Overnight: Two In The Hand

By Greg Peel

Vale October

The most exciting thing that’s happened this morning is it’s no longer October. The ASX200 finished down -6% for the month, having been down -9% at the nadir. Next Tuesday silly season begins, and October will become just a fading memory.

The fact that yesterday was the end of the month has to be considered in the context of yesterday’s session which saw an initial fall, a lot of chopping around and finally a surge to the close. This is exactly the sort of session one might expect at any month end, and in this case, a late rally of the window-dressing variety was always more likely than a profit-taking sell-off, given there weren’t any.

But there were plenty of individual stock stories impacting on the market yesterday, beyond a more general perception that perhaps the bottom has been seen.

The main driver of yesterday’s gain were financials, up 0.9%.

ANZ Bank ((ANZ)) offered a buy-the-fact opportunity, having already flagged the cost to date of the RC. Profit hit aside, the dividend was unchanged, bad debts remain low and capital has increased. Net interest margin disappointed pointing to a tough banking environment going forward, but a 1.1% rally was mostly one of relief.

Commonwealth Bank ((CBA)) finally announced the sale of its funds manager Colonial First State to the Japanese, for cash, boosting its capital positon. That was worth 1.6%.

In the face of some analyst doubt, AMP ((AMP)) announced that it would indeed be returning cash to shareholders from the proceeds of the sale of its wealth and mature businesses. Both remaining shareholders seemed pleased, and others piled in to push the AMP up 6.9%. On any other day this would look spectacular. When you’ve been down -50%, it doesn’t.

Energy (+1.4%) won the day, despite oil prices slipping overnight. The sector was reeling last week from the government’s planned intervention so here we might find some bottom-pickers.

Consumer discretionary was one of only two losing sectors. Corporate Travel ((CTD)) failed to satisfactorily address the allegations made by a short-side hedge fund, came out of a trading halt and fell -27%. Having already been slammed after its recent trading update, Kogan ((KGN)) fell another -11%. Having been carted the day before, Lovisa ((LOV)) bounced back 12%, but is not in the index.

The sector fell -1.1%, as did telcos, which seem to be back to their old tricks.

China released its October PMI numbers yesterday which confirmed what all assumed – tariffs are biting. The manufacturing PMI fell to a two-year low 50.2 from 50.8 in September, when 50.6 was forecast. The weakest segment was new export orders. The services PMI fell to 53.9 from 54.9.

Beijing is pumping more money into the system, mostly to provide support for the stock market, but manufacturing appears set to go into contraction, perhaps in the next release.

Our materials sector managed only a 0.1% gain yesterday.

While it might have been a good day for the banks, in the background it appears they will not get any chance to raise mortgage rates and use the RBA as an excuse, perhaps not in our lifetime anyway. The September quarter CPI fell to 1.9% annual growth from 2.1% in June when 2.0% was forecast. The core rate also fell to 1.9%, and is thus now back below the RBA’s target zone.

Attempts were made to contact the RBA board in St Tropez.

As The Bubble would say, it’s a new day, it’s new dawn blah blah, and we note that it took until the last day of the month for Wall Street to put two consecutive rallies together.

Picking up the pieces

Talk of a bottom now being in place has become more prevalent on Wall Street as the S&P500 reaches that two-day milestone. Again we have to put last night’s session in the context of it being month end, such that tonight’s trading will be more relevant in determining whether we have indeed now seen the worst of it.

The Dow opened higher and continued on to be up 460 points as trading entered the final hour, before giving back over -200 points to the death. I wouldn’t read too much into that late selling.

The S&P finished down -7% for the month, its biggest monthly loss since September 2011. The Nasdaq lost -9%, which it last did in November 2008.

The earnings season has still been going on in the background, and those who have throughout the month remained confident this correction was what the doctor ordered and Santa was just waiting in the wings point to a third consecutive quarter of solid results to support their argument.

Last night featured rallies from Facebook (+3.8%), General Motors (+9.1%) and the Colonel’s Yum Brands (+4.6%) post result. Throughout the mostly tech sector-driven carnage, the other A in FAANG has outperformed in falling only -6% when FANG has fared much worse. The A in FANG is down -20%. Apple reports tonight, and rose 2.8% last night in anticipation.

And if it’s not earnings, then the glass half full brigade can also point to economic data. Last night’s ADP private sector jobs report showed 227,000 new jobs being added in October, ahead of a forecast of 202,000.

However it is unlikely Wall Street will see any immediate surge in November, given next week brings the midterm elections. No one’s prepared to call the result as it’s too close in the polling, but the Republicans have been hell bent on scaring America into believing that if they think October was bad for Wall Street, if the Democrats take the House you ain’t seen nothing yet.

We might assume that risk is now sufficiently priced in, and unlike the system in Australia, the president can veto the House anyway. The risk has an upside skew, given if the Republicans hold on, and the correction is now over, Santa will be called off the bench early in the game this year.

The elections are on the night after the Cup.

Commodities

The US ten-year bond rate rose 5 basis points to 3.16% last night, probably suggesting the flight to safety trade has faded. This is corroborated by gold, which fell –US$7.80 despite the US dollar being little changed.

A turnaround in base metals and oil prices is yet to be seen, and yesterday’s Chinese data would not have helped.

Despite a little dip last night, iron ore ticked higher over the month.

The Aussie is down -0.4% at US$0.7077 on the weak CPI.

Today

The SPI Overnight closed up 26 points or 0.5%.

The rest of the world will release manufacturing PMIs today/night, Australia included.

We will also see local trade numbers for September and ANZ job ads. And house prices, but we won’t go there.

It’s National Bank’s ((NAB)) turn today to release full-year earnings. Woolworths ((WOW)) reports quarterly sales.

Today’s list of AGMs includes the two casino chains, Downer EDI ((DOW)), Perpetual ((PPT)) and Vicinity Centres ((VCX)).

The Australian share market over the past thirty days…