Overnight: The Real Deal?

World Overnight
SPI Overnight (Dec) 6732.00 + 29.00 0.43%
S&P ASX 200 6708.80 – 43.80 – 0.65%
S&P500 3168.57 + 26.94 0.86%
Nasdaq Comp 8717.32 + 63.27 0.73%
DJIA 28132.05 + 220.75 0.79%
S&P500 VIX 13.62 – 1.37 – 9.14%
US 10-year yield 1.90 + 0.11 5.98%
USD Index 97.32 + 0.24 0.25%
FTSE100 7273.47 + 57.22 0.79%
DAX30 13221.64 + 74.90 0.57%

By Greg Peel

Madness

There is little point discussing yesterday’s action on the ASX from a macro perspective, for two reasons. One is we might actually have a trade deal, with news on a signing pending as I write, and the other is that yesterday simply reversed Wednesday, and Wednesday made no sense.

The script at the beginning of this week clearly said “do nothing”, given the triple-risks of Fed meeting, UK election and tariff deadline. Most investors stuck to the script, reflected in very low volumes all week, but some did not, and seemingly went a little nuts.

Computers gone rogue? Don’t know. But everything that went up on Wednesday afternoon went back yesterday morning before the index finally stabilised. From Monday open to Thursday close, the ASX200 is up one point – just as the script had suggested.

The one exception was materials, which held its ground yesterday (+0.1%).

There were some influences at the micro level nonetheless.

They stormed the Convention Centre with torches and pitchforks, but they failed to spill the Westpac ((WBC)) board, leaving many shareholders to depart in disgust. Shareholders would not have enjoyed listening to management in any case given an outlook of soft operating conditions, low growth, interest rates falling further and ongoing regulatory intensity. The stock fell -1.2%.

The US military has put out to tender the construction and operation of a heavy rare earth separation facility in the US. The US has long let its own rare earth production and processing dwindle to zero, leaving China to account for over 90% of global production. Fearing rare earths as a trade war bargaining tool, or retaliation weapon, the US now wants to get its act together, but doesn’t have the know-how.

There is only one company in the world, outside China, that does – Lynas Corp ((LYC)). Its shares rose 9.7%, purely on speculation.

But we can turn a new page, possibly, this morning on the ASX. The Poms are still voting, so that may be a story for later today unless it’s close, which is could well be, while at any moment Trump might sign something.

Hence Wall Street has tentatively rallied, and our futures are up 29 points this morning.

Groundhog Day

The US and China have reached a deal in principle, it was declared last night, we’re just waiting for the president to sign off on it.

Back in October, a deal has been reached in principle, and it just needed to be “inked”.

Rumour has it that the White House has agreed to scrap the last round of tariffs and halve the rate of existing tariffs in return for more Chinese purchases of US ag products than had previously been agreed upon. Trump wants US$50bn, apparently. The most China had ever spent in a year during peacetime was US$26bn.

It is also expected that the usual flummery of “signing sessions” between presidents in a neutral location will be avoided by the Chinese ambassador to the US filling in for Xi in Washington.

Maybe. We don’t yet know.

Which is why Wall Street initially rallied with exuberance on the news, then got cold feet, then became a little more confident towards the close. The Dow opened up 300 points, fell to be up only 70, and then rallied again to the bell.

The S&P500 is at another new high. The Dow was handicapped by Boeing, which fell -1.1% when the company withdrew its guidance for the 737 Max to be re-certified before year-end and back in the sky in January. The timeline will now be determined by the FAA.

The Nasdaq was handicapped by Facebook, which fell -2.7% after news a court injunction would be taken out to prevent the company integrating its platforms – What’s App, Instagram – which would make the company harder to break up were an antitrust case to succeed.

Otherwise, Wall Street is excited, but understandably reticent. We’ve been here so many times before. All Wall Street wanted this week was a delay in the December tariffs. Suddenly, five minutes after the USMCA deal is signed, we have an actual China deal. Seems a bit rushed. What changed?

If there really is a deal, a couple of hundred Dow points seems a little underdone, albeit Wall Street is already at all-time highs.

By the time you read this, we may know more.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1469.40 – 5.60 – 0.38%
Silver (oz) 16.94 + 0.09 0.53%
Copper (lb) 2.77 + 0.01 0.22%
Aluminium (lb) 0.80 + 0.00 0.26%
Lead (lb) 0.87 + 0.00 0.22%
Nickel (lb) 6.19 + 0.01 0.19%
Zinc (lb) 1.01 + 0.01 0.58%
West Texas Crude 59.35 + 0.48 0.82%
Brent Crude 64.44 + 0.58 0.91%
Iron Ore (t) futures 93.80 – 0.55 – 0.58%

Nothing to see here. Awaiting confirmation.

We might note however that the Aussie – once considered the China proxy – is up 0.3% at US$0.6905, matching an upward move in the US dollar index.

Today

The SPI Overnight closed up 29 points or 0.4%.

The US will see retail sales data for November tonight, including Black Friday et al.

Locally, S&P/ASX will announce the quarterly round of promotion and relegation into and out of the ASX200, 100, 50 and 20.

Pendal Goup ((PDL)) holds its AGM.

Don’t look at the calendar.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
EVN EVOLUTION MINING Upgrade to Equal-weight from Underweight Morgan Stanley
ILU ILUKA RESOURCES Downgrade to Sell from Neutral Citi
Downgrade to Equal-weight from Overweight Morgan Stanley
MFG MAGELLAN FINANCIAL GROUP Upgrade to Hold from Sell Ord Minnett
NVX NOVONIX Upgrade to Speculative Buy from Hold Morgans
RIO RIO TINTO Downgrade to Neutral from Buy Citi
WHC WHITEHAVEN COAL Downgrade to Neutral from Buy Citi
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.

View more articles by Greg Peel →