Overnight: The Knives Come Out

By Greg Peel

Only 25?

In response to the astonishing 4.6% rally for the S&P500 on Monday night, most of it in the last hour of trade, the ASX200 rose 2% to lunchtime yesterday. It might have seemed underdone by comparison, but then Wall Street’s clearly computer-driven, momentum-fuelled rally smacked very much of overshoot.

The index then drifted around up until 2.30pm, for at that time the RBA was set to release its decision. The central bank delivered a -25 basis point cut to 0.5% as expected. Or was it as expected?

The Aussie immediately shot up, and is up a full 1% over 24 hours. The ASX200 immediately began falling back, ultimately to close up only 0.7%. A -25 point cut had been widely assumed, although not necessarily by everyone. A -50 point cut was suggested, but had little support. Mind you, if the RBA is going to cut again in April, as is expected, and backed up by yesterday’s policy statement, why muck around?

“The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target. The Board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity. It will continue to monitor developments closely and to assess the implications of the coronavirus for the economy. The Board is prepared to ease monetary policy further to support the Australian economy.”

It appears that’s the way currency traders saw it, and the stock market. Although the bulk of the pullback from the highs was due to a standout -0.9% fall in the banks – the only sector to close in the red bar energy, which was impacted by Oil Search ((OSH)) going ex.

Morrison got on the phone to the bank CEOs and laid down the law. The result is all four majors will pass on the RBA cut in full. No scope, therefore, to reprice mortgage rates to protect net interest margins when deposit rates can’t realistically be set below zero.

Lowe clearly laid down the law to Morrison as well.

“The Australian Government has also indicated that it will assist areas of the economy most affected by the coronavirus.”

This pledge was backed up by the prime minister on the ABC last night, but as yet without any detail.

Meanwhile, Australia’s current account surplus fell back to below expectation in the December quarter from the September quarter, thanks to the terms of trade retreating from a record September quarter. Today brings the GDP result, which is now very old news, but will most likely confirm the Australian economy was not in a good position heading into the virus outbreak.

In individual stock moves, Xero ((XRO)) won the day with a 7.2% gain, Bega Cheese ((BGA)) rallied 6.5% on a delayed earnings result reaction and a heavily shorted Harvey Norman ((HVN)) recovered 6.1% following its big fall on Friday.

To the downside, Netwealth Group ((NWL)) was poster child for the new age investment platforms. They, too, have problems with paying a return on cash balances when the cash rate is so low.

It was a wild ride on Wall Street last night as traders absorbed the impact of an emergency “shock & awe” cut from the Fed. The cat, I’m afraid to say, didn’t make it. Our futures are down -84 points this morning.

Sell the Fact

Helping to fire Wall Street’s snap-back rally on Monday night was a rare unprompted statement issued by the Fed on Friday that it stood ready to take action. The G7 central banks announced they would hook up to discuss the situation.

While Wall Street had already priced in a -25 point cut at the March Fed meeting, Goldman Sachs had gone one further and suggested -50bp. But as hints continued to flow, Wall Street began to entertain an even more dramatic thought. They wouldn’t, would they?

At 10am New York time the Fed announced an emergency -50 point rate cut. The last time the Fed has cut out-of-cycle – in this case not waiting for the scheduled meeting on the 18^th — and by -50 points, was during the GFC. “Shock & awe”, it was dubbed at the time.

The G7 had earlier issued a statement indicating a “commitment to use all appropriate policy tools to achieve strong, sustainable growth”.

The problem is that among the G7 major economies, which does not include China, the EU and Japan are already on negative interest rates. Only one central bank had the firepower to actually make a difference. Thus it can be assumed the Fed acted not just in isolation from a US perspective.

But as Jerome Powell was quick to acknowledge, rate cuts do not cure viruses. The Fed is simply hoping to restore some confidence.

On the news of the emergency cut, the Dow rallied over 300 points. Then it fell -1300.

We can look at this two ways: either the relief of the rate cut was quickly overwhelmed by the implication of the gravity of the situation if the Fed found it necessary to make such a move, and/or the 1300 point Dow rally on Monday night already priced in such a move. In other words, sell the fact.

On the first count, the US ten-year yield plunged an extraordinary -19 basis points on the Fed cut to 0.90%, spooking the stock market, before rising back to 1.01%.

We can also consider that rarely is the first bounce out of a correction the end of the correction. It did happen in December 2018, but that was one out of the box. As it is said, every W begins with a V. Typically, further selling follows an initial V and markets then chop around, retesting and maybe breaching prior lows, before giving it another shot.

The Dow managed to rally back from its intraday low last night, but unconvincingly.

And as central bankers all agree, monetary policy tools may help economies out of a financial crisis but a health crisis is a different matter altogether. Where things go from here is in the hands of microbes.

And can someone please tell me what’s with the run on toilet paper? It’s a flu, not gastro.

Commodities

Metal prices seemed to be rabbits in the headlights last night.

The plunge in US bond yields has fired gold back up again.

Oil markets await tomorrow night’s OPEC meeting.

A whiplashed Aussie is up 1% at US$0.6599.

Today

The SPI Overnight closed down -84 points or -1.3%.

Our GDP result is out today.

The US sees private sector jobs and the Fed Beige Book, although the latter might now substitute if aforementioned items are unavailable at the supermarket.

There’s a sizeable list of ex-divs today, including Woolworths ((WOW)), which is which has begun rationing.

The Australian share market over the past thirty days…