Overnight: Not So Sure

World Overnight
SPI Overnight (Dec) 6686.00 + 19.00 0.28%
S&P ASX 200 6697.10 + 10.20 0.15%
S&P500 3074.62 – 3.65 – 0.12%
Nasdaq Comp 8434.68 + 1.48 0.02%
DJIA 27492.63 + 30.52 0.11%
S&P500 VIX 13.10 + 0.27 2.10%
US 10-year yield 1.87 + 0.08 4.48%
USD Index 97.95 + 0.40 0.41%
FTSE100 7388.08 + 18.39 0.25%
DAX30 13148.50 + 12.22 0.09%

By Greg Peel

Choppy Times

As to why the futures had suggested the ASX200 would be up 45 points yesterday was unclear, given Wall Street rose only mildly on a bit more talking up of the trade deal and there was no support from commodity prices. But computers don’t ask questions.

The index was up 39 points in the first six minutes, and then turned tail for the rest of the morning. By midday the index was mildly lower.

The big event of the day was the return to the boards of Westpac ((WBC)), having successfully put away its placement. The raising of new capital by one of Australia’s biggest companies in by far the biggest sector of the Australian market was always going to prompt a lot of institutional repositioning and reweighting of allocations within the sector and the market.

Westpac fell -4.5% to begin with, but by the close had closed that gap to -2.5%. The action began around midday as buyers moved in and after a period of bank-bashing since ANZ Bank’s ((ANZ)) shock franking reduction the other Big Three all closed up 0.4-0.8%. But the major beneficiaries were the listed fund managers.

Magellan Financial ((MFG)) topped the leaders’ board on the day with a 3.8% gain, Janus Henderson took silver with 3.7% and Pendal Group ((PDL)) got the bronze with 3.5%. Very even moves, suggesting a block buy into that sub-sector. We note that while Janus Henderson and Pendal have struggled this year, Magellan has starred, so no differentiation there.

The financials sector closed the day up 0.07%. Westpac v. The Rest.

As the afternoon wore on, the market became distracted by the day’s other major event.

The RBA left its cash rate on hold at 0.75%.

“The easing of monetary policy since June is supporting employment and income growth in “Australia and a return of inflation to the medium-term target range.

The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth.”

No cut is now expected next month either. However…

“The main domestic uncertainty continues to be the outlook for consumption.”

Given the surprising weakness of September retail sales data, this may be the problem for the RBA. Will sales pick up into Christmas?

Outside of the bank sector, there was not much else going on. Energy (+0.9%) won the day on still-rising oil prices, while materials (+0.3%) ignored a drop in the oil price and profit-takers moving in to exploit a week of short-covering in lithium miners. Pilbara Resources ((PLS)) and Galaxy Resources ((GXY)) swung from being index leaders to index losers yesterday.

Here We Go Again?

Wall Street breathed a sigh of relief last night when the US services sector PMI for October was released. The big fear was that trade war-led weakness in manufacturing would eventually spill over into the much bigger services sector, having dragged on for so long, and thus kill the US economy.

The PMI came in at 54.7, up from 52.6 in September.

Wall Street was thus off to a positive start but it was news on the trade front that boosted the afternoon’s action.

The original “phase one” trade deal involved China buying a few more soybeans in return for the US not raising tariffs on the most recent tranche of goods to 30% from 25%. There was no mention of the planned December tranche.

Now China is pushing for the September tariffs to be completely withdrawn and the December tariffs to be withdrawn as a concession for signing the deal. The White House is reported to be considering such a concession, but in return would expect tougher intellectual property protections for US companies.

Call me old-fashioned, but isn’t this the same point we have reached every time a trade deal appeared to be close over the last two years, resulting in China walking away at the last minute and a furious Trump upping the tariff ante once more?

If the deal does get signed, well hallelujah. But the longer the negotiations drag out, the lower the chances. The Dow was up around a hundred points when this news broke, which is not that much in the scheme of things. And the indices faded to the close, suggesting there is indeed justifiable caution.

Boeing shares rose 2% on the day, after the CEO said he would forgo his bonus, which means the Dow ex-Boeing closed lower. The S&P actually did close lower.

Yet the US ten-year bond yield jumped another 8 basis points to 1.86% and gold fell over twenty bucks, in a “flight out of safety”.

A crunch is coming, one way or the other.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1484.40 – 24.20 – 1.60%
Silver (oz) 17.59 – 0.43 – 2.39%
Copper (lb) 2.67 + 0.01 0.49%
Aluminium (lb) 0.82 + 0.00 0.50%
Lead (lb) 0.99 – 0.01 – 0.56%
Nickel (lb) 7.39 – 0.15 – 1.94%
Zinc (lb) 1.16 – 0.01 – 0.64%
West Texas Crude 57.19 + 0.60 1.06%
Brent Crude 62.95 + 0.78 1.25%
Iron Ore (t) futures 82.70 0.00 0.00%

No obvious trade excitement on the LME and iron ore did indeed close unchanged.

Yet oil traders did cite trade optimism for further gains.

These hissy fits for gold are becoming rather regular (as the bond market rules over gold too); each time the price eventually gets back above US$1500/oz.

The US dollar rose 0.4% which should have sent the Aussie lower, if the RBA hadn’t hinted it was on hold for now. The Aussie’s up 0.1% at US$0.6893.

Today

The SPI Overnight closed up 17 points or 0.3%. More optimism.

Boral ((BLD)) holds its AGM today, as do Corporate Travel Management ((CTD)) Estia Health ((EHE)) and Virgin Australia ((VAH)).

Pendal Group is due to provide a quarterly update.

Note that Bank of Queensland ((BOQ)) and ResMed ((RMD)) go ex-dividend.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ABC ADELAIDE BRIGHTON Upgrade to Neutral from Sell UBS
BKL BLACKMORES Downgrade to Underperform from Neutral Credit Suisse
CSR CSR Upgrade to Neutral from Sell Citi
ILU ILUKA RESOURCES Downgrade to Neutral from Outperform Macquarie
JHC JAPARA HEALTHCARE Downgrade to Lighten from Hold Ord Minnett
MQG MACQUARIE GROUP Downgrade to Neutral from Outperform Credit Suisse
NVX NOVONIX Downgrade to Hold from Add Morgans
ORG ORIGIN ENERGY Downgrade to Hold from Add Morgans
REG REGIS HEALTHCARE Downgrade to Hold from Buy Ord Minnett
Downgrade to Neutral from Buy UBS
RNO RHINOMED Downgrade to Hold from Add Morgans
RRL REGIS RESOURCES Upgrade to Add from Hold Morgans
SCG SCENTRE GROUP Upgrade to Accumulate from Hold Ord Minnett
VCX VICINITY CENTRES Downgrade to Hold from Accumulate Ord Minnett

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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