Overnight: A Tale Of Two Budgets

By Greg Peel

Clouding the Issue

The ASX200 understandably meandered in a comparatively tight range yesterday, closing up a modest 20 points, as no one took any further risk ahead of last night’s budget release. Monday had already seen a solid rally supported by pre-budget revelations of brought-forward tax cuts and infrastructure spending, so it remained to be seen just how the market might respond to the greater mix of support.

The RBA stayed out of it, leaving the cash rate at 0.25%. Noting that…

“Public sector balance sheets in Australia are in good shape, which allows for continued support, with the Australian Government budget to be announced this evening. Both fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment.”

…we can confirm what most assumed, being that the RBA would not make a move until the extent of new fiscal support was known. ANZ Bank economists were another team yesterday to declare its assumption of a -0.15% cut in November (announced before the budget) to 0.1%.

Banks stocks were lower ahead of the release of the RBA statement, just in case, but snapped back when no change was confirmed.

It was left to the energy and materials sectors to provide the bulk of the modest index increase yesterday, rising 2.3% and 1.1%. The strong rebound in oil prices on a combination of Trump’s miracle recovery, a strike in Norway and another tropical storm shutting down activities in the Gulf drove oil stocks, while the first cab off the rank of long-anticipated gold miner M&A pushed up materials.

Kalgoorlie Super Pit dual owners Northern Star Resources ((NST)) and Saracen Mineral Holdings ((SAR)) announced a “merger of equals”, sending the former up 10.6% and the latter up 9.6% to take the top two positions on the index winners’ board. The news sent investors into other M&A contenders, with Westgold Resources ((WGX)) up 7.1% and Silver Lake Resources ((SLR)) 6.1%.

Dacian Gold ((DCN)) – not in the index – provided a quarterly production report that was worth 16.7%.

In other non-budget related news, Motorcycle Holdings ((MTO)) upgraded guidance due to strong five-month sales and jumped 24.5%, which flowed through to buying in Eagers Automotive ((APE)) to the tune of 7.0%.

Baby Bunting ((BBN)) rose 6.1% on first quarter sales growth, while Mayne Pharma received a “try again” letter from the FDA for its new contraceptive treatment, and fell -17.1%.

All things being equal, today should have provided clean air for the market to respond further to the record-breaking budget, which includes business incentives in the form of immediate asset write-downs and wage subsidies, and consumer support in the form of tax cuts, pensioner hand-outs and the same wage subsidies.

But alas, developments in the US have rendered the situation unequal. On the split, the futures closed down -17 points this morning.

Duck’s Off

“Nancy Pelosi is asking for $2.4 Trillion Dollars to bailout poorly run, high crime, Democrat States, money that is in no way related to COVID-19. We made a very generous offer of $1.6 Trillion Dollars and, as usual, she is not negotiating in good faith. I am rejecting their request, and looking to the future of our Country. I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business.

“I have asked Mitch McConnell not to delay, but to instead focus full time on approving my outstanding nominee to the United States Supreme Court, Amy Coney Barrett. Our Economy is doing very well. The Stock Market is at record levels, JOBS and unemployment also coming back in record numbers. We are leading the World in Economic Recovery, and THE BEST IS YET TO COME!”

A risky tactic by Trump with the election looming, forcing middle and low income workers to spend another month without pay? A ploy to force the Democrats into some level of capitulation? Or a move to simply ensure a Supreme Court majority such that when Biden wins, the result will be reversed?

The risk to the US economy, beyond another month without fiscal support, is a close result that requires weeks of postal vote counting (both for president and Congress), and longer still if the result is contested. Not that Trump would care. His only goal is to win, whatever the cost.

Pelosi has already responded by suggesting at least some elements of the stalled fiscal package could be individually agreed upon before the election, such as airline support, given tens of thousands of workers will now be laid off. Both parties agree on many elements but the major stumbling block has been support for state and local governments, with Trump’s attitude being they are their own jurisdictions and can live and die by their own (Democrat) swords.

Pelosi has up to now insisted a deal must be struck on a full package and not just some bits of it, as that would be to concede leverage. On that point, at least, Trump’s instruction has had an impact.

The Dow was up 150 points ahead of the Trump tweet just before 3pm. Wall Street was being led by cyclicals and value stocks, with the Nasdaq being left behind, as, ironically, confidence mounted that fiscal agreement was close to being reached. Within a heartbeat, the Dow was down -400. A few ups and downs followed, but Wall Street closed near its lows for the day.

Not even Big Tech could save the day.

Just to highlight one industry outside airlines, Cineworld, owner of cinemas across the US and UK, announced on Monday night it was not commercially viable to continue operating at socially distanced capacity and so would shut down all operations, with 45,000 facing lay-off. The stock fell -57% on the announcement.

Meanwhile, Wisconsin has moved to tighten restrictions in an attempt to stymie its rapidly growing case-count. Wisconsin is one of the three major swing-states. The Democratic governor had issued a stay-at-home order in March, but the Republicans had that overturned by the Supreme Court.

Commodities

The LME closed before Trump’s announcement.

The US dollar becomes a safe haven in times of uncertainty, impacting on gold.

Oil prices were up a lot more beforehand.

The greenback’s rise and Josh’s record budget has the Aussie down -0.9% at US$71.17, even as the RBA stays put.

Today

The SPI Overnight closed down -17 points or -0.3%.

The minutes of the last Fed meeting are out tonight. Largely redundant.

AGL Energy ((AGL)) holds its AGM.

The Australian share market over the past thirty days…