Overnight: Playing the Spread

World Overnight
SPI Overnight (Mar) 6627.00 – 28.00 – 0.42%
S&P ASX 200 6708.10 – 158.50 – 2.31%
S&P500 3116.39 – 11.82 – 0.38%
Nasdaq Comp 8980.77 + 15.16 0.17%
DJIA 26957.59 – 123.77 – 0.46%
S&P500 VIX 27.56 – 0.29 – 1.04%
US 10-year yield 1.31 – 0.02 – 1.50%
USD Index 99.07 + 0.12 0.12%
FTSE100 7042.47 + 24.59 0.35%
DAX30 12774.88 – 15.61 – 0.12%

By Greg Peel

Multiple Compression

The ASX200 fell over -2% for the third consecutive session yesterday, but yesterday’s was notably different to the prior two. While every sector has closed in the red on each of the three days, Monday began with a clear divergence of falls – sectors exposed directly to the virus impact were slammed, while sectors with little or no direct exposure fell comparatively mildly.

A similar pattern was seen on Tuesday, although by Tuesday sector falls began to show signs of a wider economic impact from the virus, rather than just lost tourism or falling oil prices. Australia’s banks, for example, have no direct connection, until one considers the flow-through to lower credit demand from exposed sectors. The greater economic impact was becoming apparent.

Yesterday, six out of ten sectors fell by the same amount as the index, give or take. If not for earnings reports on the day, which went either way, we might have seen all sectors fall by equal amounts. Yesterday was sell-the-market, sell everything, don’t discriminate. Yesterday was sell on the global growth impact story.

Yesterday looked like capitulation.

Not falling at close to -2.3% were, to the downside, healthcare (-3.6%) and IT (-3.6%). While the sector saw some mixed earnings result responses – Polynovo ((PNV)) down -20.9%, Healius ((HLS)) up 15.6%, to be the worst and best index performers on the day – CSL ((CSL)) fell -4%. Why? Because everyone who’s made a motza out of the stock wants to lock that in before things get any worse.

For IT, it’s again a case of dumping those risky high-flyers. Appen ((APX)) was a trend-bucking darling on Tuesday but fell -9.3% yesterday. WiseTech Global ((WTC)) had already been carted on its result but fell another -8.1%.

To the upside, consumer discretionary fell only -1.6%, thanks to solid earnings results from Nine Entertainment ((NEC)), which had been thumped earlier in the month when rival Seven West Media ((SWM)) posted a shocker so rose 7.1% yesterday, and InvoCare ((IVC)), which has been a chronic disappointer for years but yesterday jumped 13.7%.

Yes, death is discretionary. Who knew? And no, management did not anticipate a sudden jump in demand.

So if we smooth it all out, yesterday we saw market-wide selling that amounts to multiple compression. The market’s price/earnings ratio had become stretched to more than one standard deviation above average by the all-time peak on Thursday last, and now it has been compressed back to something more realistic. If, that is, we take the E as of the July-December half reported this results season.

For if we look ahead to the January-June half, clearly earnings will be impacted by bushfires, floods and the virus. Forecasts are already being slashed as one by one companies either downgrade or completely withdraw guidance for the period given virus uncertainty. If E falls, PEs rise back once more, unless P falls further.

It didn’t help the economic growth story yesterday when December quarter construction work done showed a -3% fall against -1% forecasts. Residential construction continued to recede but it was private non-residential that stood out as the big surprise, only sightly offset by public infrastructure. Surplus? Goodnight. The Aussie is down a full percent at US65.5c.

While yesterday on the stock market looked like a capitulation session, which typically portends a bounce, the sheer uncertainty ensures nothing is predictable. We haven’t yet seen the fat lady. Let’s hope she doesn’t have a sniffle.

We may nevertheless see a modicum of stability today. The futures are down only -28 points this morning.

Schrodinger’s Bounce

The Dow was up over 450 points by late morning. Hooray, here comes the bounce. A couple of hours later it was down -200, before tracking an uncertain path to another weak close. At least -120 points is not -1000 points.

The trigger was news from health authorities the number of new cases is now growing faster outside China than inside. The virus is spreading in Europe, beyond the epicentre in Italy. The Spanish resort town of Tenerife, full of British tourists, is in lock-down. Diamond Princess without the boat.

The Dow underperformed the other indices with some help from Disney, which fell -3.8% on the announcement its CEO was stepping down. The Nasdaq outperformed as buyers tried to pick up bargains in beaten-down tech stocks, but it, too, came well off its earlier highs.

While economists have been busy attempting to forecast the impact on the Chinese economy, and thus the impact on the global economy from Chinese slowdown, the spread of the virus now implies the global economy will be hit as a whole. To date countries have been blocking flights in from China. What happens when they have to block the whole world?

Wall Street last night showed signs it was trying to find a bottom. History suggests such attempts can often prove a false dawn.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1644.10 – 5.90 – 0.36%
Silver (oz) 17.90 – 0.24 – 1.32%
Copper (lb) 2.55 – 0.01 – 0.20%
Aluminium (lb) 0.76 + 0.00 0.03%
Lead (lb) 0.85 – 0.02 – 1.77%
Nickel (lb) 5.60 – 0.03 – 0.47%
Zinc (lb) 0.93 + 0.01 0.60%
West Texas Crude 48.78 – 1.06 – 2.13%
Brent Crude 53.49 – 1.23 – 2.25%
Iron Ore (t) futures 87.35 – 2.75 – 3.05%

Base metal prices appear to be in limbo while iron ore has taken a dive.

The US ten-year bond yield fell another -2 basis points last night to 1.30% but profit-taking in gold continues.

It’s GFC memories for an Aussie down -1% at US$0.6555.

Today

The SPI Overnight closed down -28 points or -0.4%.

Following on from yesterday’s quarterly construction data we’ll see private sector capex today.

The US will revise its December quarter GDP result while January durable goods orders will be interesting.

The final curtain is about to fall on the local earnings season, but not before one last push today. The list is quite extensive.

There’s also a long list of ex-divs today. See the FNArena Calendar (https://www.fnarena.com/index.php/financial-news/calendar/).

For a full list of earnings results due today please refer to the FNArena Corporate Results Monitor (https://www.fnarena.com/index.php/reporting_season/).

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AFG AUSTRALIAN FINANCE Upgrade to Add from Hold Morgans
AWC ALUMINA Upgrade to Hold from Lighten Ord Minnett
BSL BLUESCOPE STEEL Upgrade to Neutral from Sell UBS
COE COOPER ENERGY Upgrade to Buy from Hold Ord Minnett
EBO EBOS GROUP Upgrade to Neutral from Underperform Credit Suisse
HUB HUB24 Upgrade to Outperform from Neutral Credit Suisse
ING INGHAMS GROUP Upgrade to Outperform from Neutral Credit Suisse
NHF NIB HOLDINGS Upgrade to Buy from Neutral Citi
OGC OCEANAGOLD Downgrade to Accumulate from Buy Ord Minnett
OSH OIL SEARCH Upgrade to Accumulate from Hold Ord Minnett
RWC RELIANCE WORLDWIDE Upgrade to Buy from Neutral UBS
Downgrade to Neutral from Outperform Credit Suisse
SKI SPARK INFRASTRUCTURE Upgrade to Outperform from Neutral Credit Suisse
Upgrade to Hold from Reduce Morgans
SXY SENEX ENERGY Upgrade to Outperform from Neutral Credit Suisse
WGN WAGNERS HOLDING Downgrade to Neutral from Outperform Credit Suisse
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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