Overnight: Taking The Chance

By Greg Peel

Working it Through

The ASX200 dropped from the open yesterday, following Wall Street, and chopped its way gradually lower through the session. Investors were likely disheartened that Tuesday’s RBA rate cut has achieved little more than to send bank stocks on a downward spiral once more.

They might also have been disheartened that a -50bp cut from the Fed also failed to fire up Wall Street, and also trashed US banks. But if there is one thing that can be relied upon it is that Wall Street’s considered reaction to a Fed policy change rarely occurs on the day of that change, but rather the day after. And sure enough, the S&P500 closed up 4.2% overnight and our futures are up over a hundred points this morning.

The Bank of Canada also cut its cash rate by -50 basis points overnight, to 1.25%. Our lookalike peer remains ahead of the US on 1.00% (lower bound) and us on 0.50%. Likely adding to the disappointment locally yesterday was the December quarter GDP result.

At 0.5% growth for the quarter, December slowed from 0.6% in September but beat forecasts of 0.4%. Annual growth actually rose to 2.2% from 1.8% in September and beat expectations of 2.0%. Josh was beaming.

Of course it’s all ancient history, ahead of a March quarter that will likely show contraction due to fires, floods and pestilence. But that follow-up rate cut from the RBA all and sundry had pencilled in for April is now not so certain.

It’s a guessing game nonetheless. Anything could happen.

The banks led the index down yesterday in falling -2.7%. The IT sector fell a standout -4.2%, but cap-wise it pales by comparison and the bulk of that fall was due to Computershare ((CPU)) dropping -8.3% following the Fed rate cut.

Energy (-2.5%) is not waiting around to see whether OPEC cuts might make a difference in the face of ever-reducing airline services (United in the US last night announced a -20% overall cut of international services and -10% for domestic), while healthcare’s (-2.3%) early safe haven status has since diminished. For healthcare it’s still a case of taking money back out of what was the star performer up to last week, probably to cover losses elsewhere.

Consumer discretionary (-1.8%) remains an obvious target but the opposite is true for staples. Yet even staples are being sold (-1.5%) as supplies run out.

The defensive sectors put in a slightly better showing but materials won the day, being the only sector to close in the green (+0.1%). It was all about the bounce in the gold price, and gold miners taking all podium positions on the top five winners’ board.

Computershare was not the biggest loser on the day. It was beaten by Corporate Travel Management ((CTD)), down -9.2%, and Webjet ((WEB)), down another -8.8%, despite being heavily shorted. No surprises there.

Yet, today we bounce again. The bargain hunters will be out in force, if they can catch an offer before sell-orders vanish. The good news is that yesterday’s close of 6325 is well above the sell-off low of 6256, intraday on Monday. The low has not been retested ahead of today’s upside.

The bad news is the low has not been retested. Often this has to occur before a bottom can be called.

Biden their time

Joe Biden’s resounding victory on Super Tuesday has put him ahead of Bernie Sanders on the delegate count, although California is still being counted. Even if the two are now close, Biden’s star is rising and Sanders’ appears to be fading.

This is great news for Wall Street, where Sanders’ socialist, anti-business policies are anathema. The healthcare sector led the S&P higher last night because Sanders has threatened to wipe out private health insurers.

Following behind healthcare were utilities, REITs and staples. These are the steady yield payers that benefit form a lower cash rate and are not directly exposed to any virus impact – the safest place to go for yield.

Over on Capitol Hill, a bipartisan bill was passed to provide US$8bn in emergency funding to fight the virus impact.

And if the virus is set to cripple the US economy, it wasn’t apparent in last night’s data releases. The ADP private sector report showed 183,000 new jobs added in February when 165,000 were forecast. The US service sector PMI for February rose to 57.3 from 55.5.

Compare that to China, where yesterday the independent Caixin services PMI showed a drop to 26.5 from 51.8.

Put it all together and the Dow has lodged yet another thousand-pointer, such that we’re all no longer astonished at such moves. Wall Street, too, has not tested its sell-off low.

Commodities

Base metals continue to lean to the positive as monetary and fiscal stimulus builds. Iron ore is hanging in there.

Oil markets await tonight’s OPEC meeting. It’s scheduled for two days, so tonight may not bring agreement.

The GDP result was good for another 0.3% for the Aussie to US$0.6621.

Today

The SPI Overnight closed up 112 points or 1.8%.

Australia’s January trade balance data are out today.

Myer ((MYR)) and TPG Telecom ((TPM)) report earnings today.

Note that the materials sector will be clobbered from the open today, until buying commences. All of BHP Group ((BHP)), Rio Tinto ((RIO)) and South32 ((S32)) go ex today, along with QBE Insurance ((QBE)), Ramsay Health Care ((RHC)) and many, many more.

The Australian share market over the past thirty days…