Overnight: Consolidation Phase

By Greg Peel

Pay Day

Having shown the signs on Tuesday, the ASX200 was set for a recovery rally yesterday as long as Wall Street played ball, and that’s exactly what happened. Buying was largely market-wide and relatively uniform across sectors with a couple of exceptions.

The most sought after sector was healthcare, which having been an outperformer ahead of the sell-off was hit hard last week, offering up attractive re-entry points. CSL was in there as usual but even underperformer Ramsay Health Care ((RHC)) found some strength yesterday. The sector led the gains at 2.6%.

Providing the most index points was a 1.4% rally for financials.

The miners missed out this time around, falling -0.3% to be the only sector to close in the red. Base metals prices were lower across the board in London overnight but BHP ((BHP)) fell -0.7% from the open after releasing its production report.

There was not a lot of interest in the big telco, with that sector managing only 0.3%, while uncertainty in the oil market vis a vis Saudi Arabia et al saw both energy and utilities underperform with 0.6% gains.

The big news at the individual stock level was that of the banking Royal Commission shifting its focus to pay-day lending. The market has now learned that when it comes to RCs, you sell first and then wait to see what happens, not the other way around. Hence Afterpay Touch ((APT)), which despite arguably being a “financial” (surely being the target of the RC would suggest so) but has become poster child for the IT sector, plunged -19%.

Afterpay is probably the most volatile stock in the ASX200 at present, regularly appearing among the top five index movers on any given day in either direction. Not so volatile is Credit Corp ((CCP)), which yesterday lost -9% as RC collateral damage.

Note that IT still managed a 2.0% rally.

Perpetual ((PPT)) reported quarterly funds under management numbers yesterday. A -4.8% drop tells the tale.

On the buy-side, yesterday saw anyone selling anything to China enjoy a solid rebound, with Bellamy’s ((BAL)) up 12.5%, Blackmores ((BKL)) up 8.8% and a2 Milk ((A2M)) up 8.5%. All these were previous high-flyers, all three were thus heavily hit in the sell-off, and these are the growth stories previously hesitant investors now feel safe to jump into given de-rating.

Another quiet high-flyer in 2018 has been mining equipment hire service Emeco Holdings ((EHL)) which can only be described as “comeback king”. The company did it very tough when the mining investment boom dried up but has become a darling amidst the commodity price recovery and mining investment resurrection. It rose 10.1% yesterday.

And finally, previous underperformer Link Administration ((LNK)) rose 6.0% on a broker upgrade. (See: Investors Missing Link)

Wall Street wobbled last night, and the script suggests we will follow suit today after a couple of sessions of clawing back around a hundred index points. The futures are down -27 this morning.

Sticking to the Script

We’ve had the sell-off, the dead cat bounce, the rebound and, as of last night, the start of the uncertain consolidation phase. So far it’s all text book for Wall Street.

Having jumped over 500 points on Tuesday night in a broad-based rebound, last night the Dow fell over -300 points from the open, rallied back to be square, fell almost -200 points again into the last hour and then closed down -91.

Wall Street is trying to figure out whether it’s time to buy again, or not.

This is evident in indecision regarding which stocks and sectors are worth  jumping back in to. As the indices tumbled last week, with the Nasdaq hit hardest, commentators were calling the death of the growth trade, with value now the target. But Tuesday night saw growth lead the rebound.

Tuesday night also saw financials rally but lag the rest of the market, despite strong earnings reports from Goldman Sachs (Dow) and Morgan Stanley. Netflix reported after the bell and jumped 13% in the aftermarket.

Last night Netflix closed up only 5%, and financials were the strongest sector in the S&P. Tech was dragged down in both the Dow and S&P500 by IBM, which also reported on Tuesday night but fell -7.6% last night.

Arguably fuelling the initial sell-off from the open was another move up in US rates ahead of the release of the Fed minutes. The ten-year gained only 2 basis points to 3.18% but any move north now triggers some nervousness. It was the minutes themselves that triggered the second round of intraday selling.

There was very little new in the minutes, with the “gradual” tightening program being reiterated, but what caught Wall Street’s eye was that “a few” FOMC members believed the Fed could move to “modestly restrictive” given the strength of the US economy.

Under Yellen, the Fed was prepared to let the economy run a little “hot”, meaning let inflation gain some traction before hitting it with a rate rise. Well, the economy has been running hot, so now, under Powell, the FOMC is shifting towards pre-emption – getting ahead of the curve.

This scares Wall Street.

Hence we are not yet in a position to say a bottom is in place. October still has two weeks to run. Once again we can say it will all come down to earnings.

Commodities

The weekly US crude inventory lottery (one of them anyway, there are two and they often contradict) last night showed another surprise increase in stockpiles – the fourth in a row. The other lottery earlier in the week declared a decline.

Oil watchers are blaming the hurricanes, but WTI was down -2.5% last night nonetheless.

The US dollar index jumped 0.6% with some help from the Fed minutes but base metal prices were mixed on metal-specific factors and Chinese data.

Gold held its ground despite the jump in the greenback.

The Aussie is down -0.5% at US$0.7107.

Today

It looks like we’re in for a bit of give-back today, with the SPI Overnight closing down -27 points this morning.

The local September jobs numbers are out today.

A busy day for stocks sees an earnings report from Australian Pharma Industries ((API)), AGMs for Ansell ((ANN)), Aurizon ((AZJ)), Inghams ((ING)) and Treasury Wine ((TWE)), among others, and an investor update from Growthpoint Properties ((GOZ)).

Quarterly production reports are due from Santos ((STO)) and Woodside ((WPL)), along with Alumina ltd ((AWC)).

Note that Alcoa, JV partner of Alumina, reported quarterly earnings this morning after the bell and the stock is up 4.5% in the aftermarket.

Rudi will present tonight in front of ATAA members and their guests in Sydney, 6-9pm.

The Australian share market over the past thirty days…