Overnight: All Over The Shop

By Greg Peel

Comeback Again

The ASX200 again dropped over -50 points in the opening rotation yesterday and again immediately bounced, although this time the recovery was less convincing than that of Friday. A choppy session followed as the index tried to hold onto the 5900 level, managing to scrape above by the close.

The standout difference between Friday’s trade and yesterday’s was that late last week the financials were enjoying some bargain hunting, while yesterday it was back to selling mode with a -0.8% fall. Ongoing weakness in healthcare continues to weigh, with both CSL ((CSL)) and the sector down -1.7% yesterday. CSL is now down -20% from its September peak.

Consumer discretionary (-1.7%) was another sector to standout on the downside following an update from Flight Centre ((FLT)) at its AGM that sent  its shares down -10% to be the worst index performer on the day.

IT (-1.6%) continued to follow the Nasdaq. The Nasdaq was up last night so we’ll see what happens today.

The only sectors to close in the green – and only just – were consumer staples and materials. In the case of materials, one might have expected something better after the Chinese stock market surged 4% on the day.

On Friday the Shanghai index rebounded 2% as a weak GDP read was accompanied by a promise from Beijing that the stock market would be supported. China’s private sector is a specific target of support and personal income tax cuts have also been flagged. Over the weekend Beijing went further in suggesting these measures need to be implemented quickly and noted a need to solve finance issues for SMEs.

So it looks like Beijing has rolled out the Plunge Protection Team, resulting in gains of 2% and 4% in consecutive sessions. This comes after a fall of -25% this year, thus reeking of deceased feline. Beijing refuses to consider the obvious path to an economic and stock market rebound.

The Chinese rebound may have provided support for materials as one might expect but the same would be expected of energy, yet that sector fell -0.8% yesterday. This was not a macro story nonetheless – WorleyParsons ((WOR)) went into a trading halt and the scuttlebutt is the company is preparing to raise $3bn in new equity to acquire relevant divisions of Jacobs Engineering for $4.6bn, with debt providing the balance.

The magnitude of the raise had index trackers selling off some of their energy sector holdings to prepare for the issue and reweighting.

In other news, the Australia-wide auction clearance rate fell to 47% over the weekend and 44.5% in Sydney, despite spring being the prime season for real estate. AMP’s Shane Oliver is now forecasting a -20% house price pullback. One researcher suggests 9% of all mortgages are now in negative equity, noting prices are so far down only -6.1% in Sydney.

That would explain bank weakness.

No Traction

The Chinese rebound was the trigger, traders suggest, for a strong start to Wall Street last night. But it lasted all of a heartbeat. Having opened up over 100 points, the Dow was down -150 points within an hour. Twenty minutes later it was back in the green and by midday down over -200 points. Another attempt to recover was made in the final hour but last minute selling ensured a close of -126.

One could be forgiven for assuming there was a barrage of news at various points during the session that caused such volatile mood swings, but no. Wall Street is simply fighting to find direction, as it did all last week. Once again, this is not unusual after a big fall.

All last week the Nasdaq was on the nose. Last night it bounced 0.3%. The technology sector was the strongest performer in the S&P500.

The S&P quickly broke down through its 200-day moving average but panic did not set in. Despite the breach the S&P is yet to test the previous October low. A close above the 200-day MA would have been heartening but a close below simply means more uncertainty.

The VIX is holding on below 20, which implies Wall Street is more complacent than it is frightened.

Adding to uncertainty – as if we needed any more out of the White House – was Trump’s decision to pull out of the nuclear arms treaty with Russia that ended the Cold War. So tick them off: out of the TPP, out of the Iran nuclear deal and now out of the Russian nuclear arms deal. What is Trump planning? World War III? I think we’re already in Cold War II.

Earnings are, of course, the major focal point at the micro level at present and on that note Intel (Dow) reported well and rose 2.3%, sparking a 5.8% jump for rival Advanced Micro Devices ahead of its own report.

On the other hand, consumer products maker Kimberley-Clark beat on earnings but earnings that were lower than the previous year, with higher input costs and the strong dollar blamed. It fell -3.5%.

Rising input costs and the strong dollar have been common themes in reports to date. Tariffs and rising interest rates have been common themes for outlooks. The US earnings season has only just begun but this week is the biggest on the calendar with 149 S&P500 stocks reporting. So in a week’s time we’ll have a better idea as to whether earnings will save Wall Street or not.

The market needs to make hay while the sun shines given forecasts for 2019 earnings growth fall back from 2018’s 20% plus to a more familiar 8-9% given last year’s tax cuts will have been cycled.

Commodities

The US dollar index rose another 0.3% last night but commodity prices remained generally buoyant on Chinese stimulus talk.

Gold nevertheless gave way to the greenback.

A -0.4% fall for the Aussie to US$0.7084 will at least provide the offset for Aussie gold miners.

And maybe CSL.

Today

The SPI Overnight closed down -12 point or -0.2%, which would take us back below 5900.

Today’s local stock calendar features an earnings report from Cimic ((CIM)), quarterly reports from Mirvac ((MGR)) and Oil Search ((OSH)), traffic numbers from Atlas Arteria ((ALX)), and a list of AGMs that includes Bega Cheese ((BGA)), Brambles ((BXB)), SG Fleet ((SGF)) and Southern Cross Media ((SXL)), among others.

One other is WorleyParsons. One presumes all will be revealed.

The Australian share market over the past thirty days…