Overnight: One Small Step

By Greg Peel

Poor Start

Had it not been for the banks on Friday, the ASX200 would have closed the September quarter relatively square at a shade under 6200. The banks rallied on Friday on a “buy the fact” of the RC interim report not containing any surprises.

But I noted yesterday that it was after close of trade when the Labor Party reaffirmed its call for the financial RC to be extended and being in no political position to protest, the prime minster suggested the idea could be entertained.

The result? Yesterday the financials sector led the index down with a -1.3% fall, to wipe out all of Friday’s gains.

Beyond the banks, only healthcare (+0.7%) finished in the green yesterday, with every other sector closing lower by mostly small percentages – consumer discretionary being the worst among them on -0.6%. The coin came up heads on CSL, despite only a small dip in the Aussie, but otherwise it looked like a very “risk off” start to the new quarter.

We must take into account NSW was closed for business yesterday, impacting on volumes.

The most interesting point about yesterday’s session is there was no reaction to the news, which came out in our time zone, of Canada having reached an agreement on a new trilateral trade deal. Australia may not be a part of NAFTA, but it’s a join the dots story of any progress on US trade agreements engendering more hope China may eventually cave in too, and that would be comforting for Australia’s economy.

Maybe today will be different, given Wall Street’s response overnight and the fact all states are back on board today after their various long weekends. The futures are up only 7 points this morning, which doesn’t seem all that inspiring.

The 6200 level will remain a barrier, it seems.

At the individual stock level yesterday, there were no particularly large moves other than that of Nufarm ((NUF)), which came back from a trading halt post dilutive capital raising and fell -9.7%.

Against the tide, the milk stocks had a good day after Fonterra ((FSF)) announced improved milk volumes due to more favourable weather.

In economic news, house prices fell at an annual rate of -2.7% in September, with Sydney leading to the downside with -6.1% and Melbourne on -3.4%. Those who can’t afford a house in the mainland capitals have clearly all headed south. Hobart prices are up 9.3%.

One Small Step

NAFTA is dead. Long live the USMCA.

After much deliberation, yesterday Canada finally agreed to a NAFTA 2.0 which will be renamed the US-Mexico-Canada Agreement without any mention of ‘FT’ as this was always a misnomer to begin with.

The deal is good news for automakers, farmers and others in the US as was reflected in last night’s response on Wall Street. USMCA also for the first time includes agreement on fintech and other digital services that simply didn’t exist when the first NAFTA deal was signed. But that didn’t seem to help the Nasdaq.

The response on Wall Street was as one might expect. The Dow solidly outperformed with a 0.7% gain as all the big industrial trade war poster boys rallied as they do whenever there is any breakthrough or signs of one in the realm of global trade, even if in this case they are not directly boosted by the USMCA.

Recalling that Washington recently reached a trade agreement with South Korea, has now reorganised NAFTA, has the EU still working on a mutual solution and Japan is eager to bed something down, one might suggest the stepping stones towards general global agreement are gradually being crossed, or the dominoes are falling, or [insert analogy here].

And that path leads to China. A US-China agreement seems as distant as it ever was, but the question is as to whether Beijing wants to land itself in total trade isolation if everyone else settles with the US. Being a member of the TPP minus one is not going to cut it.

The flipside of the Dow’s outperformance was a -1.4% fall for the Russell small cap index. Small caps have been the go-to trade in 2018 on the basis of (a) they typically paid full income tax and thus are greater beneficiaries of the tax cuts than the big corporates who never paid the full amount anyway, and (b) being mostly domestic-facing they are less likely to be impacted by a global trade war.

The Russell is up 13% year to date to the S&P500’s 9% and has constantly hit new all-time highs. Good reason, thus, to lock in some of those profits and go back into the big multinationals that have been impacted for the last six months by trade war fears.

The most notable response to the USMCA announcement nevertheless came from the oil markets. All three members are oil producers but despite the US being energy self-sufficient, it still imports crude across both borders given logistical impediments domestically.

WTI crude jumped 3% to reach its highest level in four years. Back then it was coming down from prices above US$100/bbl. Now all talk is of WTI going back there, or at the very least Brent.

The euphoria did start to wane towards the close last night – the Dow was up 279 points at its high, and commentators pointed the fact it was the first session of a new quarter and likely reflected fresh funds coming into US stocks – which globally are the place to be right now – beyond just trade relief.

Commodities

Some of the base metals jumped up sharply on Friday night and all most drifted back last night, which would reflect last minute buying ahead of China’s week-long holiday and now a week of low volatility, unless something comes out of the blue.

Nothing much else of note beyond oil.

The loony went nuts last night (+1%) and the peso caught a bid but the Aussie is steady at US$0.7219 with the US dollar index up 0.2%.

Today

The SPI Overnight closed up 7 points.

Some poor sap at the RBA office will be tasked with copy-and-pasting last month’s policy statement to provide today’s release. The board itself is holidaying on the Riviera.

Little else going on in the world today.

Nick Scali ((NCK)) goes ex.

Rudi will connect with the newly renamed Your Money via Skype at around 11.15am this morning to talk shares.

The Australian share market over the past thirty days…