Overnight: Curve Ball

By Greg Peel

The ASX200 plunged -40 points from the open yesterday, the computers having decided Wall Street’s response to the Trump-Xi meeting was not as euphoric as hoped. But by 11am the index was almost back to square.

11am seems to have become the critical time for the local market of late, especially when selling is involved. The index fell sharply into lunch time, and continued to drift lower thereafter.

What caught the attention of markets in the Asian region was a movement in US bond yields.

From November 23, the Dow rallied 1500 points in a straight line. The Fed kicked off the recovery with its more dovish tone, and then US-China trade optimism kept the momentum going. But in the same period, the US ten-year bond yield quietly drifted lower. Post Trump-Xi dinner, it dropped under 3%.

That was the line in the sand. A rush into long-end bonds followed, to the point where last night the US two to ten-year yield spread closed in to a cycle low of around 10 basis points, having for a long time this year hovered above 20 points. The two to five spread closed in to zero.

An inverted yield curve (long yields lower than short yields) implies a recession is coming. At least, it has in the past. Suffice to say in the wake of growing confusion over just what, if anything, was achieved in Buenos Aires, markets are fearing a global slowdown.

Yesterday provided the final piece of the Australian September quarter GDP puzzle. The current account deficit narrowed on a balance of stronger services exports and lower imports. But adding up all the “partials” released over the past couple of weeks, economists now expect the quarter to have seen only 0.6% growth when 0.9% was previously forecast, or 3.2% annual, down from 3.4%.

Part of slowing global growth?

Even the Pollyannas over at the RBA have become a little less ebullient. The central bank still sees growth at 3.5%, but yesterday’s statement gave a nod to signs of a global slowdown, the fact commodity prices have fallen of late, particularly oil, and local credit conditions being tighter than they have been for some time.

Yesterday saw pretty much market-wide selling. Falls in the -1-1.5% range were common across sectors, suggesting index selling rather than anything else. Although Telstra ((TLS)) was back to its game of going the other way, and industrials managed only a small drop.

The banks and resource companies fell by similar amounts, IT did not stand out, and defensives (staples, utilities) also fell in concert.

Note that in the time the Dow rallied back 1500 points, the ASX200 made it back a net 55 points. We are stuck in that parallel universe where Wall Street rallies but we don’t, but when Wall Street falls we fall right alongside.

The futures are down -75 this morning.

What Deal?

What exactly was agreed to in Argentina? About the only thing that seems certain is that there is a ninety day cooling off period in which there will be no tariff increases or new tariffs from either side. But even that’s a source of confusion. It now appears everyone was right the first time around – the clock did start ticking at the meeting, December 1. The ninety days is not from January 1 as was the belief the day before.

The White House has not yet issued a statement about what was agreed to. All we have is Trump’s tweets, and they are unconfirmed. China being prepared to take auto tariffs to zero, for example, is apparently news to everyone else. There has been no statement as yet because both parties are “working on it”. Seems both parties cannot agree as to what was agreed to.

It is enough to send the US bond yield back under 3%, and last night the buyers rushed in. The Fed’s slight shift towards dovishness was one reason yields began to fade, albeit good news for the stock market. But be careful what you wish for. One minute Wall Street loves lower rates, the next it’s running scared. A drop to 2.92% for the ten-year, amidst trade confusion, had the Dow down -200 points by midday.

Last night British politicians delivered a rebuke to Theresa May, finding her government in contempt of parliament for refusing to publish the advice it had received from the country’s top law officer about the proposed terms of Brexit.

No British government has ever been held in contempt of parliament before.

May’s Brexit deal appears to be heading for inevitable defeat in the Commons next week. What happens next is completely unknown. Britain is sailing into uncharted waters.

That news was enough to weaken Wall Street further, to the point the S&P500 crossed over its 200-day moving average once more. The floodgates then opened as the algos took over. The Dow was down -800 at its low, rebounded for a while, and then fell back to the low.

Two points to note are that volumes were on the light side, suggesting a lack of buyers rather than a stampede of sellers, and that at -800 down, the Dow has simply given up about half of the week-long rally back from the prior low.

Wall Street is not panicking, but volatility reigns – volatility brought on by complete confusion over trade, which has led to further debate about whether the US yield curve is set to actually invert and what that actually implies. History says recession down the track, but not on every occasion. Nay-sayers point to a decade of unprecedented central bank intervention which has made the rule book redundant.

Sell first, ask questions later. Bear in mind that US markets are closed tomorrow, which probably expedited the exit of positions last night.

That ninety day window suggests Christmas may not be such a jolly affair this year after all.

Commodities

Copper dipped a bit but otherwise it appears London metal traders don’t quite know what to think either. Oil prices are poised ahead of the OPEC meeting. Iron ore is playing its own game as usual.

Gold is sneaking its way back as the safe haven play. The US dollar was only down slightly last night.

The Aussie is down -0.2% at US$0.7338.

Today

The SPI Overnight closed down -75 points or -1.3%. Adding in yesterday’s -1.0% fall gives us -2.3% (roughly) and last night the S&P500 fell -2.7%.

US markets are closed tonight for George Bush’s funeral.

Today is service PMI day across the globe.

It’s GDP day downunder. How exciting.

TPG Telecom ((TPM)) holds its AGM today, Investa Office ((IOF)) has an extraordinary meeting, CSL ((CSL)) hosts an R&D day and Telstra ((TLS)) provides a 5G update.

The Australian share market over the past thirty days…