Overnight: Hold Fire

By Greg Peel

Bond Selling

The futures had suggested up 17 and the ASX200 duly opened up 18 points in the first twenty minutes yesterday, but there marked the peak for the day. Overnight, US bond yields had rallied strongly and the yield curve steepened on trade hopes, and that sentiment was matched downunder.

The Australian ten-year rallied 9 basis points to 1.26%. The twos rallied 5 points and the fives rallied 6, so steepening here as well.

The sharpness of the moves put bond-proxy equities in the spotlight – the stocks that have underpinned this market as rates have slid lower. Utilities closed down -1.1%, telcos -1.0%, consumer staples -0.9% and industrials, led by the bond-proxies therein, down -1.8%.

The banks might have fared worse than their -0.2% fall in different circumstances but after franking/dividend cuts, had already been de-rated. National Bank ((NAB)) reports today.

Selling gained momentum throughout the session as the index tracked a steady downward path. An excuse, thus, to take profits in healthcare stocks that have been leaders of late (-1.0%), while consumer discretionary (-1.1%) was likely spooked by a reported -9.1% fall in new car sales in October – the nineteenth straight month of falls. Not buying cars, not buying anything.

And IT of course has to be jettisoned quickly in any sign of a pullback (-1.9%).

Only the resource sectors escaped the vacuum, with energy steady and materials up 0.2%.

Had volume been light one might have assumed buyers were just stepping out of the way, but volume was solid, probably making up for Tuesday afternoon. This implies a level of conviction, but for the fact US bond yields have fallen back again overnight so the futures are up 28 points this morning with Wall Street flat.

Flippant market.

Corporate Travel Management ((CTD)) confirmed its full-year guidance at its AGM yesterday, which was worth 10.0% and top spot on the leaders’ board.

Coming in second was Pendal Group ((PDL)), up 9.5% on a very weak looking set of quarterly results at face value but clearly not as bad as feared. We recall that on Tuesday, all of Pendal, Magellan Financial ((MFG)) and Janus Henderson ((JHG)) curiously rallied an even ~3.5%. Magellan updated for the quarter yesterday and slipped a bit, but Janus Henderson, which reported late last month, gained another 3.2% to also make the leaders’ board.

Are we seeing a fund manager revival? AMP ((AMP)) rose 3.3%.

On the other side of the ledger, Medibank Private ((MPL)) bemoaned excessive claims and fell -8.5%, while the rest of the losers’ board was made up of volatile “growth” stocks.

Might be a slight delay

Phase one of the trade deal was supposed to be signed next week at the APEC summit in Chile, except the summit has been cancelled, and as yet Washington and Beijing can’t agree on an alternative “neutral” location for the get together. At one point Iowa was touted, but now Trump has pointed out they don’t come more “neutral” than Switzerland and he’ll be in Europe early next month.

The failure to agree on a location had threatened to push back the signing, but it doesn’t matter anyway because the two parties need more time, it was reported last night. Negotiations are ongoing.

Is this good news or bad news?

Yesterday I noted an eerie resemblance in this round of negotiations to all previous occasions when a trade deal was supposed to be “close”. China wants tariffs lifted, the US wants commitments on IP, and never the twain has met. Beijing invariably walks away.

But if this round of negotiations requires an extension, maybe that suggests a deal could be reached. Beijing hasn’t yet walked away.

And so it was Wall Street closed flat, unsure of the implications, preferring just to take a breather in the recent rally to new highs. It’s not often you see the Dow move by less than one point.

The US ten-year yield nevertheless fell back -5 basis points to 1.81%, as noted. This may reflect concern over the trade delay, or a weak productivity number reported last night, or both, given the two are linked.

US productivity fell -0.3% in the September quarter – the first decline in nearly four years. The fall is hardly a surprise –trade war uncertainty has forced companies to cut back on production, as PMI and other numbers have confirmed, while not yet implementing mass lay-offs, as strong jobs numbers corroborate. Hence GDP per man-hour – productivity – has declined.

With the US earnings season now winding down into its long tail, Wall Street can only await news on trade. Having hit new highs, it might be quiet times from here until there is a breakthrough one way or the other. Hopefully it’s not the other, or December 2019 might look a lot like December 2018.

In other news, Xerox has made a takeover offer for HP (Hewlett Packard). I didn’t realise Xerox still existed.

Commodities

Not much going on in metal land.

The weekly US crude inventory lottery (one of the two) suggested a build, hence oil prices slipped back.

The Aussie is down a tad at US$0.6884.

Today

The SPI Overnight closed up 28 points or 0.4%. All is forgiven.

Australian trade numbers are out today.

The Bank of England holds what must surely be a redundant policy meeting.

National Bank reports today. Be very afraid.

James Hardie ((JHX)) and Xero ((XRO)) also report.

Downer EDI ((DOW)) and Flight Centre ((FLT)) are among those companies holding AGMs.

The Australian share market over the past thirty days…