Overnight: Let’s Talk

World Overnight
SPI Overnight (Dec) 6710.00 + 38.00 0.57%
S&P ASX 200 6672.90 – 49.50 – 0.74%
S&P500 3103.54 – 4.92 – 0.16%
Nasdaq Comp 8506.21 – 20.52 – 0.24%
DJIA 27766.29 – 54.80 – 0.20%
S&P500 VIX 13.13 + 0.35 2.74%
US 10-year yield 1.77 + 0.03 1.96%
USD Index 98.01 + 0.09 0.09%
FTSE100 7238.55 – 23.94 – 0.33%
DAX30 13137.70 – 20.44 – 0.16%

By Greg Peel

Capitulation

Wednesday saw the big banks trashed on news of the AUSTRAC suit against Westpac ((WBC)) and National Bank’s ((NAB)) $50m settlement for selling dodgy insurance which led to a plunge for 25% of the ASX200 market cap, being the Big Four, triggering index selling. Buyers stood aside.

They stood aside again yesterday morning as index selling continued. The banks were gain being sold by those who missed the boat on Wednesday and news that the phase one trade likely will not be signed this year also had an impact, notably in a -1.0% fall for the materials sector despite a higher iron ore price and -0.5% for energy despite a higher oil price.

The standout “get me out” trade over the two days is healthcare, which realistically has only been sold because it had previously outperformed and there was a rush to lock in profits, including -1.0% yesterday. The big cap sectors – banks (-0.8%), materials and healthcare – led the market down.

But that’s net of the lunchtime bounce, at which point the buyers said enough is enough. The index swung from -85 points down to close -50 points down. And we might note that with Wall Street yet again flattish, the futures are up 38 this morning.

What is interesting about this sudden swoon, arguably sparked by Westpac alone, is that a glance through the banks’ recent financial statements for FY19 reveals a contingent liability for AUSTRAC reprisal and this is one of the reasons Westpac elected to raise capital. In other words, the law suit was flagged and provided for, although the final figure is unknown.

In NAB’s case, $50m is already well covered in the bank’s FY19 provisions for remediation.

So, we can argue there was absolutely no reason for this sell-off (net of trade concerns). Other than sentiment, and the old “stairs and elevators”.

For the week to yesterday’s close the ASX200 is down -89 points and down -134 from Tuesday’s close – a day in which everything was bought on RBA rate cut excitement.

It is a truth universally acknowledged that Melbourne Cup Day signals the beginning of the Silly Season. But it’s not meant to be literal.

Come on over

Amidst all the negative newsflow on trade this week, last night the WSJ reported that late last week the Chinese premier and chief trade negotiator had invited his US counterparts to Beijing to continue discussions.

Bloomberg reported last night that at a speech given by the premier in Beijing on Wednesday, he said he was “cautiously optimistic” about a deal being reached, despite being “confused” by US demands. He also confirmed his invitation to the US delegates but noted the invitation was yet to be accepted.

Positive news? Well it’s not negative. But in terms of cautious optimism, that’s how Wall Street saw it in not marking further new index highs last night, rather recovering from an initial hundred point fall in the Dow to return to the flatline and then wither late in the session.

As we approach Thanksgiving, Wall Street is suffering from “trade fatigue”. We are no longer seeing spikes and plunges on every tid-bit of positive/negative news, rather weary indifference. It is going to take some sort of breakthrough or collapse in talks to shake the market into direct action. Traders are sick of the up and down newsflow.

Distracting the market last night was news of the proposed merger of America’s two biggest retail broking houses – Charles Swab and TD Ameritrade. Retail broking has been shaken up recently when the big players decided to join the junior upstarts in offering zero brokerage – a bottom that had been seen as inevitable for some time. Charles Swab shares rose 7% on the news and TD Ameritrade’s 17%.

The other big retail player, ETrade, fell -9%.

In US economic news, the Conference Board’s leading economic index fell -0.1% in October to mark the third consecutive decline, and on a rolling six months fell into negative for the first time since mid-2016.

It is of no surprise to anyone the US economy is slowing, and of no surprise why. So all we have to do is sort that out and we can all get on with it.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1463.90 – 8.30 – 0.56%
Silver (oz) 17.07 – 0.06 – 0.35%
Copper (lb) 2.63 – 0.02 – 0.61%
Aluminium (lb) 0.79 – 0.00 – 0.04%
Lead (lb) 0.89 – 0.02 – 1.67%
Nickel (lb) 6.47 + 0.01 0.19%
Zinc (lb) 1.06 – 0.01 – 0.98%
West Texas Crude 58.53 + 1.42 2.49%
Brent Crude 63.87 + 1.44 2.31%
Iron Ore (t) futures 86.85 + 0.20 0.23%

The US Energy Information Agency has increased its WTI crude price forecast for November by US$2 to US$56/bbl, and December and January by US$1 each to US$55 and US$54/bbl. The EIA also increased its US production forecast, due to its forecast price increases, but the report was still worth a net 2.5% for the WTI price.

Meanwhile, metals have not done much, other than to note copper gave back Wednesday night’s gains and zinc keeps falling, while iron ore continues its incremental comeback.

Gold has slipped back again, likely on “positive” trade news.

The Aussie is down another -0.2% at US$0.6787.

Today

The SPI Overnight closed up 38 points or 0.6%.

Tonight’s flash estimate of November manufacturing PMI will be closely watched, while the eurozone and Japan also flash.

Today’s list of AGMs includes those of Megaport ((MP1)), ResMed ((RMD)) and Orocobre ((ORE)). The latter is 14% shorted.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALQ ALS LIMITED Downgrade to Neutral from Buy Citi
BLX BEACON LIGHTING Downgrade to Hold from Add Morgans
CCL COCA-COLA AMATIL Upgrade to Neutral from Underperform Credit Suisse
DMP DOMINO’S PIZZA Downgrade to Reduce from Hold Morgans
MIN MINERAL RESOURCES Downgrade to Hold from Accumulate Ord Minnett
MND MONADELPHOUS GROUP Upgrade to Neutral from Sell Citi
MVF MONASH IVF Upgrade to Add from Hold Morgans
NXT NEXTDC Downgrade to Hold from Accumulate Ord Minnett
SAR SARACEN MINERAL Upgrade to Buy from Neutral Citi
SEK SEEK Downgrade to Hold from Add Morgans
SIQ SMARTGROUP Downgrade to Hold from Add Morgans
VHT VOLPARA HEALTH TECHNOLOGIES Downgrade to Lighten from Hold Ord Minnett
WPL WOODSIDE PETROLEUM Upgrade to Accumulate from Hold Ord Minnett
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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