Overnight: Overstretched

By Greg Peel

The Non-Believers

The futures suggested on Saturday morning the ASX200 would fall -40 points yesterday which was not far off given a -50 point close. But not before the index dropped -188 points to midday.

Early sellers – probably mostly computers – appeared to take another -350 points down for the Dow on Friday night as the signal to keep selling, ignoring the fact the Dow had rallied to the close from -1000 down. The signs were there that, barring any major development over the weekend, Wall Street was ready to bounce.

Bounce it has. The Dow closed up almost 1300 points. Yet our futures are suggesting a mere 1.1% rally this morning compared to 4.6% for the S&P500.

So what happened locally at midday yesterday?

December quarter data were released showing company profits had fallen in the quarter by -3.5% — greater than expected. The numbers would reflect the drought, and perhaps some early bushfire impact, but certainty no virus impact. While inventories grew more than forecast, and even wages were better than expected, the implication that the Australian economy was weak even before the virus impact only served to increase expectations the RBA will cut today.

This is evident in the biggest drag on the ASX200 yesterday being the banks, down -1.5%, well ahead of second worst sector materials (-0.8%), which included Fortescue Metals’ ((FMG)) dividend and reflected a washout for gold miners.

Aside from local data, the Chinese stock market opened and rallied hard on stimulus expectations, closing up 3.2%. Japan followed with 1% and even Korea – epicentre 2 – gained 0.8%. Beijing has already been throwing the stimulus around to now but one might assume the alarmingly weak February PMI data were enough for the market to assume more needs to be done, and fast.

Locally, in came the bargain hunters. The two sectors which have been hardest hit on the way down are energy, on falling oil prices, and IT, because strong growth, no profits and leveraged balance sheets is not a formula for confidence at such times. Yesterday energy rallied 1.1%, ahead of an oil price bounce overnight, while IT gained 0.9%, including a 12.7% bounce for virus poster child WiseTech Global ((WTC)).

Consumer staples (+0.3%) also saw some buying – and why wouldn’t they if consumers begin emptying the shelves in preparation for virus lock-down? (Don’t laugh – there were long queues at Costco in the US over the weekend). All other sectors closed around -0.5% down.

Fortescue’s ex-dividend put that stock at the top of a losers’ board otherwise full of gold miners, while WiseTech was top of the pops along with volatile biotech Polynovo ((PNV)), up 7.4%, and IT sector companion Appen ((APX)), up 7.1%.

So now it’s over to the RBA. A timid 69 point rise in the futures this morning against an enormous Wall Street rally suggests the market is not yet convinced – not every economist is tipping a cut – and will likely be disappointed if no cut is forthcoming.

But a rate cut is not a cure.

The Believers

The Dow opened down a thousand points on Friday night and all US indices moved further into -10% correction territory. Relative strength indices were hitting prior historical lows – suggesting “oversold”. The VIX volatility index reached 40 – the GFC high – implying a rush into put option protection. Gold, which had played its role of safe haven up to that point, tanked, as underwater investors rushed to raise cash.

The scene was set. It’s always darkest just before the dawn.

The Dow rallied back 650 points to Friday night’s close and given nothing startling new occurred over the weekend, rallied another 1300 last night, including 800 points in the final hour and a half. There was no specific trigger – the rubber band had just stretched too far.

There is, nonetheless, growing expectation the Fed will cut this month, and last night’s US manufacturing PMI number did nothing to upset that assumption. It fell to the brink of contraction at 50.1, down from 50.9.

Goldman Sachs is predicting the Fed will cut by a full -50 basis points in March, and maybe even deliver the cut before the scheduled meeting on the 18^th. It will cut by another -50 points before the end of the June quarter, Goldman anticipates. Not everyone on Wall Street is forecasting such dramatic action, but even one -25 point cut this month would be a salve.

And more so if monetary stimulus is enacted in coordination across the globe. The Bank of Japan said yesterday the central bank would take steps to steady markets, and bolster liquidity through short-term lending operations and asset purchases.

America’s biggest company, Apple, rallied back 9% last night, driving all three indices. Apple had been beaten down hard, but such a one-day move is unheard of. And Apple is one company with direct exposure to the virus.

Otherwise, US advisors are now suggesting clients begin stepping into the market to pick up select stocks – preferably companies with strong balance sheets in stable markets with little exposure to Chinese supply chains. But no one is yet prepared to call the correction over.

Such snap-back rallies are typical features of corrections and usually the first bounce does not signal the end. The problem with this correction is of course is Mother Nature is not easy to forecast.

If signs emerge the spread of the virus outside China is slowing, then we may well have seen the bottom. If the spread accelerates, this isn’t over yet.

Commodities

All green on screen!

Oil in particular stands out, and as was the case for the US stock market, there was no specific trigger. OPEC meets on Thursday and it is assumed will have to cut production.

The US dollar has taken a tumble (-0.7%) on Fed rate cut expectations, which is in isolation a boost for commodity prices anyway. The Aussie has thus bounced back 0.9% to US$0.6530, looking a little less like a Banana Republic.

Today

The SPI Overnight closed up 69 points or 1.1%.

Australia’s December quarter current account is out today, including the all-important terms of trade. January building approvals data are also due.

The market will hold its breath at 2.30pm.

The Australian share market over the past thirty days…