Overnight: Tech & Trade

By Greg Peel

Nowhere to run to

The SPI futures had suggested a 17 point rally for the ASX200 yesterday on Wall Street strength but that was Saturday morning. By yesterday morning the aggressive tone of the US Vice President in PNG and the failure of APEC to release a joint communique had investors rattled on the trade front once again.

That was an overriding theme as every sector closed in the red on the local market yesterday, but local factors also conspired.

The bank Royal Commission fired up again. Enough said. Financials down -0.8%.

Myer ((MYR)) is not an ASX200 member these days but its death spiral – down -8.9% yesterday after coming out of its trading halt – is not boosting sentiment in retail land. Consumer discretionary down another -0.9%. Wesfarmers ((WES)) continues its pre spin-off slide. Staples down -0.8%.

Oil prices were heading south in aftermarket trade during yesterday’s local session. They have since rebounded, but energy closed down -1.6%.

Lower than expected refiner margins led Viva Energy REIT ((VEA)) to issue a profit warning, and it fell -12.2%.

One of the market’s most volatile stocks at present, Afterpay Touch ((APT)), shot up on good news from ASIC on Friday and then fell -8.8% yesterday. IT fell -2.3%.

Medibank Private ((MPL)) announced it had missed out on a big health services contract and fell -6.1%. Healthcare fell -0.8%.

The “winning” sectors on the day were telcos and materials, in both falling only -0.2%, with the latter a solid performance when trade is again an issue.

It was thus a meeting of the macro and micro driving weakness across the board. Wall Street has taken another hit last night with trade fears once again front and centre. The question for our market this morning is did we sufficiently pre-empt Wall Street yesterday or will we just blindly follow the US down yet again? The major US indices enjoyed a bounce late last week. We didn’t.

The futures are down -16 this morning.

Nowhere to hide

President Trump had been trying to talk things up on the trade front late last week and for some reason Wall Street was prepared to be hopeful, but when his vice president delivered an aggressive anti-China speech at APEC over the weekend, that mood changed.

So last night it was back to the trade fear trade – the big multinationals like Boeing, Caterpillar and 3M led the Dow down. Dow component Apple is a company potentially also impacted by trade tariffs but for the fact the bulk of its suppliers are in China, but Apple has its own problems.

Those suppliers are apparently being hit with cuts in orders for parts from the iPhone maker, according to the Wall Street Journal, leading the market to assume demand for Apple’s three new iPhones is soft. Apple shares fell another -4% last night and are now down -20% from their early October high.

The soft smart phone demand assumption has been corroborated by chip maker and one of Apple’s supplier, Nvidia, which having fallen -18% on Friday night after an earnings result miss, which was blamed on apparent smart phone saturation and a crypto-hangover among other things, fell another -12% last night.

Thus the Apple story resonated through the tech sector in general, and all the of Dow, S&P and particularly Nasdaq, along with every index ETF, tech ETF, growth ETF…and on and on.

When Trump’s tariffs were hitting trade-exposed stocks at various stages throughout the year, the FANG’s were to the go-to haven. Facebook had its own issues but China is not important for any of Amazon, Netflix or Google, and those growth stocks took Wall Street up to ever new all-time highs.

Or perhaps we can call them all-time too-highs. If you’re a growth stock, your valuation is based squarely on future earnings expectations, discounted back to today’s dollars. The discount rate employed is typically the “risk free” US ten-year bond rate. Twice this year that yield has shot up to 3.23%, with a bullet, and twice this year the FANG’s have taken a hit on a simple equation of future earnings reduced in value due to a higher discount.

The ten-year is now back to 3.06% but it’s been too late to save the FANGs. The overvaluation call finally made its impact in October and that foursome is now down -30-40% from the highs. History will likely show that the second great tech wreck of our time came just after Standard & Poor’s decided to separate out a new sector called communication services.

Tech in general was hit hard last night as tariffs do impact across the sector, and right now sentiment is such that no one wants to miss the rush to get out of growth and into the safety “value”. Stocks like Coke and Maccas have been hitting new all-time highs in this swoon.

Not helping, either, last night was the latest index of housing market sentiment which has dropped to 60 from 68 last month when 67 was expected. The US housing market is suffering from higher mortgage rates.

Throw in Brexit, ongoing deadlock on Italy’s budget and whatever else you like and Wall Street is simply struggling to find reasons to be cheerful right now. It might also prove difficult to find reasons to give thanks, but no doubt many are looking forward to a holiday break.

It’s typical for traders to exit positions ahead of a holiday.

Commodities

The US dollar index is continuing to drift lower which is providing the offset for metals prices at present as trade remains the focus. Iron ore has made a comeback.

The oils dipped early but bounced back.

Despite the -0.3% drop for the dollar index, the Aussie is down -0.2% at US$0.7293.

Today

The SPI Overnight closed down -16 points or -0.2%, a far cry from the S&P500’s -1.3%.

US housing starts numbers are out tonight which might prove another source of angst.

The minutes of the RBA meeting are due today.

ALS ltd ((ALQ)), CYBG ((CYB)) and OzForex ((OFX)) release earnings results today.

A2 Milk ((A2M)), Domain Holdings ((DHG)) and Fletcher Building ((FBU)) are among those companies holding AGMs today.

The Australian share market over the past thirty days…