Overnight: Pandemonium

By Greg Peel

Jumped the Gun

It seems every time this month I’ve sought to analyse why the ASX200 had a positive session the day before, it’s in the context of another fall on Wall Street overnight, thus rendering any explanation most likely redundant. Suffice to say, the index closed up 63 points yesterday, and the futures are down -51 points this morning.

But for the record…

It seems local traders decided yesterday to take a punt that Wall Street was showing signs of trying to find a bottom. That may be the case, but last night’s action proved far from conclusive. All sectors closed in the green yesterday and if it weren’t for some individual stock-specific influences in a couple of sectors, it was largely a market-wide rally, Buy Australia.

The standout move was nevertheless a 2.7% gain for healthcare. Traders decided CSL ((CSL)) had finally fallen far enough. It rose 3.7%.

Two of the Big Four banks report earnings in the next couple of days and traders have decided to take a punt here too, that bank stocks have been sufficiently trashed and provisions already pre-announced such that there simply can’t be any worse news at this stage. Financials gained 1.1%.

Indeed all of financials, energy, materials, telcos and utilities gained a bit over 1%. Consumer staples fell a little short on 0.8%.

The laggards were industrials (+0.4%), likely because it is a mixed bag, and IT (+0.6%), likely because Nasdaq fear lingers. The standout underperformer was consumer discretionary, up only 0.2% when other cyclical sectors had a strong session.

It was a bad day in discretionary. Outside of the ASX200, Kogan — the aspiring acorn to the oak that is Amazon – fell -33% following a trading update that revealed the new GST on global brands had cut sales as offshore websites continue to do business GST-free. What we have is a failure to germinate.

Hair/skincare company BWX ltd ((BWX)) fell -16% following its trading update, at which it was admitted the failed management buyout attempt had caused disruption. BWX is one of the most shorted stocks on the ASX.

Inside the ASX200, places two through five on the top five losers’ board yesterday were discretionary stocks. Seven West Media ((SWM)), which took the cricket rights off Nine for the first time since Lillee pounded down like a machine, just in time for Smith & Warner to commit treason, fell -4.9% as the damning report into cricket culture was released. Also on the list were Treasury Wine Estates ((TWE)), InvoCare ((IVC)) – yes, apparently dying is at your discretion — and GUD Holdings ((GUD)), all falling over -3%.

On the flipside, the second most shorted stock on the ASX, Syrah Resources ((SYR)), jumped 8.6% to top the leaders’ board, but volatility in the battery space is run of the mill. If you’re wondering, the answer is JB Hi-Fi.

Rare earth miner Lynas Corp ((LYC)), up 5.4%, sent a positive postcard from KL.

But it remains to be seen how the local market responds today to last night’s wild ride on Wall Street. The -51 drop in the futures reflects a Dow down -250, but does it reflect a Dow that rallied back 300 from its low?

We’ll see.

Whiplash

After a stutter on Friday night, last night Wall Street provided just the open Australian traders were punting on in buying locally yesterday. The Dow shot up 350 points and it looked like another attempt at a rebound, and thus perhaps a call that the bottom had been seen, was on the cards.

Wall Street hung there in rarefied air for an hour. Then started drifting back again. All the way back to square by 2pm.

From the outset, Boeing had been a drag on the Dow. The plane that crashed in Indonesia yesterday was not only built by Boeing, it was built this year. But what really set Wall Street off was news from the UK.

The UK is planning to introduce a 2% “digital services tax” aimed at reaping something back for the UK coffers out of global search engines, social media and online retail platforms whose profits all go back to the source. Yes, call it the “FANG tax” – something the Australian government has in the past contemplated but never had the balls to try, beyond GST, which doesn’t work (See: Kogan).

FANG was subsequently trashed when the news broke. Amazon, which fell -8% the day before following its earnings report, fell another -6% to be the worst performer in the group. The FANGs are all now in “bear market territory” (supposedly). Facebook is down over -30%. (Note: Apple is not, but it’s not a FANG.)

If that wasn’t enough to bring the sellers back in, another piece of news broke just after 2pm. Trump has said that if talks with President Xi at the G20 meeting in late November fail to achieve a breakthrough (which they won’t), the “all in” tariffs on the remaining US$267bn of Chinese imports will be implemented.

A bit over an hour later, the Dow was down -550. At that point it had officially hit “correction territory” (down -10%). The S&P, Nasdaq, Russell small cap and Dow Transports are all already down over -10%.

Forty minutes later, the Dow was down -245 as the bell rang.

Given the “real” US stock market is focused on the S&P500 and not the misleading Dow, it’s hard to imagine this milestone was the trigger for the bottom-pickers to pile in. But it sure seems that way. To emphasise the point, Boeing was already falling when the tariff news broke, which is kicking a man when he’s down, and it closed down -6.5%. That’s worth -175 of the -245 Dow points.

Was that the bottom? The suggestion is no, that likely was not. The reason is volume on the day was not substantial. The tariff news? Well we already knew that anyway. It was meant to be “automatic” a couple of months ago but never happened, so really it’s no surprise. Hence when it was confirmed, the buyers simply stood aside.

The plunge from square to down -550 did not involve any heavy selling, just a vacuum. A bottom is typically set on a day of very heavy selling.

But history is not guaranteed to be an accurate guide. What we do know is that last night saw the biggest turnaround in the Dow in eight months, and the biggest turnaround in the Nasdaq in three years.

It may not be capitulation, yet, but it’s certainly headless chook.

Here’s an interesting fact: This whole correction began because the US ten-year yield cracked 3.10%, before heading as high as 3.24%. It’s now at 3.08%.

Commodities

The US dollar was up again so base metals again leaned to the downside. The LME closed before the tariff news.

The oils copped the brunt of the tariff news.

The Aussie is down -0.5% at US$0.7059.

Today

The SPI Overnight closed down -51 points or -0.9%.

The eurozone releases its GDP number tonight.

Locally, building approval numbers are due today.

Among today’s AGMs: Bendelaide ((BEN)), Boral ((BLD)), Reliance Worldwide ((RWC)) and Vocus ((VOC)).

Production reports: Alacer Gold ((AQG)), Orocobre ((ORE)), Origin Energy ((ORG)).

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.