Overnight: Fade To Grey

By Greg Peel

Hard Deck

Chartists had noted the 5800 level for the ASX200 was a technical line in the sand, a breach of which would signal the end of the longer term uptrend. On that basis 5800 offered strong support after the index had fallen so swiftly, down -7% since August.

Yesterday the futures suggested an open of -51 which seemed a lot given Wall Street had managed a bounce on Friday, if not a particularly convincing one. Which is probably why, when the index did fall -50 points from the open, buyers emerged. But suddenly they were swamped by what is rumoured to have been one big sell order.

In another hour the ASX200 was thumped to be down -100 points, slammed into the deck at 5800, and immediately rebounded around 40 points in the course of the next hour. A few more points were added to the close. With indicators suggesting the market had now fallen to oversold levels, this time the buyers showed more conviction.

I noted yesterday markets rarely V-bounce from a correction, but that intraday bounce off 5800 was about as ‘V’ as they come. Wall Street was still wobbling unconvincingly last night, and our futures are flat this morning, raising the question of whether or not our sell-off has found its nadir.

It will likely come down to whether Wall Street can avoid another down-leg.

The big banks and the big miners appeared to be the specific targets yesterday. For the financials sector to fall -1.6% in one session is a talking point by itself. To do so after having fallen so far this year is remarkable, even if house prices are falling, auction clearance rates are falling and credit conditions are tightening by duress.

Materials fell -1.1% when overnight metals prices were almost all to the upside, outside of a small pullback for gold. It was not a Sell Australia trade yesterday, as most of the recent weak sessions can be dubbed, but rather a very targeted one. If all the big caps were being sold we would not have seen energy up 0.4% and telcos up 0.2%.

IT was actually the biggest percentage loser at -2.1% but that is barely a drop compared to the banks. Afterpay Touch ((APT)) appears to have taken on the mantle of sector poster child, and it was the biggest loser in the ASX200 yesterday having been one of the biggest winners on Friday.

Domain ((DHG)) saw further selling after Friday’s rout, with REA Group ((REA)) now being sucked into the reality of a weakening housing market.

Despite this big sell-off, the Australian economy is supposedly doing rather well, with growth above 3% and unemployment approaching 5%. But if house prices do fall substantially and China slows down due to tariffs, what are the drivers? The most frustrating thing, nevertheless, is that we have lagged Wall Street for a decade, including this year, but every time Wall Street has a tumble we have to go down too.

That 6350 high now seems a long way away. It took about five months to get there from 5800 earlier in the year. Right now, as the futures are suggesting, we’re at an inflection point.

No Conviction

Wall Street’s bounce on Friday night was a little half-hearted, and last night the US stock indices bungled around with little sense of direction on much lower volume than seen late last week. A fade away at the close would normally suggest Wall Street is still playing to script and another down leg is nigh – the capitulation that suggests the bottom.

But earnings season is just ramping up. The coincidence of timing means this week could be more ad-lib than scripted depending on just how those results come out. Forecasts are still for earnings growth of some 23-24% which if accurate, should be enough to stop the rot and suggest value has emerged.

The key will nevertheless be guidance. If companies book solid earnings as expected and then down-play December quarter expectations based on any one of higher interest rates, stronger dollar, higher fuel prices, higher input prices in general, and of course, tariffs, then it will likely be a different story.

Friday saw the heavily beaten down sectors, and the FANG group in particular, rebound. Last night they were being sold again and the winning sectors were staples, REITs and utilities – all the defensives. Bank of America reported an earnings beat in the morning and it closed down -0.3%. As was the case with JPMorgan on Friday, slower loan growth was highlighted.

US September retail sales numbers came out and for the second month running showed a mere 0.1% growth. Economists expected 0.6%. Commentators have pointed to the hurricanes but that seems a stretch on a nation-wide basis.

And now we have a new geopolitical crisis to deal with, that of the suspicious disappearance of Saudi journalist Jamal Khashoggi. Trump has threatened sanctions against Saudi Arabia if it is confirmed the regime is responsible for Khashoggi’s murder. The Saudi King has denied any involvement, but as Wall Street was closing news services began to report that the Saudis may end up admitting to an interrogation session that went “horribly wrong”.

Were the US to impose sanctions on the Saudis, they would in turn cut oil production to the extent the price would shoot through US$100/bbl and beyond. Oil prices were modestly higher last night, suggesting this risk is seen as unlikely, but it’s just another ingredient to contend with in the current geopolitical cauldron.

If China were to wave a white flag, the world would change in an instant.

Goldman Sachs (Dow) reports earnings tonight, as does Netflix. Netflix is down -20% from its July high.

Commodities

The US dollar index was a little weaker on the US retail sales number, again providing modest support for metals prices. Apparently lead has gone nuts due to falling inventories.

Gold looks to be finding a bit of safe haven support.

The Aussie is 0.3% stronger at US$0.7131.

Today

The SPI Overnight closed “unch”.

China will report September inflation numbers today. The US sees industrial production tonight.

Locally the minutes of the October RBA meeting are due.

Cochlear ((COH)), Orora ((ORA)) and Telstra ((TLS)) are among those companies holding AGMs today. Challenger ((CGF)) provides a quarterly update.

Whitehaven Coal ((WHC)) provides a production report.

The Australian share market over the past thirty days…