Overnight: On Hold

World Overnight
SPI Overnight (Dec) 6676.00 + 6.00 0.09%
S&P ASX 200 6689.50 – 55.90 – 0.83%
S&P500 3046.77 + 9.88 0.33%
Nasdaq Comp 8303.98 + 27.12 0.33%
DJIA 27186.69 + 115.27 0.43%
S&P500 VIX 12.33 – 0.87 – 6.59%
US 10-year yield 1.80 – 0.04 – 2.02%
USD Index 97.48 – 0.21 – 0.21%
FTSE100 7330.78 + 24.52 0.34%
DAX30 12910.23 – 29.39 – 0.23%

By Greg Peel

Rampant Inflation

The ASX200 opened down -24 points in the first hour just as the futures had called it, following mild weakness on Wall Street that was as much about dips for Google and Apple as it was about a potential delay in the phase one trade deal. But the initial fall was ultimately more than doubled following the release of the September quarter CPI result.

Headline inflation rose 0.5% in the quarter for a 1.6% annual rate, exactly as forecast. Quelle horreur!

Clearly there was some “hope” the numbers would surprise to the downside again, as they had done the past couple of quarters, thus forcing the RBA into action next week, despite the fact no one expected the RBA to act next week anyway.

And despite the fact another -25 points is likely to achieve little.

All sectors closed in the red, led by telcos (-1.5%) and staples (-1.4%), with the latter exacerbated by Woolworths ((WOW)) having slayed its rival on September quarter sales growth but admitting it had ripped off staff by $300m. To be fair to Woolies, management blew its own whistle, and pointed to the complexity of enterprise bargaining agreements.

The banks (-0.9%) had a big impact, as no rate cut means no chance to further reprice mortgages and upset the government.

The “outperformer” was industrials, which fell only -0.2% after sector heavyweight Transurban ((TCL)) fell only -0.14%. One might have though this popular yield play would have joined the chorus.

There was nothing much of note in the day’s individual stock winners – short covering continues in lithium miners – but biggest loser on the day was Costa Group ((CGC)), which came back on the boards following its heavily discounted capital raising and duly fell -24%.

The heavens only know why Speedcast International ((SDA)) jumped 11% on Tuesday and fell -8.7% yesterday, while Bega Cheese ((BGA)) fell another -7.6% in the second session following its profit warning.

While monetary policy may have been a trigger, we might note that today is the last day of the month, and ahead of yesterday the month had produced a 4% rally, so perhaps what we really witnessed was a bit of day-before locking in of profits.

The futures are up a mere 6 points this morning with the S&P500 up 0.3% to another new high, so today we might just let October quietly pass.

All Fixed

Four hikes up and three cuts back – now the Fed funds rate is right in the sweet spot at 1.50-1.75% after a -25 point cut, Jerome Powell believes.

It is universally acknowledged the Fed’s fourth hike in 2018 was a mistake. The first cut in 2019 fixed that, and subsequent cuts reflect the deterioration of the global economy in the face of trade war escalation. Now that things are looking a little brighter on the trade front, the FOMC acknowledged, and a little less dangerous on the Brexit front, monetary policy is about where it should be for the foreseeable future.

No more cuts? Sell!

But when asked whether trade resolution would lead the Fed back into hiking mode, Powell said inflation would have to be “materially” above the 2% target before the FOMC would consider such a move.

Buy!

And so the S&P500 hit another new all-time high.

Ahead of the Fed release, the first estimate of US September quarter GDP came in at 1.9%, just short of June’s 2.0%, and well above forecasts of 1.6%. Is this good news or bad? Well we don’t know, because ahead of the Fed release Wall Street stood still.

Likely it’s good, and also justifies an “on hold” Fed, at least until the first revision is made.

The October private sector jobs report showed 125,000 new jobs added, bang on expectation.

Earnings results on the day were again to the net positive side, although Yum Brands (KFC, Pizza Hut etc) fell -6%.

M&A was again in the frame, with Fiat Chrysler (up 5%) and Peugeot (up 4%) confirming they are in merger talks.

Johnson & Johnson (Dow) announced independent tests had found no asbestos in its baby powder. It rose 3%.

After the bell, Facebook is up 2.5% post result and Apple (Dow) up 2% after having initially fallen -3%. So a positive bias is likely for Halloween.

On the trade front, the White House assured the planned signing of the phase one deal would occur within the previously suggested time frame, despite Chile having cancelled the APEC summit due to civil unrest. The summit is yet to be rescheduled, but the White House had already warned the paperwork may not have been ready in time for Chile anyway.

So add it all up and Wall Street is pretty happy, ahead of historical strength in the last two months of the year, other than last year.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1494.20 + 5.50 0.37%
Silver (oz) 17.83 + 0.04 0.22%
Copper (lb) 2.66 – 0.01 – 0.30%
Aluminium (lb) 0.79 + 0.00 0.18%
Lead (lb) 1.02 – 0.02 – 2.11%
Nickel (lb) 7.63 + 0.08 1.06%
Zinc (lb) 1.16 – 0.01 – 0.45%
West Texas Crude 54.89 – 0.54 – 0.97%
Brent Crude 60.52 – 0.97 – 1.58%
Iron Ore (t) futures 85.10 – 0.40 – 0.47%

Base metal prices continue to provide no signals of any note. LME trading closed ahead of the Fed.

Oil prices reflect the weekly US crude inventory lottery.

The Aussie rose yesterday on the CPI numbers but the bulk of the 0.5% gain to US$0.6898 was post-Fed, with the greenback falling -0.2%. Basically the Fed has cut and the RBA won’t, for now.

Today

The SPI Overnight closed up 6 points.

Building approval and private sector credit numbers are out locally today.

China will release October PMIs.

The Bank of Japan holds a policy meeting.

The eurozone reports its GDP, what there is of it.

PCE inflation numbers are due in the US, but no longer matter for the time being.

Hang on to your hats, ANZ Bank ((ANZ)) kicks off bank earnings season today.

The last of the September quarter production reports are due, including those of Iluka Resources ((ILU)) and Origin Energy ((ORG)), while Rio Tinto ((RIO)) hosts a strategy day.

On today’s AGM list are Adelaide Brighton ((ABC)), Blackmores ((BKL)), Challenger ((CGF)), and Reliance Worldwide ((RWC)), among others.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALL ARISTOCRAT LEISURE Downgrade to Neutral from Outperform Credit Suisse
CGC COSTA GROUP Downgrade to Neutral from Buy Citi
Downgrade to Underperform from Neutral Macquarie
COL COLES GROUP Downgrade to Underperform from Neutral Credit Suisse
CWY CLEANAWAY WASTE MANAGEMENT Upgrade to Neutral from Underperform Credit Suisse
DMP DOMINO’S PIZZA Downgrade to Neutral from Buy UBS
FLN FREELANCER Upgrade to Neutral from Sell UBS
LLC LENDLEASE Upgrade to Buy from Accumulate Ord Minnett
PLS PILBARA MINERALS Downgrade to Neutral from Outperform Macquarie
RRL REGIS RESOURCES Upgrade to Buy from Neutral Citi
SGM SIMS METAL MANAGEMENT Upgrade to Buy from Neutral Citi
Upgrade to Neutral from Underperform 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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