Overnight: No Worries

World Overnight
SPI Overnight (Dec) 6186.00 – 13.00 – 0.21%
S&P ASX 200 6210.30 + 31.10 0.50%
S&P500 3483.34 – 5.33 – 0.15%
Nasdaq Comp 11713.87 – 54.86 – 0.47%
DJIA 28494.20 – 19.80 – 0.07%
S&P500 VIX 26.97 + 0.57 2.16%
US 10-year yield 0.73 + 0.01 1.25%
USD Index 93.82 + 0.43 0.46%
FTSE100 5832.52 – 102.54 – 1.73%
DAX30 12703.75 – 324.31 – 2.49%

By Greg Peel

Rate Cut Coming

“When the pandemic was at its worst and there were severe restrictions on activity we judged that there was little to be gained from further monetary easing. The solutions to the problems the country faced lay elsewhere. As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.”

The market was already tipping a rate cut to 0.10% from 0.25% ahead of the October board meeting, but decided the RBA would hold off to see what the federal budget would bring. Despite the budget’s stimulus impact, this statement from the governor yesterday pretty much seals the deal. Economists firmly believe the cut will come on Cup Day.

Making it once again the rate that stops the nation.

The other question is as to whether the RBA might back up a near zero rate with “pure” QE. To date the central bank has been conducting a Term Funding Facility at the three-year maturity, holding that yield at 0.25% (albeit without having to do much), but “pure” QE would imply buying government bonds out to the ten-year maturity.

“Our balance sheet has increased considerably since March, but larger increases have occurred in other countries. We are considering the implications of this as we work through our own options.”

This implies pure QE is on the cards, but economists are not necessarily expecting that in November – maybe next year.

The board has noted previously “addressing the high rate of unemployment as an important national priority”. Yesterday’s September jobs numbers followed Lowe’s speech. Suffice to say, they don’t paint an accurate picture.

After a solid three months of gains, -30,000 jobs were lost across the country last month. The unemployment rate ticked up to 6.9% from 6.8% and underemployment to 11.4% from 11.3%. There’s a simple explanation – Victoria – but no. Victoria’s unemployment rate fell half a point to 6.7%. This is because the participation rate plunged in the month.

The same situation was evident back in April-May when the whole country was in lockdown. People were not bothering to apply for jobs as it was pointless. The usual rules of having to prove one was actively seeking a job to receive the dole were waived. So once again the national numbers are misleading at best, given to be counted as “unemployed” one must “participate”.

After a stuttering start the ASX200 jumped up 50 points by midday on the economic news. It wavered through the afternoon and closed up 30. The Aussie plunged on possible confirmation of a rate cut to as low as US70.6c but has since recovered, despite a strong US dollar overnight, to US$0.7094, down -1.0% in 24 hours.

The banks (+0.6%) had a positive session, trading off the impact of a near zero rate on net interest margins with support for the economy reducing the risk of bad loans.

The big sectors moves on the day came from energy (+2.5%) on a jump in oil prices and materials (+1.2%) despite a spiralling iron ore price. The sector was boosted by an index winning gain for Whitehaven Coal ((WHC)), up 11.7% despite the Chinese not buying the stuff. It was all about the miner’s September quarter sales and production report, and the fact the stock has been on the nose of late.

Other than utilities (+1.1%), driven by AGL Energy ((AGL)), remaining sector moves were insignificant.

Other sizeable individual stock movers included Pro Medicus ((PME)), up 7.7% after signing a deal with a German hospital, Eagers Automotive ((APA)), after reporting a 45% year on year jump in sales, Zip Co ((Z1P)) down -7.5% on ongoing downside momentum, and IDP Education ((IEL)), down -6.1% after the company’s largest shareholder suggested it might bail.

I have given up on the ASX website as I cannot interpret the data (and it takes a month of Sundays to upload) and I have received no response from the ASX to my request for interpretation. A third party website informs me the futures closed down -13 this morning.

Virus Bites

Major economies in Europe, along with the UK and Ireland, are now seeing higher daily case-counts than the first time around and as such are reapplying various degrees of restrictions. The US is also seeing record case numbers in some states.

Last night stock markets fell -1.7% in London, -2.5% in Germany and -2.1% in France. On the time differential overlap, the Dow was down -330 points by late morning in New York.

Once Europe closed, the Dow recovered to be slightly in the green just before the close. Hope continues to spring eternal. For reasons unknown, the White House is continuing to work on a stimulus agreement, which is heartening investors. Yet while Trump has said “go big or go home,” Senate Republican leader Mitch McConnell has effectively said not a hope in Hades.

US new jobless claims climbed by 53,000 last week to 898,000 when economists had forecast 830,000, to mark the greatest weekly rise since August.

While to date the antitrust campaign against social media companies has been mostly Democrat-led, last night the Republican majority Senate voted to subpoena the heads of Facebook, Google and Twitter. The EU is also stepping up its attack.

Goldman Sachs put out a note last night downgrading its technology rating to Neutral, suggesting likely policy shifts and slowing economic growth may temporarily cap the outperformance of the sector. It’s by no means a “Sell!” rather a suggestion it’s time to take some profits and refocus on other sectors for the time being.

Which is what Wall Street did last night, as evidenced by the Nasdaq falling -0.5% to the S&P’s -0.15%, and the Russell small cap jumping 1.1%. It’s all about cyclicals/value and the assumption that even if it’s not before the election, there will be stimulus. And Goldman’s downgrade.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1908.30 + 8.30 0.44%
Silver (oz) 24.27 + 0.02 0.08%
Copper (lb) 3.06 + 0.01 0.36%
Aluminium (lb) 0.83 – 0.00 – 0.29%
Lead (lb) 0.81 – 0.00 – 0.30%
Nickel (lb) 6.91 – 0.08 – 1.13%
Zinc (lb) 1.09 – 0.01 – 0.65%
West Texas Crude 41.01 – 0.02 – 0.05%
Brent Crude 43.19 – 0.12 – 0.28%
Iron Ore (t) 118.90 – 0.85 – 0.71%

Not much to see here, despite the US dollar index rising 0.5% and the fact the dollar rose on euro and pound weakness, reflecting economies re-locking down, which is not great for commodities.

As noted the Aussie is down -1.0% at US$0.7094.

Today

The SPI Overnight fell -13 points, it appears.

New Zealand goes to the polls tomorrow. Can the pin-up girl win a majority in her party’s own right?

The US will see retail sales, industrial production and consumer sentiment data tonight.

Iluka Resources ((ILU)) shareholders vote today on the proposed Deterra demerger, which will probably waltz through.

Rio Tinto ((RIO)) releases its quarterly production report.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BOQ Bank Of Queensland Upgrade to Outperform from Neutral Credit Suisse
Upgrade to Add from Hold Morgans
Downgrade to Underperform from Neutral Macquarie
FLT Flight Centre Downgrade to Neutral from Outperform Credit Suisse
HUB HUB24 Upgrade to Neutral from Underperform Macquarie
LNK Link Administration Upgrade to Equal-weight from Underweight Morgan Stanley
Downgrade to Hold from Accumulate Ord Minnett
NST Northern Star Upgrade to Hold from Lighten Ord Minnett
TWE Treasury Wine Estates Upgrade to Hold from Lighten Ord Minnett
WOW Woolworths Upgrade to Overweight from Equal-weight Morgan Stanley
Greg Peel

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

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