Overnight: Ever Patient

World Overnight
SPI Overnight (Dec) 6760.00 + 21.00 0.31%
S&P ASX 200 6735.10 + 36.70 0.55%
S&P500 3096.63 + 2.59 0.08%
Nasdaq Comp 8479.02 – 3.08 – 0.04%
DJIA 27781.96 – 1.63 – 0.01%
S&P500 VIX 13.05 + 0.05 0.38%
US 10-year yield 1.82 – 0.06 – 2.94%
USD Index 98.16 – 0.19 – 0.19%
FTSE100 7292.76 – 58.45 – 0.80%
DAX30 13180.23 – 49.84 – 0.38%

By Greg Peel

Great News!

Australia shed -19,000 jobs in October, roughly half and half full and part-time, to mark the first decline since September 2016. The market had forecast +15,000. The participation rate ticked down, the unemployment rate rose to 5.3% from 5.2% and the underemployment rate rose to 8.5% from 8.3%.

The ASX200, which before the release was doing nothing, shot up 48 on the news, before easing back late in the afternoon.

Why? Because clearly the RBA will have to cut its cash rate again, maybe next month, despite recent hints it was done for the year. But why is this good? Rate cuts to date have clearly had no impact. Consumer spending is stagnant, credit growth is flat, and unemployment is rising. The RBA target is 4.5%.

The only reason another rate cut is good is it makes Australian dividend-paying stocks more attractive, and increases discounted cash flow valuations of all stocks based on a lower “risk free rate”. The Australian ten-year yield yesterday fell -10 basis points to 1.18%.

The Aussie plunged -0.7% to US$0.6789, which is about the only thing the RBA can be happy about.

Consumer staples (+2.0%), telcos (+1.9%) and utilities (+0.9%) inevitably led the charge yesterday, along with healthcare (+1.1%), but if we count back National Bank’s ((NAB)) dividend, all sectors closed in the green. Another rate cut would be a two-edged sword for the banks – they can again “re-price” their mortgage books and cop the flack but margins will remain under pressure from the deposit side.

Even consumer discretionary (+0.5%) enjoyed the spoils, and that was net of a -17.8% plunge for G8 Education ((GEM)) post AGM profit-warning. Discretionary should be boosted by a rate cut, except when that cut reflects a central bank desperately trying to avoid recession.

Materials (+0.4%) joined in, even though dividends in that sector will be under pressure in FY20 on lower commodity prices. Energy only just snuck over the line.

There were some big individual stock moves yesterday. G8 topped the losers’ board but going the other way was Nearmap ((NEA)), which jumped 14.1% just by reaffirming guidance, while Afterpay Touch ((APT)) rose 7.5% on a broker upgrade. The IT sector rose 1.1%.

Outside of the index, heavy equipment rental company Emeco Holdings ((EHL)) gained 10.2% on better than expected guidance while auto dealer AP Eagers ((APE)) fell -8.0% on its update. Another victim of consumer non-spending.

So for the record, as we head into Friday’s session, the ASX200 has rallied 15 points since last Friday in a range of 81 points.

Wall Street is yet again flat overnight but our futures are up 21 this morning.

Hey Cisco!

Internet networking device manufacturer Cisco Systems (Dow) fell -7.3% last night, having reported after the bell on Wednesday night. Businesses are simply not investing, the CEO warned, given a laundry list of global uncertainties: trade war, Hong Kong, Brexit, impeachment…

The Dow was down over a hundred points in the morning but recovered for yet another flat session on Wall Street. Walmart (Dow) initially jumped 3% on its earnings result before the profit-takers moved in. The consumer staple is up 28% year to date.

The good news on the trade front last night is that China has lifted its ban on US poultry exports, opening the door for US$1bn worth of chooks to head east. The bad news is China still won’t commit to an actual dollar amount of other US agri-products purchases it has proposed for the phase one deal. That was supposed to be the simple part. Never mind IP etc.

The good news is the Chinese Commerce Ministry is continuing to hold “in depth” discussions with Washington. The bad news is any deal requires tariffs to be lifted.

The US will only lift tariffs if China is seen to be adhering to a deal. Trump has played down the suggestion of tariff roll-back concessions. This is where we’ve been for two years.

For the record, Chinese industrial production and retail sales numbers, released yesterday, beat forecasts for October, but fixed asset investment fell short.

Yet Wall Street remains optimistic, albeit cautious. The stock market is in a holding pattern, but how long can it hold out for? The crunch will probably come mid next month when the December tariff tranche is due. If nothing has been resolved by then, and the tariffs go ahead, look out.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1471.00 + 7.50 0.51%
Silver (oz) 17.00 + 0.09 0.53%
Copper (lb) 2.64 – 0.00 – 0.17%
Aluminium (lb) 0.79 – 0.01 – 1.72%
Lead (lb) 0.92 – 0.01 – 1.25%
Nickel (lb) 6.90 – 0.09 – 1.28%
Zinc (lb) 1.11 – 0.01 – 1.18%
West Texas Crude 56.84 – 0.39 – 0.68%
Brent Crude 62.30 – 0.19 – 0.30%
Iron Ore (t) futures 83.40 + 2.25 2.77%

And still base metal prices continue to fall.

Iron ore appears to be on a bit of a comeback though.

The longer a trade deal doesn’t happen, the more likely it is gold will tick back up to previous highs.

The weekly US inventory lottery sent oil prices lower.

The US dollar is actually down -0.2%, which underscores the impact of the Australian jobs numbers. Aussie down -0.7% at US$0.6789.

Today

The SPI Overnight closed up 21 points or 0.3%

The US releases retail sales and industrial production numbers tonight.

FlexiGroup ((FXL)) and Link Administration ((LNK)) are among those companies holding AGMs and James Hardie ((JHX)) goes ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AST AUSNET SERVICES Downgrade to Reduce from Hold Morgans
AUB AUB GROUP Upgrade to Outperform from Neutral Credit Suisse
CAT CATAPULT GROUP Upgrade to Add from Hold Morgans
CMW CROMWELL PROPERTY Downgrade to Lighten from Hold Ord Minnett
DHG DOMAIN HOLDINGS Upgrade to Outperform from Neutral Macquarie
Upgrade to Accumulate from Hold Ord Minnett
ENN ELANOR INVESTORS Upgrade to Accumulate from Hold Ord Minnett
IPL INCITEC PIVOT Downgrade to Neutral from Buy Citi
Downgrade to Underweight from Equal-weight Morgan Stanley
Downgrade to Hold from Buy Ord Minnett
OZL OZ MINERALS Downgrade to Neutral from Buy Citi
Downgrade to Lighten from Hold Ord Minnett
QBE QBE INSURANCE Downgrade to Neutral from Buy Citi
SKI SPARK INFRASTRUCTURE Upgrade to Equal-weight from Underweight Morgan Stanley
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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