Overnight: Buy Everything

By Greg Peel

OMG it’s a Recession

You’ve possibly heard by now Australia’s GDP dropped -7.0% in the June quarter, having fallen -0.3% in the March quarter, which technically confirms the “recession we knew we would have”. Economists had forecast -6.0%.

The stats are fun:

Biggest quarterly drop in recorded history (1959), last worst being -2.0% in 1974. Annualised “growth” of -6.3% is also a record, last worst being -3.4% in 1983. Consumer spending – half the economy – fell an unprecedented -12.1%. Hours worked dropped -9.8% but household incomes rose 2.2% thanks to stimulus packages. Household savings rose to 19.8% from 6.0% in the prior quarter, which brings us back full circle to consumption plunging -12%.

Bovvered?

The stock market certainly wasn’t. Economists might have been in sixes and sevens but every sector closed in the green yesterday. This proves two things:

Firstly, the prior day’s equivalent sell-off was not about a general feeling of a market having run too far in August, or of fear around the historically weakest month of the year, it was most likely a large offshore fund manager reallocating at the end month. A lower Aussie on the day supports this theory.

Secondly, the market couldn’t care less about the GDP result. Six? Seven? It could have been either side of that and no one would have blinked. It’s September, which is a long way from April when the June quarter began. We know it was going to be bad, and (note to politicians) we know it was nobody’s fault.

In two sessions, the ASX200 has not moved. The market long ago dismissed the June quarter, and has taken on board a September quarter that will no doubt be weighed down by Victoria. The market is looking ahead to 2021, and even 2022.

For a rundown on what happened yesterday, just hold Wednesday morning’s Overnight Report up to a mirror.

The only stock move of any real note, in a day when everything that got sold down on Tuesday was bought back up again, was that of fund manager IOOF Holdings ((IFL)). It came out of a trading halt which followed the announcement of a significant capital raising, and duly fell -18%, on a combination of dilution and concern.

The concern relates to whether it’s a good idea to buy struggling fund manager MLC Wealth from National Bank ((NAB)).

The only other point to note is that energy, financials and IT lagged a bit yesterday (IT was a standout “loser” on only +0.7%), while all other sectors clocked 2%-plus.

While there will be much wailing and gnashing of teeth in Canberra, and pins being stuck in Dan Andrews dolls as the economy faces possibly another negative quarter, today is just another day on the market and the futures are up 42 points this morning.

Recession? Depression? The latter does not actually have a definition.

Utilitarian

Data showed the US added 428,000 new private sector jobs in August. Forecasts were for 900,000. The good news is the July figure was raised to 212,000 from an initial 167,000. The forecast then was for 1.9m.

Bovvered?

Clearly not. Momentum fed on itself all last night’s session. Whenever the Nasdaq has underperformed the S&P500 over the past few months the call is one of rotation out of growth and into value, mostly cyclicals, and it never lasts very long. But when the Nasdaq underperforms by still rising 1.0% to the S&P’s 1.5%, it’s not rotation out of one and into the other. It’s rotation out of rotation and into Buy!

The Nasdaq’s gain was trimmed off a bit last night by small falls in Apple, Zoom and Tesla, which is hardly surprising after their parabolic runs. But Amazon and friends pushed on.

Every S&P sector closed in the green last night bar energy. The WTI price fell -3.3% last night on data showing production and supply declines due to Hurricane Laura, which seems the wrong way round, but news Gulf production is bouncing back fast was the trigger.

Utilities has one been of the hardest hit sectors, due to a collapse in energy demand from industry, but it topped the table with a 3.1% gain last night. REITs have also been badly hit, on collapsing rents and asset devaluation, but it was just pipped for the silver with 2.2%.

Materials has also been hard hit, because the US does not export iron ore, but it rallied 2.3%.

Wall Street has perhaps learned the lesson that rotating out of growth, ie Big Tech, to buy cyclicals is a bet to nothing when Big Tech just keeps running higher. Best just to buy both, and hedge through diversification.

To that point, it is interesting to note that the VIX volatility index has been rising during this recent upward flurry, now over 26, when typically rallies drive the VIX lower as downside hedge protection is deemed less necessary.

The VIX is known as the “fear index” because it almost always reflects demand for downside put option protection. But the implied volatility level from which the VIX is derived is impacted by both put and call options.

While there is a clear cluster of demand for downside protection closer to the election, right now there is huge demand for call options over Big Tech stocks. This is in itself a form of “hedge”, as it is a way to ensure you’re still in the game if this thing just keeps on going up, without having to outlay the full amount. To that end we might still call it a “fear index” – FOMO.

The reason downside protection is mounting closer to the election is because Wall Street is still acting as if Trump will waltz back into the White House. A Biden victory will, among other things, double capital gains tax, if he can get his policy through. That is not good for Wall Street, whatever the moral dilemma.

Could the tipping point be ahead?

Commodities

The US dollar index posted a rare 0.4% gain last night which stopped most base metals in their tracks.

But it looks like iron ore has climbed into an EV.

The Aussie plunged yesterday on the GDP result but held at 73, and despite the rise in the greenback overnight is back to US$0.7334.

Today

The SPI Overnight rose 42 points or 0.7%.

It’s services PMI day across the globe today.

BHP Group ((BHP)) goes ex.

The Australian share market over the past thirty days…