Overnight: Lows Tested

By Greg Peel

Sell Australia

In a rare occurrence, the computers did not send the ASX200 shooting up or down from the open yesterday, only to reverse once the humans took control. Rather, the market did nothing in the first half hour before a wave of selling hit.

That wave appeared to be one of a Sell Australia nature, as not one sector was spared yesterday. It lasted until midday and thereafter the index largely stabilised, but the damage had already been done.

That damage was done before other Asian markets – China in particular – could have an impact. Over the weekend Beijing pledged to support the stock market and free up credit for SMEs, providing the stimulus needed to avert further slowing in the economy. Beijing said yesterday that US tariffs were not of any great concern.

That’s not the opinion at the coal face, pardon the pun. The Shanghai index proceeded to fall another -2.2%, ensuring the previous two sessions of up 2% and up 4% were indeed a dead cat bounce. Where was the promised Plunge Protection Team? Hong Kong fell -3.1% and Japan -2.7% as hopes for any sort of resolution between the US and China faded further and assumptions the trade war would be over by Christmas waned.

In Australia, all the large caps were hit in the morning. The banks closed down -1.2%, materials -1.0% and telcos -1.3%. Healthcare fell -1.1% despite Healthscope ((HSO)) jumping 19% on a yet another takeover proposal. CSL’s slide continues.

The worst hit sectors were energy (-3.2%) and utilities (-1.9%). Despite energy being another sector of large caps, additional weakness was provided by the Morrison government’s post-Wentworth panic.

How to get energy prices down? Cap them! That’ll be an election winner!

Origin Energy ((ORG)) subsequently fell -4.4% and the big upstream oil & gas producers were equally carted. AGL Energy ((AGL)), which is in utilities, fell -2.7%.

I’m not sure the rumour is true the government is also considering a cap on beer prices.

The consumer sectors were not as hard hit as other sectors. Staples (-0.6%) played a defensive role while Flight Centre ((FLT)) bounced 4.0% after brokers called Monday’s -10% fall an overreaction. Discretionary lost -0.1%.

IT did not manage a bounce on the back of the Nasdaq, as I suggested yesterday morning, but only fell -0.3%.

As the world turned, the ongoing sell-off continued. Asia closed and then Germany fell -2.2%. The focus was then on Wall Street.

Suffice to say, the SPI futures closed unchanged this morning.

No Follow-Through

China was offered as the reason all major US indices plunged from the open last night, with the Dow falling to be down -548 points in the first hour. If Beijing suggests it is not concerned about tariffs, the trade war is here to stay.

At that point, Wall Street had fallen further than the lows of a couple of weeks ago. As they say in the market, the lows were being retested. Again Wall Street is sticking to script. Typically the first lows are retested before a bottom can be called. It would all depend on how the computers responded. If the algos chose to play the momentum trade, a big hole would have opened up.

But they didn’t.

It started with the most beaten-down sectors, which are also amongst the most shorted – home builders, semi-conductors and banks. They began to rally back, and slowly a more general rally began to play out. It was not a sharp V-bounce but rather a grafting recovery that took all the majors back to around square in the last hour.

It was a big day for earnings releases and this time they were not particularly helpful as Wall Street tumbled early. Among the Dow names, 3M and Caterpillar posted decent results but guidance was the issue. The strong dollar and higher input prices, including energy, were cited as the numbers were trimmed. 3M closed down -4.4% and Caterpillar -7.6% — its biggest drop in over three years.

While tariffs were not cited as an issue – yet – these two names have been pin-ups for trade war fears since March.

On the other hand, McDonald’s jumped 6.3%, United Technologies 2.9% and Verizon 4.1%. All are Dow names and all reported earnings.

It was only in the last half hour Wall Street began to fade once more. Too risky to take positions home. China is now a day to day proposition, and tonight Italy puts its budget to the EU.

And then there’s oil.

Last night the Saudi oil minister told Russian media that the Kingdom would increase oil production and take a “constructive and responsible role” in stabilising energy prices. The current OPEC-Russia production quota agreement would be replaced, the Saudis propose, by an open-ended agreement which would allow members to raise and lower production  as required to balance the market.

“Constructive and responsible” is one way of looking at it. “Open slather” is another. WTI crude fell -4.4% and Brent -4.7%. Not a good day for the US energy sector but perhaps a good day for everyone else suffering from surging fuel costs.

For the most part, Wall Street’s comeback is a positive sign. The late sell-off is not unexpected. But as to whether we have now seen the bottom remains unclear.

Commodities

Little movement in currencies but with tensions rising, gold is up once more. Metal prices remain mixed.

The oils are the standout.

The Aussie is steady at US$0.7087.

Today

Australia was a leader rather than a follower yesterday. On Wall Street’s recovery, the futures this morning are flat.

Flash estimates of October manufacturing PMIs are due from Japan, the eurozone and US.

The Fed Beige Book is out tonight.

Production reports will be forthcoming today from Newcrest Mining ((NCM)), Iluka Resources ((ILU)) and Senex Energy ((SXY)). There’s a welter of AGMs on the calendar today, among them Stockland ((SGP)), Bellamy’s ((BAL)) and Super Retail ((SUL)).

The Australian share market over the past thirty days…