Overnight: Modestly Positive

By Greg Peel

And Back Again

It took all day on Friday for the ASX200 to fall ninety points and half an hour yesterday to get that all back again. Thereafter the index barely moved all day before claiming the ton.

It remains somewhat of a mystery as to why our market was so weak on Friday, but yesterday’s strength comes as no surprise at all. The bottom line, nonetheless, is that our market has not at all responded to the trade truce on a net basis.

Unlike Wall Street.

The biggest winners yesterday were also obvious. The trade truce had oil prices surging in electronic trade and WTI has confirmed that strength in closing up 4.6% overnight. The energy sector jumped 4.6% yesterday.

Materials (+3.0%) was another no brainer. Base metal prices and iron ore are all up overnight, albeit not enormously, and gold has responded to a drop in the US dollar.

Healthcare (+2.6%) was back in vogue and IT (+2.4%) anticipated a good night last night for the Nasdaq.

Consumer discretionary (+1.6%) reflected all the China-facing stocks, particularly those in milk, which were also aided by progress on Chinese e-commerce requirements.

Consumer staples (+1.8%) may well have been left behind but for a takeover bid for Graincorp ((GNC)), which came as no surprise to analysts, sending that stock up 27%.

Utilities and telcos also joined in and indeed every sector had a positive session. The comparative underperformer on the day were nevertheless the banks.

Australian average house prices fell in November at their fastest pace since the GFC. Could be a clue there. Building approvals continued to trend lower in October, as expected, amidst tighter credit controls.

On the wider economic front, ANZ’s job ads series showed a modest decline in November, while September quarter company profits and inventory numbers came in lower than expected, which will impact on Wednesday’s GDP result.

Today brings the all-important trade numbers.

So where to now? Two boxes have now been ticked, being the Fed and US-China trade. Wall Street is knocking on the door of the twin highs of October and November yet our equivalent twin high (5941) is still over 250 points away. What do we have to do?

We still have OPEC later in the week. And next week the UK parliament votes on May’s Brexit deal. Our GDP result is out on Wednesday. We won’t mention the government.

Our futures are down -10 this morning.

Pop Gun

It was not quite the “explosion” on Wall Street traders had been expecting last night, but 287 Dow points is not a bad effort on top of Friday night’s anticipatory rally. The Dow did nevertheless open up over 400 points before dropping back in morning trade.

Details have begun to emerge about just what the supposed “trade truce” really means.

Firstly, the truce will last ninety days from January 1, not from the dinner itself on the weekend as initially assumed. Secondly, the news coming out of Washington and Beijing in the wake of the dinner does not at all correlate. Beijing, for example, has made no mention of ninety days.

There is a level of confusion. Washington, for example, has suggested Beijing is prepared to reduce tariffs on cars exported into China ultimately to zero. Beijing has said nothing.

Many are also questioning exactly what progress has been made. All they see is a four-month hiatus in escalation which may still lead to nought. Opinions are becoming rather polarised between those believing a resolution will ultimately be reached and those believing a US-China trade war will be with us for years at least.

The US ten-year yield fell back below 3% last night. The US yield curve flattened further.

For now, Wall Street remains more positive than negative. The Dow outperformed the S&P last night because a lot of the big names therein are multinationals – the same Boeings and Caterpillars and so on that led the market down initially.

The same can be said for the big tech stocks. The Nasdaq had another good session.

Energy was unsurprisingly the winning sector on the night.

The focus for Wall Street now is as to whether the S&P500 can return to, and continue up past, the October-November twin highs of just over 2800. Only ten more points. Technically, that would confirm the end of the correction (notwithstanding any new developments).

The government has announced a day of mourning on Wednesday for George HW Bush. All US markets will be closed. At this stage I have assumed scheduled US economic data releases on the day (including private sector jobs and the Fed Beige Book) will be pushed back a day but I’m not entirely sure.

Commodities

There were two bits of news from Buenos Aires impacting on oil markets. One was the truce, but it has also been revealed Vlad and the Crown Prince got together and agreed they would cut oil production.

The oil-rich Canadian province of Alberta surprised everyone last night by announcing its own (enforced) production cuts. Alberta’s problem is one of pipeline bottlenecks and a subsequent build-up of crude inventories – a problem which also exists for US shale oil but is now being addressed. Alberta’s problem means Canadian oil has been trading at a deep discount to WTI at a time the WTI price has itself fallen -30%.

In other news, Qatar announced last night it will leave OPEC on January 1. Qatar is not a major producer of crude but it is the world’s swing producer of LNG. The beginning of the end for OPEC?

Metals prices rallied last night as might be expected on trade news, assisted by a -0.2% fall in the US dollar. A lot of recent US dollar strength this year has been as a result of the trade war on a “safer” haven basis. Gold has enjoyed a boost.

The Aussie is up 0.6% at US$0.7352. A lot of Aussie weakness this year has been attributed to the trade war.

Today

The SPI Overnight closed down -10 points.

The September quarter current account is released today, including terms of trade for the period.

The RBA meets.

IOOF ((IFL)) hosts an investor day.

The Australian share market over the past thirty days…