Overnight: Playing It Safe

By Greg Peel

Spill the Wine

The ASX200 managed a modest rebound yesterday of 37 points against Tuesday’s near -100 point drop. The -100 points reflected a sell first and think later approach to the coronavirus scare, while yesterday investors decided things may not be quite as dramatic as feared.

Companies were quick to play down the effect of the virus on their earnings. Specifically we heard calming talk from the likes of Qantas ((QAN)), Webjet ((WEB)) and Sydney Airport ((SYD)).

While the IT sector (+1.7%) posted the biggest gain on the day, the banks (+0.9%) and consumer discretionary (+0.9%) bounced back the hardest. The banks reflected a rebound in US bond yields. Healthcare rose 1.1%, but then healthcare barely dipped on Tuesday and CSL ((CSL)) just keeps on keeping on amidst the virus scare.

The big miners notably recovered some ground despite the iron ore price adjusting down sharply after reopening post the lunar new year break – that had been anticipated and priced in. Materials rose 0.3% even with a drag from lower gold stocks.

Train wreck of the day was Treasury Wine Estates ((TWE)), which cut its full year earnings growth guidance to 5-10% from a prior 15-20% – not an unsubstantial downgrade. The stock fell -26%, wiping out two and a half years’ worth of gains.

Second worst performer in the index was oOh!media ((OML)), which having warned on guidance at its result release last August, then suggested things actually aren’t that bad, yesterday confirmed their result next month will be at the lower end of guidance. That was worth -6.7%.

Virgin Money UK ((VUK)) topped the leaders’ board, rising 9.4% following a quarterly update, Iluka Resources ((ILU)) rose 6.4% on its production report and Credit Corp’s ((CCP)) first half result, unfortunately posted on Tuesday, was worth 4.7% yesterday.

In economic news, yesterday’s December quarter CPI numbers have done nothing to swing the odds back to an RBA rate cut next week. Headline inflation rose 0.7% in the quarter against 0.6% expectations, having risen 0.4% in September, to an annual rate of 1.8%, up from 1.7%.

Core inflation rose 0.4% to remain at 1.6%, well below the RBA’s 2-3% comfort zone. The headline number is beginning to drift above the core number due to rising food prices. The drought is having its impact, and the bushfires are yet to show up in the data.

With the world taking action to contain the coronavirus, markets are now pausing to assess developments. Wall Street has closed flat overnight post Fed meeting, and our futures are suggesting much the same for us today.

Don’t call it QE!

The Fed left its funds rate unchanged in the 1.50-1.75% band last night, shocking no one. All anyone was interested in were the central bank’s repo operations.

To recap, last year the Fed was caught out with insufficient funds in the drawer to cover an unforeseen spike in drawdowns, causing overnight interest rates to hit double digits, and prompting the Fed into topping up its short-end reserves by buying Treasury bills. It has been topping up ever since, to the tune of US$60bn per month.

Jerome Powell’s intention is to ensure “ample” funds are always available for any situation. At this stage purchases will likely continue until April but no specific deadline has been set. It’s just “technical”, it’s just “plumbing”.

It’s just short-end QE.

The stock market should like QE, but instead a 200-plus point rally in the Dow ahead of the Fed statement release and press conference, driven largely by solid earnings results for the likes of Apple, McDonalds and Dow Inc, completely fizzled out by the close.

Seems Wall Street still wants to take a cautious stance at this time.

With 25% of S&P500 companies having reported to date, 72% have beaten forecasts. Current estimates suggest 10% earnings growth in 2020, but optimism always reigns at the beginning of a year and inevitably sours as time goes on.

Trump’s trade war is going well – the US trade deficit rose 8.5% in December after the December 15 tariffs were scrapped, boosting imports from China. December quarter GDP is now expected to fall short of 2%. And that’s before the phase one deal signed in January.

When Trump came to office, little did he know.

I’ll let that one hang there.

Commodities

Base metal prices are still feeling corona-pain but iron ore has stabilised.

QE that’s not QE had the US ten-year yield down -5 basis points to 1.59% last night, making gold popular again.

The oils appear to have settled around these levels for now.

The Aussie is little changed at US$0.6754 post CPI result.

Today

The SPI Overnight closed down -10 points.

Fortescue Metals ((FMG)) posts its production report today, IOOF Holdings ((IFL)) provides a quarterly update and IGO ((IGO)) offers a daily double – quarterly production report and interim earnings result.

The Australian share market over the past thirty days…