Overnight: Getting Set

By Greg Peel

Hard Fought

The ASX200 shot up to its high for the day of up 53 points in the first half hour yesterday as might have been expected following the rally on Wall Street. There it hit a morning brick wall, and having failed to progress, faded through lunchtime. The index again tried to rally, failed, and rallied once more to a less spectacular close.

Either some traders are unconvinced the Fed has really started to back off, or sellers who missed out in the last plunge are taking the opportunity, or maybe there are just too many Grinches.

Or perhaps yesterday’s September private capex numbers caused some consternation.

Capital expenditure in the quarter fell -0.5% when a 1.3% gain was forecast. But beneath the headline, the numbers don’t look so bad.

We recall that Wednesday’s construction work done number was a disappointment, let down by a decline in private engineering construction. Well that element also impacted on capex – construction was weak. But spending on machinery & equipment was strong and the outlook for business investment was upgraded.

Non-mining firms expect to increase investment by 7% in FY19. Three months ago they said 2%. Mining is also slowly turning around, with gas impacted by the impending completion of Ichthys but iron ore ramping up.

So looking ahead, the picture is a bit more positive as we near the end of LNG completions.

Only two sectors closed in the red yesterday. One was utilities, which fought a battle between not being a “risk on” play and benefitting if US rates do not run up too fast. The former won and the sector fell -0.5%.

Consumer discretionary fell -0.1% after Aristocrat Leisure ((ALL)) missed on the top and bottom lines in its result (-2.6%).

All other sectors gained on the day, led out by IT, which rose 2.8%. The Nasdaq rose 2.8% overnight. Who said there was a correlation? Afterpay Touch ((APT)), Altium ((ALU)) and WiseTech Global ((WTC)) took out the medals on the ASX200 winners’ board.

Materials (+1.3%) came back into vogue after a drop in the US dollar provided some metal price relief. Don’t mention the Aussie.

The healthcare heavyweights chimed in (+1.0%) while the banks (+0.5%) continued to play Nellie Melba.

Put it together and we are starting to see a W-bounce from the October and November lows. The number now to watch for the index is 5942. That was where the ASX200 briefly returned to on a first attempt at an October bounce, before a second wave, and also the peak we reached on the more substantial bounce ahead of the November wave.

That’s almost a couple of hundred points away so a bit to do yet.

With the Fed box ticked for now (supposedly), the next box is trade, followed by oil. Santa is loaded up and ready to go, but he still needs that green light.

Positioning

The Dow was down over -150 points early in last night’s session after having surged 550 the night before. Such a dip after a strong rally is not in itself unusual. But there may also have been some doubt over just how “dovish” the Fed chair’s speech really was.

Powell basically said the current rate is “just below a wide range of estimates from FOMC members of just where the elusive and somewhat ephemeral notion of ‘neutral’ might be”.

Or something like that. In order to better gauge if there had been any shift in Fed thinking, Wall Street would need to wait to read the November minutes.

Handily, they came at 2pm. The Dow then rallied to be up a hundred.

In a nutshell, the minutes all but confirmed a rate rise in December but thereafter insisted that the central bank was not on a “pre-set course”. There were several references in the document to tariffs, global slowing, geopolitical tensions yada, yada, yada. The Fed will need to assess developments as they play out, and will remain “data dependent”.

So yes, it does look like the three rate rises for 2019 assumption of past months is now not so certain, and that is good news for Wall Street.

Yet Wall Street gave it all back at the death to a flattish close. There were a few things to consider.

Firstly, Trump will now not meet with Putin in Argentina, given the Russia-Ukraine thing. Secondly, Trump’s lawyer last night admitted he had lied about Trump’s plans in Russia in the lead up to the election. Is Wall Street concerned? I doubt it. 2017 was the year of concern on this front but given the story is painfully slow-moving, 2018 has been a year in which little attention has been paid.

More immediate is the matter of Trump’s meeting with Xi.

The feeling here is that there are three possible outcomes: (1) China will capitulate and a resolution will be reached; (2) Trump will agree to hold off on the January tariff increase (to 25% from 10%) and the last tranche of US$267bn, pending negotiations Beijing is prepared to engage in; (3) Neither side will give an inch and the increase and last tranche will go ahead as planned.

Of the three, strike out (1) – no one expects that. The market is resigned to the fact number (3) is probably the lowest odds which means Wall Street may be disappointed but won’t necessarily fall off a cliff once more. A lot of faith is being placed in (2), which would at least signal a small step in the right direction, and would likely be well received on Wall Street.

That’s Saturday night, meaning Australia will have the first (apart from that other mob to the east) chance to respond to whatever transpires.

Tonight on Wall Street will likely be a quiet one. But never say never.

Commodities

Base metal prices again showed some signs of life last night, with the greenback steady. Copper, nickel and zinc looked good.

WTI briefly traded below US$50/bbl last night. Stop losses were set off but buyers took the opportunity, seeing 50 as a support level, and turned a possible rout in to a short squeeze.

The Aussie is up slightly at US$0.7318.

Today

The SPI Overnight closed down -2 points.

It’s drinkies tonight for 20 world leaders before the real stuff kicks off on Friday, Argentina time.

China will release November manufacturing and services PMIs today. That’s timely.

Locally we’ll see October private sector credit numbers.

Myer ((MYR)) and Sandfire Resources ((SYR)) are two among a handful of companies holding AGMs today.