentage moves amid such “risk on” sentiment. But both materials and IT closed flat yesterday.

While materials again fought against a lower gold price, which incidentally is higher overnight, the big diversifieds failed to fire as well after Rio Tinto ((RIO)) issued an underwhelming production report and iron ore futures fell through the session.

In IT, it was all about one sector heavyweight cancelling out gains elsewhere.

In a tale of “what makes a market”, on Monday Morgan Stanley initiated coverage of Afterpay Touch ((APT)) with an Overweight rating and a $44.00 price target, suggesting the company has revolutionised point-of-sale finance and disrupted traditional payments and consumer finance operators, achieving mass adoption in Australia and two million users in its first year in the US.

The stock rose 3%.

Yesterday UBS initiated coverage with a Sell rating and a $17.25 target. Yes, that’s right. The stock closed over $36 on Monday. UBS’ view is based upon research suggesting the average user of BNPL services is below average credit-worthy, which means, according to UBS, this sector continues to carry above average risk for regulation.

The stock fell -7.2%.

Beyond that, we can say yesterday was largely a market-wide buying session. Wall Street was a tad lower last night so the -14 point give-back suggested by our futures this morning seems reasonable.

Having a Rest

After a few sessions of trade-related optimism, Wall Street is now focused on earnings results. The banks kicked things off on Monday night, and Bank of America chimed in last night with a similarly positive result.

News from across The Pond suggests Johnson and the EU may be within a whisker of agreeing on a deal. The pound continues to reflect optimism. But as I, and the rest of the world has noted, Theresa May tried three different deals and couldn’t get one of them through the UK parliament. Can Boris?

As the session opened, traders were somewhat disturbed by a weak US retail sales number. Sales fell -0.3% in September – the first fall in seven months – when forecasts had a 0.3% gain. That’s a pretty big miss. If the US consumer retreats, so too does the US economy.

Yet the S&P consumer discretionary sector rose on the day. While September was weak, the August result was revised up to 0.6% growth from a prior 0.4%. There is a suggestion US consumers had decided to bring forward purchases ahead of tariffs to be placed on a range of consumer goods in the last round, currently set for December, hence the September vacuum.

There is also a suggestion your average US consumer wouldn’t know what a tariff was.

The data were worth an -80 point initial drop in the Dow, but soon the index recovered before spending the rest of the session doing not much. BofA was the major result release on the day, while traders had to wait until after the closing bell for results from Netflix and IBM (Dow).

In the aftermarket, Netflix is up 7.5% and IBM down -4%, so maybe tonight might be flattish as well.

The S&P500 is sitting just shy of all-time highs, representing another round of pricing in hope on the trade front. But with nothing yet signed, Wall Street knows all hope can be dashed with just one tweet.

The market had already been expecting better-than-forecast earnings results, on the belief analysts were too pessimistic heading into the season. So from here it will likely take something extraordinary on the earnings to push the S&P to a new all-time high, if this can at all be achieved ahead of any resolution on trade.

A Brexit deal being passed might provide some impetus (EU debates tonight, UK parliament sits on Saturday night), as would peace in the Middle East.

Okay, so no need to get carried away just yet.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1489.60 + 8.60 0.58%
Silver (oz) 17.36 0.00 0.00%
Copper (lb) 2.58 – 0.02 – 0.83%
Aluminium (lb) 0.77 – 0.01 – 1.12%
Lead (lb) 0.98 + 0.01 1.36%
Nickel (lb) 7.62 – 0.13 – 1.71%
Zinc (lb) 1.10 – 0.01 – 0.72%
West Texas Crude 53.29 + 0.40 0.76%
Brent Crude 59.32 + 0.49 0.83%
Iron Ore (t) futures 92.05 0.00 0.00%

Our materials sector looks set to be the laggard again today, with perhaps just a slight offset from the gold miners.

The Aussie is steady at US$0.6763 despite the US dollar falling -0.2%.

Today

The SPI Overnight closed down -14 points.

Locally we’ll see September jobs numbers today. The RBA is on the edge of its seat.

The US will be focused on industrial production and Philadelphia Fed manufacturing data.

It’s another busy day in the local market, with AGMs to be held by ARB Corp ((ARB)), Aurizon ((AZJ)), Perpetual ((PPT)) and Whitehaven Coal ((WHC)) among others, while BHP Group ((BHP)), South32 ((S32)), Northern Star ((NST)), Santos ((STO)) and Woodside Petroleum ((WPL)) all post production reports.

Bank of Queensland ((BOQ)) reports earnings.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALQ ALS LIMITED Downgrade to Neutral from Outperform Credit Suisse
AQZ ALLIANCE AVIATION Upgrade to Outperform from Neutral Credit Suisse
AWC ALUMINA Downgrade to Lighten from Hold Ord Minnett
BOQ BANK OF QUEENSLAND Downgrade to Reduce from Hold Morgans
HT1 HT&E LTD Downgrade to Underperform from Neutral Macquarie
NCK NICK SCALI Upgrade to Buy from Sell Citi
PLS PILBARA MINERALS Downgrade to Sell from Hold Ord Minnett
PPT PERPETUAL Upgrade to Neutral from Underperform Macquarie
PRU PERSEUS MINING Upgrade to Outperform from Neutral Credit Suisse
RRL REGIS RESOURCES Upgrade to Neutral from Underperform Credit Suisse
SBM ST BARBARA Upgrade to Outperform from Underperform Credit Suisse
SFR SANDFIRE Downgrade to Hold from Accumulate Ord Minnett
STO SANTOS Downgrade to Equal-weight from Overweight Morgan Stanley
Downgrade to Hold from Buy Ord Minnett
SUN SUNCORP Downgrade to Underperform from Neutral Credit Suisse
SXL SOUTHERN CROSS MEDIA Downgrade to Neutral from Outperform 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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